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9 I T OUTSOURC I NG STRATEG I ES FOR THE D I G I TAL AGE

Outsourcing today bears little resemblance to the Indian call center cliché. Like the nature of business itself, IT sourcing has evolved due to globalization and a slew of technological advances. Great IT leaders not only recognize the changing tides, they have actively shifted outsourcing strategies to respond in ways that give their organizations an edge over the competition. Some moves are obvious: transitioning to the cloud and using software-as-a-service (SaaS) is widely known to be a strategic imperative. Other strategies are subtler, though no less critical in delivering business value. For instance, the best IT leaders eschew the adversarial attitude toward service providers that was common in the past. Collaboration is critical to business success in today’s world, and IT organizations must be willing to adapt everything from billing terms to service level agreements (SLAs). Wavestone has identified nine ways outsourcing has changed, and what great IT leaders are doing in response.

9 I T OU T S OUR C I NG S T R AT EG I E S FOR T H E D I G I TA L AG E

There are more providers than ever in the market, and increasing competitive pressures have resulted in a dramat- ic increase in the quality of their work. Good IT outsourcing firms can do more than just support technology platforms and customer service functions. They are routinely able to develop mission-critical applications that require a high degree of involvement, including customer-relationship management (CRM), enterprise-resource planning (ERP), and supply-chain management (SCM). The Provider Market Has Matured

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Great IT leaders…

explore a larger scope of work with strong outsourcing partners, which still comes at a 30-70% reduced price. They look for credentials that attest to a service provider’s quality, such as The International Organization for Standardization (ISO) certifications and the Capability Maturity Model Integration (CMMI) certifications from Carnegie Mellon’s Software Engineering Institute. In fact, there are many firms with level 4 and 5 CMMI certifications, particularly in India.

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9 I T OU T S OUR C I NG S T R AT EG I E S FOR T H E D I G I TA L AG E

All Roads Lead to Automation and Standardization

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With the advent of cloud computing came autonomics. Sourcing providers are implementing virtual agents like chatbots that are easily hosted by cloud platforms, thereby cutting costs and increasing efficiency. Likewise, the standardization of cloud-computing technologies continues to minimize the technical differences between providers, meaning companies can enjoy increased efficiency at reduced costs. In addition, the convergence of technologies allows for new operating models, leading outsourcing analysts to predict that more than $100 billion worth of contracts will be renegotiated annually, spurred by the transition from IT processes as a centralized tower run by a single provider to a cloud-based model with multiple providers.

Great IT leaders…

view labor as a service and simplify the IT environment with the use of smart bots and automation on cloud platforms wherever possible. They study up on cloud- brokerage software that allows for streamlined outsourcing operations through increased use of automation. And if a contract renegotiation is in order, they don’t hesitate to pursue it, ideally with the help of an experienced advisory firm.

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9 I T OU T S OUR C I NG S T R AT EG I E S FOR T H E D I G I TA L AG E

Sourcing today trends toward smaller deals—but more of them—due to the increased use of cloud platforms. As IT infrastructure and software specialization are becoming more commoditized, the availability of outsourced services on offer increases. SaaS is a driving force behind the grow- ing number of outsourcing firms used by IT organizations, and the integration of multiple providers will become a critical factor in the overall success of a company’s out- sourcing efforts. The Number of Sourcing Deals Is Increasing

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Great IT leaders…

take time to develop and strengthen the organization’s governance structures. The management of service providers more and more resembles the management of software. With so many moving parts, strong governance structures can mean the difference between success and failure, with a make-or-break impact on the competition.

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9 I T OU T S OUR C I NG S T R AT EG I E S FOR T H E D I G I TA L AG E

IT Purchases Are Business Decisions

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The purchase of technology services is shifting from IT to individual business units. For example, product development teams are more likely to consider IT services to be a core requirement and handle those purchases directly—which has the unfortunate consequence of dividing organizations that are unprepared for change in shared services. When business leaders purchase IT services directly, it also means a short-term shift of negotiating power to services providers as they target new buyers. This creates “shadow IT,” when separate business units deploy their own applications rather than provisioning infrastructure through the IT department.

Great IT leaders…

move toward a service-brokerage model, thereby streamlining the procurement process. They take more direct control over IP services from separate business units, and focus efforts on eliminating shadow IT. They make compelling business cases for delivering savings in IT outsourcing through superior service selection, integration, and measurement.

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9 I T OU T S OUR C I NG S T R AT EG I E S FOR T H E D I G I TA L AG E

The traditional IT procurement process is characterized by requests for proposal (RFPs), which generally involve a burdensome bidding process—expensive and time-consuming in the current environment of rapid technological change. Furthermore, business requirements frequently change by the time organizations begin receiving RFPs. Emerging technologies such as wearables are a particularly poor fit for procurement with RFPs, since enterprises may not understand new technology. Then there is the risk that outsourcing providers cannot meet expectations. Familiarity is the only way to be sure of avoiding misunderstandings and ensuring project is not too complex for the provider to handle—but that takes time. The Procurement Process Has Changed

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Great IT leaders…

avoid RFPs in favor of enterprise marketplaces and pilot projects, and collaborate with service providers to determine how to use technologies most effectively. An enterprise marketplace that serves as a broker to connect customers with providers serves as a more effective purchase process in today’s dynamic business environment than RFPs. Consider pilot projects as an opportunity to refine the processes of interaction and to build familiarity between both parties, especially when they have different cultures and business processes. Projects should be relatively easy to manage and carry a low risk in the event of failure if the purpose of the main outsourcing project is to accomplish a specific task.

