The infrastructure and enterprise cloud market continues to evolve as as-a-service and hyperscale cloud put pressure on traditional delivery models. More and more enterprises are looking for partners to tackle challenges from writing off legacy to providing a platform for the expansion of digital services. As this market develops, providers are becoming more specialised—more providers are coming to the market armed with deep relationships with the major cloud providers, placing less emphasis on their own infrastructure assets. Indeed, some are coming to market with no assets at all—playing the role of a pure-play services broker.
While infrastructure and cloud may no longer be the buzzword on the lips of business and IT leaders, it’s the essential foundation for many of the digital technologies that take up more mindshare. To this end, Infrastructure spending is shifting away from specific IT components and instead is being reframed as an enabler for other engagements in contracts. Infrastructure and applications, for example, are becoming increasingly interchangeable for enterprises. The focus is on the outcome to be achieved not on the tools and levers used to achieve them.
In this second iteration of this research (but first in the developed HFS Top 10 methodology), we explore the emerging market in the provider ecosystem for infrastructure and enterprise cloud services.
WHAT YOU’LL KNOW AFTER READING
How the market is evolving to face the onslaught of hyperscale cloud and as-a-service delivery models
The movements of the biggest providers operating in the space, and how they are evolving offerings to meet the changing needs of enterprise clients
The strengths, challenges, and opportunities for the major providers servicing the infrastructure and enterprise cloud market.
DevOps synthesizes methods, processes and tools with the goal of improving your company’s velocity at which you deploy applications, which serves your customers better. Teams using DevOps best practices and tools to create production software are much faster than organizations using traditional infrastructure management and software development methods. In 2016, RightScale’s “State of the Cloud Report” estimated that 70 percent of SMBs were adopting DevOps methods. Every indication is that percentage has increased.
For companies that already understand the value of software development outsourcing, partnering with a capable outsourcing vendor for DevOps is a natural next step. For companies who want to embrace the benefits of DevOps but haven’t yet, aligning with a qualified DevOps outsourcing company is really worth considering.
Consideration No. 1: Pick the Right Project
If DevOps is new to your company, or the DevOps partner is new to your company—or both—it’s very important to pick the right project to begin work together. Also, it’s possible that the project you target will influence the selection of your DevOps outsourcing partner.
Here are some questions you may want to use in selecting the right project:
This question….is important because… Which software, if successful, will show the clearest benefit (i.e.: ROI) to the company? Software with clear business benefit will generally get better buy-in from the user community, and higher quality participation. Which software has the clearest goals and scope of work? It’s always easier to achieve the goal, when the goal is clear. Do any projects require the use of new, unproven technology? Unfamiliar technology can be a dangerous variable in your work and risk estimates. How many other systems will the newly completed software need to integrate with? Integration testing is time-consuming and requires a high levels of coordination. Which projects are expected to have the longest duration? Unforeseen variables naturally occur in long running projects — personnel changes, other business distractions, loss of momentum, etc. Which projects are expected to require the largest number of participants? More people involved equals more complexity. What employees (IT and business stakeholders) will be part of the projects? DevOps requires good collaboration and speed. IT and business area participants must be able to fulfill their roles accordingly.
Consideration No. 2: Vendor Communication
In selecting the right outsourcing DevOps partner, the ability to communicate well is one of the most important considerations. A partner who communicates poorly can derail a relationship that has all the right methods and tools in place for success. design iterations and project sprints simply cannot happen if your outsourcing partner lacks the proper communication skills. Conversely, an outsourcing vendor who is truly acting like a partner in the relationship, communicating well and often, can help you overcome any number of unforeseen issues along the way.
Evaluate how well prospective vendors respond to your due diligence questions. Their responses could tell you a lot about how they’ll interact with you during the project. Are they clear? Do they interact in professional ways, or does it seem a bit random and disorganized? Are they prompt and timely in their interactions, or are there “black holes of silence”?
If you see evidence of poor communication during the due diligence process, you’ll almost certainly have problems when you’re actually engaged in working together. As you check references, try to determine if other customers experienced problems in communication and interaction—those can pose as red flags when it comes to selecting your vendor.
Consideration No. 3: Vendor Location
Global software development outsourcing is a proven success for many companies. However, you must be attuned to the vendor’s geographic location compared to yours. Would time zone differences be an issue? This may affect the geographic location from which you’ll select your outsourced DevOps team. In a recent survey, one-third of U.S. companies that outsourced to India considered the 10-hour (or more) time difference to be a big challenge. DevOps activities cannot be artificially hampered because of time zone issues. The best DevOps outsourcing companies have a business model that allows U.S. time zone companies to interact easily with the vendor’s “A team” supporting your project. Be wary of companies that assume that all Skype and conference calls will be done off-hours to your normal business day—or plan to have secondary members of their team available during your normal work hours.
Consideration No. 4: Vendor Technical Skills
As you examine a prospective outsourcing DevOps partners technical capabilities, consider these questions:
Do they have the relevant skills and tools experience I need?
Is this a core competency of the company, or the expertise of a small select few inside the company?
How does this company go about attracting new talent with these same skills?
What certifications do they hold?
Automation of good process makes it possible to eliminate bottlenecks in the software development cycle, so you can truly “sprint through your Sprints.” Automation tools must be used with consistency by you and your outsourcing DevOps partner. Perform an inventory of the available tools:
Will you be able to seamlessly (and automatically) promote code?
Can you perform test-driven design?
Can you perform test-driven development?
Can you easily associate features and fixes with promoted code?
How will you perform regression testing?
DevOps teams will have programming language expertise that includes Python, Ruby, PHP and Java. Remember: DevOps means infrastructure as well as applications, so a true DevOps outsourcing company will have employees with expertise in infrastructure-oriented software and tools such as Windows PowerShell, Docker, Puppet, Ansible and SaltStack. You may also want to look for expertise and certifications for networks, databases, and operating systems.
DevOps outsourcing companies should be experienced with the continuous integration (CI) method—the CI tools which support the associated processes. CI tools help merge source code updates from all developers on a specific software build, notifying the team of any failures in the process. Popular CI Tools include CruiseControl, Jenkins, Travis CI, TeamCity and GitLab.
The best partners employ a programming staff that have achieved certifications that are important for your DevOps project needs. In addition to certifications around the tools and language mentioned earlier (such as Puppet Certification, for example), you will want to look for certifications in:
Consideration No. 5: Vendor Commitment to Training
As you evaluate a prospective DevOps outsourcing company, ask yourself: Is continuous training a part of their business model? A good partner invests in their programming staff’s training on a continual basis. We like to see evidence that their programming staff regularly renews their certifications—and the outsourcing company should be actively advocating this.
Consideration No. 6: Vendor Experience and Size
To succeed with DevOps outsourcing, you need a partner who has relevant experience and is a size that complements your company size.
Experience. The ideal DevOps outsourcing team will have experience in your business vertical (example: discrete manufacturing, banking, etc.). It also should have expertise in the system functional area of your target project (e.g. finance, e-business order processing, warehouse management, etc.). Of course, the demonstrable experiences should include work using Agile and DevOps techniques.
Size. The right partner should be neither too large nor too small. The outsourcing company needs a pool of programmers large enough to keep with the intended work pace of your project. Conversely, we caution IT managers to be wary of extremely large outsourcing companies. Your project and company must be “big enough to matter” to the partner you select. If you are seen as too small in terms of the revenue opportunity, the outsourcing company will defer attention and their top talent to larger customers who are more able to influence decision-making.
India’s position as a labor arbitrage market may continue for another “25-35 years”, said IT consultancy Everest Group. However, it is unlikely that earlier offshored work would be back to its home market, it added.
“There is no doubt that India is still a highly attractive and viable option for low-cost labor, albeit not quite as good as it was 15 years ago, but still very compelling, and it will likely remain so for another three decades,” said Michel Janssen, Chief Researcher at Everest. “We move out our estimate for the end of the India labor arbitrage to beyond the 2040-50 time horizon.” Indian IT firms have put it that they have shifted from a model based purely on labor arbitrage and have been hiring in bulk onshore.
However, changes to the business model have seen slow growth and hurt margins. “The services jobs that moved to offshore locations will not be coming back in any large quantities because labor arbitrage economies will continue to be attractive,” Everest said in its report.
India’s huge talent base will also ensure a buffer to rising labor costs. Around one million engineers enter the job market every year and salaries for fresh engineers with no specilaised skills have remained stagnant for nearly a decade. “Fifteen years ago, we thought that wages in Bangalore would grow to reach those wages in Dallas. But we didn’t take into account the growing talent pool. That really keeps a lid on costs,” Janssen told ET.
He further said that while robotics process automation (RPA) would change some of the ways companies do business, it may not be a drastic change. “RPA is important, but if the costs of labor remain low and you can get access to talent at low prices it might limit the amount of process automation a company might put in place. They may not need to invest as much in RPA.”
While automation will render pressure on headcount, the country’s talent base will be an advantage as the industry moves to more digital technologies.
“The current limited availability of niche/emerging skills in India puts them at a premium; however, as more people learn these skills, they may lose their premium status,” the report said. This will further restrict labour rate hikes.
European companies are looking to outsource operations in the Philippines to capitalize on a young workforce, whose skills need to be upgraded to meet demand, officials said.
The Nordic Chamber of Commerce considers the Philippines as “outsourcing destination” for information technology, accounting and graphic design jobs, said its president, Bo Lundqvist.
“The opportunities are amazing, there are so many opportunities, there’s not just enough talent,” Lundqvist told ABS-CBN News.
As Europe taps Filipino workers, the Philippines can benefit from technology transfers, said EU Ambassador to the Philippines Franz Jessen, who also chairs the EU-Philippines Business Network committee.
“Europe does not have a young workforce so we focus very much on technology,” Jessen said.
European Chamber of Commerce of the the Philippines president Guenter Taus cited Austria as example, wherein the government offers graduates free courses to give them skills that meet job demand.
The European Union is home to some 800,000 Filipino workers and the bloc is the second largest source of remittances. Seafarers alone account for 30,000 of the total, he said.
BM remains an American-based, not an Indian- based company, as a recent New York Timesarticle gave the impression to some readers when it claimed that IBM employs more people in India than in America.
IBM may have outsourced a great deal of its operations around the world as many other large companies have done, but its center of gravity remains in America. IBM was founded in the U.S. 106 years ago, and its headquarters and major research facilities remain to the U.S.
But IBM is an American company in decline, as evidenced by the long string of drops in its sales.
The root cause of IBM’s long decline is the failure to make a timely transition from the traditional mature declining business segments to emerging fast growing segments.
To be fair, IBM’s revenues from “strategic imperatives” (cloud, Watson and analytics, security, social and mobile technologies) have been rising in recent years. But IBM is late in this space, which is already crowded with heavyweights like Amazon, Microsoft and Google.
Apparently, IBM’s leadership has been spending too much time to revive its traditional business rather than to renew its pioneering drive that made it a great technology leader back in the old days.
That raises a simple question: why keeping the old business around, anyway? Because these businesses are outsourced at a lower cost to India and other locations.
But that has been a trap. Outsourcing hasn’t helped IBM improve its operating margins, which continue to slide — see tables.
Besides, outsourcing leaves management with fewer resources to plow into new business initiatives. Hence, the slow speed of transition from traditional business segments to new business segments.
Wall Street has taken notice, sending IBM’s shares south as the rest of the technology shares have been soaring. Over the last five years, IBM’s shares have lost close to 30% of their value, as the Powershares QQQ have gained 121.26% — see table.
Outsourcing provides certain competitive advantages to early-movers – that is, to companies that adopt it first — but it isn’t proprietary. Others can adopt it, and therefore, isn’t a source of sustainable competitive advantage.
Then there’s corporate complacency whereby leadership of these companies fails to renew the pioneering drive that characterizes market leaders.
That’s what eventually happened in the PC industry, to companies like the old HP.
Outsourcing was supposed to cut costs, limit corporate size, and improve operating margins. But instead it ended up giving HP’s advantage away to Asian PC and printer makers, piece-by-piece, failing to re-ignite sales growth.
Meanwhile, HP failed to revive its old pioneer drive that made it a great technology company in the first place.
The rest is history, which IBM will be destined to repeat. Unless it scales back on its outsourcing activities in India and other locations.
IT purchasers and providers can achieve win–win outcomes by altering their sourcing routines. Here’s how they can be more strategic about the principles and practices they follow.
Global companies in all industries typically acquire a significant portion of their IT services from external providers. Annual global spending on external IT services is about $900 billion, with companies procuring IT consulting, systems integration, application development and maintenance, and IT-infrastructure-management services, among others. 1. Forecast alert: IT spending, worldwide, 4Q16 update, Gartner, January 2017, gartner.com.
We can expect spending on IT services to increase as companies explore digital products and business models, and require more and different types of technology support. Indeed, digital transformations typically require higher-order IT capabilities and involve strategic partnerships with providers that supply critical knowledge and expertise along with new technologies and support services.
For a number of reasons, however, IT-sourcing relationships have been difficult to get right. Given the speed at which new technologies and software-development approaches emerge, IT purchasers often struggle to understand how to set realistic objectives and incentives; how to balance multiple priorities relating to cost, efficiency, quality, and innovation; and how to structure governance arrangements to benefit both sides. For their part, IT providers wrestle with similar issues: how best to meet a range of customers’ expectations, how to prioritize objectives and resources to help customers meet their individual needs, and how to create next-generation improvements and innovations for customers rather than just carrying out immediate tasks.
To help executives understand how to answer these questions, we conducted reviews of hundreds of contracts over the past three years. 2. Our observations are drawn from a sample of more than 50 companies and about 200 live contracts. We examined an average of 35 to 40 data points per contract. In performing this research, we employed the strict confidentiality procedures that govern our work with purchaser–provider relationships. The contracts covered IT-sourcing relationships across multiple industries and regions. We analyzed the contracts along three main dimensions: general terms and conditions, commercial terms and conditions, and governance structure (Exhibit 1).
In many of the contracts we reviewed, the sourcing relationship was not meeting its full potential (Exhibit 2). For instance, greater innovation was a desired goal on both sides but often was lacking, according to the executives with whom we spoke. Such performance gaps exist because of shortfalls on both sides of the partnership.
Our research revealed five obvious but often overlooked changes IT purchasers and providers can make to their sourcing routines that could bridge these gaps and create win–win outcomes. Specifically, they must develop a shared understanding of business outcomes, emphasize the long term, actively collaborate on critical IT architecture decisions, pursue transformation with clear planning and relentless “grit,” and devise win–win contract mechanisms (Exhibit 3). Businesses and IT providers should address all five of these areas if they want to achieve a full spectrum of benefits from IT contracts, beyond just cost. Based on our experience, the value gained by both sides could be between two and four times that of pursuing traditional contracting approaches (Exhibit 4). We believe the best way to break from status-quo practices and relationships is to fully recognize the dynamics at play and devise clear plans to alter them.
Develop a shared understanding of business outcomes
For many IT purchasers and providers, it can be hard to achieve a shared understanding of business objectives. In more than 60 percent of the contracts reviewed, teams had not followed a thorough process for internally discussing desired business outcomes.
IT purchasers faced hard internal deadlines for developing and finalizing contracts with providers. They felt they did not have enough time to engage all relevant business stakeholders in defining the full potential value to be gained from investment in external IT services—whether it be cost savings, increased productivity, or more agility and innovation. As a result, they were often unsure of priorities when setting new contracts or resetting existing ones. In 100 percent of the contracts we reviewed where business outcomes were not clearly defined, key indicators of performance were not exhaustive; they tended to be focused on cost. Hence, they were inadequate for measuring desired business outcomes.
Because they had incomplete information about purchasers’ business priorities, providers were unable to determine how best to allocate talent and resources. And because providers were required to follow purchasers’ standard contracting structures and processes, they were less likely to bring new ideas to the table.
To ensure a shared understanding of objectives, purchasers and providers will need to actively break from time and process constraints. Purchasers should involve end users and business-unit leaders in contract discussions with providers early in the process. Desired outcomes should be captured in a minimum viable contract, with the understanding that there will be further collaboration and refinement on terms over time. At one asset-management firm, IT leaders insisted that the CEO, other C-suite executives, and members of the board be involved in the provider-selection process. Senior business executives were asked to attend supplier visits, and the board received periodic updates on the selection process. When properly informed in this way, business executives and other stakeholders can help contract teams set meaningful short-term and long-term objectives and ensure that enforcing mechanisms are embedded in contracts.
IT purchasers and providers will also need to reimagine the request-for-proposal (RFP) process as a “request for solution” process—an opportunity to jointly identify critical problems and define potential solutions. We observed one provider challenge traditional boundaries: in response to an RFP, the provider went beyond a simple outline of services it could provide; it suggested ways that the purchasing company could form a joint venture with the provider and go to market with a joint service offering. This proposal reframed service provision as an opportunity to generate revenue—an approach that turned heads and established the provider’s credentials with the purchaser. The joint-venture idea was not approved, but the provider eventually was rewarded with the services deal.
Emphasize the long term
Almost 80 percent of the contracts we examined included service requirements that were narrow in scope. They were valid for a particular point in time but left little room to incorporate future needs. Contract teams had estimated the volume of work flow required but had built in few or no options to reset contract parameters midstream based on actual usage. Additionally, it was often the case that purchasers had not considered future IT needs in any depth. About the same percentage of contracts we reviewed (80 to 90 percent) did not include adequate mechanisms for encouraging long-term innovation.
The conventional thinking among purchasers is that contracts implicitly compel providers to innovate and adopt a long-term focus. The reality is that the success of the sourcing process will be measured according to savings in the first year rather than value created beyond that. This was evident in our reviews. Ninety percent of the contracts included commercial terms and conditions that were not mutually advantageous, implying that discussions around these terms and conditions had been focused on the here and now rather than on how to activate longer-term innovation and value.
To unlock long-term vision, commitment, and innovation, purchasers should delineate a range of service requirements and expected volumes at the outset, based on real-world business objectives, but then refine and codevelop the service requirements with providers through regular “hackathons”—gatherings aimed at surfacing new ideas and determining the resources required to act on them.
IT purchasers also need to give providers more visibility into the business and its big-picture goals: What capabilities and technologies could providers bring to the table to help the business achieve its objectives? The agreed-upon contract could include a continuously updated backlog of requirements and options for both sides to shift to alternative work-flow requirements and management approaches when delivery models, the volume of work, or the scope of work changes. Both sides might also agree to a series of checkpoints at which they could reassess and redefine terms. Purchasers could also join providers’ customer-council meetings to understand and influence their long-term direction.
A consumer-electronics company negotiated for such flexibility from core IT providers as it determined the best ways to shift to a cloud-based infrastructure. The company did not want to upend existing operations all at once, so it developed a three-year transition plan with providers. The providers would continue to deliver traditional infrastructure services in the first year while gradually shifting the company’s work flow to a cloud platform in the second and third years. Frequent reviews were built into the process, and both sides agreed that pricing mechanisms would be changed accordingly. The transformation is still under way, but as a result of this arrangement, the purchaser has made significant progress in migrating applications to the cloud.
Actively collaborate on critical IT architecture decisions
Most of the contracts we reviewed contained comprehensive governance plans—detailed descriptions of multilevel forums convened by purchasers, designed to gather input from providers or to review and refine day-to-day processes and tasks. But in practice, providers were mostly kept at arm’s length, with no direct input into important technology and innovation forums—for instance, the architecture-review board.
In our observation, this dynamic occurred, in part, because contract-governance mechanisms were generally designed and agreed upon by teams that were not accountable for day-to-day execution and outcomes—for instance, procurement and legal. The teams’ primary focus understandably tended to be on anticipating potential catastrophes and retaining control rather than on creating long-term value from the sourcing relationship.
Win–win relationships cannot exist when IT purchasers do not treat IT-service providers as strategic partners. To facilitate this partnership, companies can activate a provider-success team that includes sourcing experts, technicians, and business leaders from both the purchaser and the provider. This team should create a seat at the table for IT-providers in forums like an architecture-enablement board, where the purchaser discusses ideas on IT architecture and underlying platform innovation jointly with providers.
In our observation, transformations are less likely to succeed—and changes are less likely to be implemented on the ground—when providers do not have input into purchasers’ decisions about the underlying architecture. In about 10 percent of the contracts reviewed, we saw evidence that IT purchasers were beginning to design contracts to actively involve providers in these types of forums and explicitly asking providers to be consulted or informed in architecture-review boards. Companies could improve collaboration by following Toyota’s genchi genbutsu approach—that is, scheduling go-and-see sessions for purchasers and providers. 3. Genchi genbutsu means “actual place, actual thing” and it is a key principle of the Toyota Production System. It suggests that in order to truly understand a situation one needs to go to the “real place” where work is done.
A global telecommunications company works with multiple IT providers that support the company’s infrastructure management and delivery of software applications. The telco’s contracts with these providers explicitly define partnership-based governance principles. There is a built-in expectation that subject-matter experts from the IT providers will actively participate in conversations about architecture and innovation. In turn, IT providers have gained greater visibility and have shown greater commitment to ensuring that the IT purchaser meets program-level measures of success—for instance, improvement in service levels or direct impact on fees. This approach has enabled the overall environment to function smoothly, with an emphasis on collaboration and transparency.
Pursue transformation with clear planning and ‘grit’
About 75 percent of long-term IT-sourcing contracts reviewed had language indicating that purchasers expected the sourcing relationship to result in a significantly altered IT landscape. But in most cases, there was limited evidence of a transformation plan or a strategy to get the required investments for changing the underlying operating model. For example, 75 percent of the contracts focused on cost control as a significant transformation objective but had less focus on how to measure progress against their transformation objectives. Any dialogue about transformation plans was typically led and owned by IT representatives rather than business stakeholders. The latter were informed as needed. For their part, providers often were not privy to plans regarding the architecture road map, so they felt they could have little influence on outcomes from transformation efforts. In most cases, neither side was completely clear about the starting point for change, the target state, and the exact path to get there.
IT transformations cannot succeed without two things: a shared commitment to creating change, including the underlying IT-architecture choices, and something we call transformation “grit”—or rigorous and relentless attention paid to planning and execution. Purchasers and providers must jointly design a transformation road map; it is critical that it be codeveloped and co-owned by the business-unit leaders. Purchasers and providers must support this road map with detailed planning to get to a new target operating model. In this way, they can build a baseline against which to measure outcomes from any sort of IT transformation. Contract teams can monitor costs, but they can also track nonfinancial performance-based metrics (for both business and IT activities) such as asset-refresh rates and service-delivery times. Under this approach, IT purchasers can manage change in the IT landscape more effectively (with input from business stakeholders), and IT providers can be assured that their share of gains will be based on a solid business case rather than an ambiguous definition of success.
The contract team at one investment bank set aggressive transformation goals at the outset of its conversations with sourcing partners. The contract team sought a 40 percent reduction in costs in the first two years and an additional 40 percent reduction over the following six years through the use of the provider’s services. These numbers galvanized the bank and the IT provider. They jointly considered unconventional ideas for transforming the bank’s operations—for instance, moving to cloud-based services and retiring some applications—and implemented each according to a detailed plan they had drawn up early in the process. The bank, its stakeholders, and the IT provider managed to reset existing relationships and worked together to push for significant technology improvements over the long term.
Devise win–win contract mechanisms
The reality of IT-services sourcing is that in most contracting relationships, negotiations are treated like miniature battles, typically with each side focused on achieving the best price rather than mutual value. Indeed, in most of the contracts we reviewed, commercial mechanisms were not designed to be mutually advantageous, particularly during large contract resets. Certainly, cost reductions are an important objective for IT purchasers, but those reductions cannot come solely at the expense of providers’ margins if sourcing relationships are to flourish.
Both sides should instead pursue a balanced set of economic incentives. They could ensure sustainable economics by being transparent about underlying sources of cost and by setting mutual targets. Instead of focusing solely on unit prices, they could adopt a total-cost-of-ownership approach to pricing that, at the outset, incorporates all possible costs, consumption patterns, and other factors, given different scenarios. There could be an open discussion about mutual incentives in a scorecard that tracks implementation of gain-sharing mechanisms in the contract. Both sides should also consider the value of the contract over its duration rather than just at the beginning. Some contracts are structured so that one side can meet its business and financial objectives in the first year while the other party benefits in the ensuing years. We found balanced incentives in only about 10 percent of the contracts reviewed.
An automaker struck a deal with the provider of IT-infrastructure services under which it agreed to a certain minimum in annual spending. It also agreed to provide reliable forecasts of service needs for a small group of business activities that were stable and thus easier to predict. In return, the provider offered the automaker commercial discounts and agreed to a gain-sharing arrangement in which both sides would benefit from aggressive productivity improvements.
Similarly, a European telecommunications company struck a win–win deal with the provider of its infrastructure-management and application-development services. Under the terms of the deal, the purchaser would benefit from an aggressive and predefined schedule of productivity improvements that would push unit prices down, thereby counterweighting the effects of inflation. Instead of offering outright volume discounts, the provider changed unit rates every year based on actual consumption by the telco compared with the previous year’s numbers. This helped sustain the volume of work flowing to the provider and allowed it to correctly gauge and meet the required levels of service each year. As a result of these win–win economics, the provider was always willing to address any pain points for the telco during the contract term. The purchaser received reliable service. In turn, the telco’s IT users gave the provider high customer-satisfaction scores.
IT sourcing is not going away. Companies in all industries lack the bandwidth necessary to maintain all their IT capabilities in-house. They must rely, to one degree or another, on external service providers to get even the most basic tasks done. And as more companies attempt to digitize their products and operations, IT sourcing becomes even more critical.
Companies should continually assess the efficacy of their strategic partnerships—they must evaluate not just technologies provided or service-level agreements forged but also the expertise obtained and innovations achieved. Our research pointed to five ways to strengthen IT-sourcing dynamics. There are likely other areas for improvement as well. What’s clear is that both sides will need to view their interactions differently—as true win–win partnerships, where more value from IT is created together than apart.
Recently a customer of ours gave me a copy of the ‘Outsourcing Performance 2016’ guide published by Giarte. It had caught my eye when I was in his office, because the title was ‘Simplicity’. One of my favorite topics, and one that I fail to understand would be at all applicable to the outsourcing industry…
Struggling to survive
For years I have seen outsourcing companies in bad weather, resulting in many layoffs across the board. It seems that a lot of companies are struggling to survive, now that their customers are beginning to see the true nature of many of these companies.
The report summarized this problem very clearly: “For years the buzzword ‘partnership’ has been abused by the IT outsourcing market. Much was promised, but innovation and transformation hardly ever emerged. The result: a huge lack of trust between the partners, managed by using very strict contracts and a tight, direct control structure.”
It is evident that this lack of trust and the absence of promised results leads to many companies taking a different approach to outsourcing. General Motors, for example, has gone from a maximum of 50% of IT being outsourced to a 10% maximum. Similar reductions are seen in many other companies as well.
The future of outsourcing
The lack of trust is also exactly our own experience in the outsourcing market. When we started with our first company, we were in the outsourcing business. Customers would often not trust a deal, and we had to make a huge list of specifics to show that what we offered was realistic. Even if we offered a deal as fixed price.
The Giarte report also concludes that the future of outsourcing lies in making different choices. Letting go of the focus on technical specifics, instead managing on output and business goals. I couldn’t agree more. Outsourcing companies have a broken business model. Can this be fixed, or is it too late?
Broken Business Model
I have been in the IT business for about 15 years now and for as long as I can remember, outsourcing companies have had the billability business model. A junior consultant costs X per hour, a senior costs Y and a principal consultant costs a lot more. If you need a number of hours of consultancy, simply multiply, haggle a bit for a discount and you’re good to go.
The problem of course is, that you need to ask the consultancy firm how many hours something takes. Not a big deal, I hear you say. You just ask for 3 different offers, from different companies. Choose the least expensive one, and you feel you have done a great deal. But now the problem manifests itself….
You want a change in your software, or need to expand your IT because you expect more customers to be using your website for example. Now you are stuck with the outsourcing company you hired, because they have all the knowledge. The Giarte report states this as one of the major downsides of how outsourcing has been done in the past years. This, in effect, puts all the power in the hands of the outsourcing company and leaves companies fully dependent on the outsourcing company. These outsourcing companies will now drive up their price, because switching to a competitor is more expensive.
In my perception, the issue is that your success as a customer, isn’t necessarily the success of the outsourcing company. You’d want the outsourcing company to be successful if you are, and to suffer enough if you aren’t due to their work.
In 2014 I was in a meeting with the board of a big consultancy firm. They claimed to do things differently, they were no stranger to making deals based on the results of the project, they said. So I asked them what percentage of projects was done using a results based model, instead of invoicing the hours spent. They couldn’t really say. So I asked how many projects they had done this way, in absolute numbers. The answer? None.
And I can’t blame them. It is easier to be able to invoice the effort, and not the result. It is easier to not take responsibility when a project doesn’t bring what it was supposed to. And there we are; the problem. How to align the success of the outsourcing company with the success of the customer?
A truly results-based, longterm business model
At Triggre we ran into this exact same issue. As I said, we came from outsourcing originally (granted, a long time ago), and we got fed up with this issue. Old school software companies don’t need to pay attention to the customer, because they care more about their outsourcing partner eco-system. If their partners are happy, they will sell the product for them. To make partners happy, all they need to do is make sure the partner can spend a lot of hours. So there is no need to fix any non-critical defects very quickly, or make a new release completely backwards-compatible. The partners will solve these issues for the customer, by spending additional hours on implementation. Happy partner, happy software company. And if they’re very lucky … a happy customer.
The solution lies in making the (financial) success of the software company and partner dependent on that of the customer. And the model doesn’t need to completely change. For example, a good first step would be to charge cost-price for hours during the project, and charging a percentage of the financial gains the customer makes. If there are no direct financial gains such as extra turnover or saved costs, a similar agreement could be made based on the improvements the customer intends to achieve with the project, e.g. a price per point that customer satisfaction increases. Sadly, there are very few companies that are willing to take this risk. And think about it; is that really testament to how well they will perform for the customer?
I truly hope that outsourcing companies world-wide can change their business model to a fair one, a more value-based pricing model. Because if they don’t, their business will dry up very quickly. Rightfully so, if you ask me.