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2020 © WAVESTONE I 9 IT OUTSOURCING STRATEGIES FOR THE DIGITAL AGE

9 I T OU T S OUR C I NG S T R AT EG I E S FOR T H E D I G I TA L AG E

The displacement of domestic workers continues to be a subject of scrutiny in the U.S., and employment regulation has increased. However, regulatory requirements are more likely to affect the manner in which outsourced services are delivered, rather than causing an overall reduction in the use of outsourcing. For example, outsourcers that largely rely on staff members who require long-term work visas may be at considerable risk from new legislation designed to protect domestic workers. Domestic Workers Are Preferred

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Great IT leaders…

lean toward sourcing providers that use an even mix of foreign and domestic workers. They also mitigate regulatory risk by selecting partners with some domestic facilities, and securing commitments to move key personnel to these facilities. They also make greater use of mediated outsourcing services to avoid regulatory issues when using off-shore outsourcing. An added benefit is that this third party also provides management consulting services, allowing the provider to focus on performing commodity services.

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9 I T OU T S OUR C I NG S T R AT EG I E S FOR T H E D I G I TA L AG E

Sourcing Engagements Are More Complex

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These days, “full outsourcing” engagements are not uncommon, where the provider takes complete control over staffing requirements and staff augmentation. Some companies outsource high-value business processes in addition to commodity activities. In these cases, collaboration and structural changes (including the restructuring of management) may be necessary to support more substantial projects and retain accountability.

Great IT leaders…

drive the outsourcing process and actively realign the organization to support outsourced processes. They put governance measures in place to monitor service providers carefully, even when there is a high degree of trust in the relationship. They put internal personnel in positions to manage, set directions, establish priorities, and assure quality of service. As a best practice, they visit outsourcers’ facilities to monitor compliance. In contracts and SLAs, they include an exit clause and specify remedial actions in case of unsatisfactory performance.

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2020 © WAVESTONE I 9 IT OUTSOURCING STRATEGIES FOR THE DIGITAL AGE

9 I T OU T S OUR C I NG S T R AT EG I E S FOR T H E D I G I TA L AG E

Supply Chains Are More Transparent—and Riskier

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Discussions of supplier risk have traditionally been limited to quarterly board meetings, but the topic has become an important topic in major business decisions. The increased visibility into an organization’s supply chain greatly increases brand risk in the case of a supplier failure. Geopolitical risk is also a factor when providers are located in unstable regions. Communication differences and related misunderstandings can jeopardize a business relationship. And operationally, a major time difference can pose a problem that should be carefully considered before entering into a commitment with a provider.

Great IT leaders…

examine analytics and data to obtain more visibility into outsourced supply chains. They consider the political and economic climate in a vendor’s geographic region when making outsourcing decisions; and once the contract is signed, they are vigilant in location monitoring to minimize disruptions due to location-specific issues like legislative changes, reduced labor pools, and even weather. They also pay special attention to the outsourcing contracts themselves, given that foreign legal systems can be antagonistic. Requirements and deliverables must be rigorously discussed and placed in their proper context to avoid confusion based on different perspectives. Contracts should contain a provision that any disputes must be adjudicated in a domestic court or at least mediated by domestic authorities. The company’s legal representatives should also ensure that an outsourcing partner can be challenged in a domestic court.

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9 I T OU T S OUR C I NG S T R AT EG I E S FOR T H E D I G I TA L AG E

Measuring performance accurately is an imperative for an optimized IT operation. Although the best metrics will vary depending on the organization, effective monitoring of outsourcing projects is achieved by proper and sophisticated metrics-setting. The metrics should be easily measurable, and the number of metrics should be limited so it does not add significantly to the provider’s costs. The measurement environment should not be overly complex or require a large quantity of data collection and analysis. Baselines and benchmarks should be clearly defined in SLAs, and achievable from the very beginning of the project. Performance Monitoring Is a Must

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9 I T OU T S OUR C I NG S T R AT EG I E S FOR T H E D I G I TA L AG E

CATEGORIES OF METRICS AND HOW TO USE THEM

Type

Description

The right metrics…

Measures an outsourcer’s ability to provide a service at a reasonable cost

Measure true efficiency. If the metric is to process 100 customer support calls at a cost of $1,000 per day, an efficiency metric that simply measures the average cost per call won’t show an increase in efficiency if the outsourcer cuts the average duration of the calls, since the outsourcer will still be handling 100 calls per day for $1,000. Are easy to measure. While a metric to determine whether a program meets a particular set of software standards sounds ideal, it wouldn’t be easy to implement

Efficiency

Measures a deliverable’s conformance to a set of specifications, in order to determine when deliverables fail to meet criteria

Quality

since it would require an extensive manual review.

Measures the level of effort the outsourcer provides within the scope of the contract, generally

Motivate the right behavior. If a metric in a software- development project measures the number of lines of code produced by the programmers, it may motivate programmers to generate code, but will also discourage them from generating elegant code that will be easy to modify. Are focused on performance. Focus on setting metrics that increase efficiency and performance for the end user. It’s better for the business to resolve issues in one call, rather than have a large backlog to fix.

Volume

as the number of deliverables

produced within a given unit of time

Measures the time needed to handle customer requests, including backlog size and time-to- acknowledgement

Responsive

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9 I T OU T S OUR C I NG S T R AT EG I E S FOR T H E D I G I TA L AG E

Great IT leaders…

choose the right metrics to motivate performance, and are prepared to make frequent adjustments to the baseline to ensure that they are aggressive, but achievable. They use metrics analysis tools that can automate this process to obtain the desired behavior at a fraction of the cost. When developing metrics, they prioritize performance factors such as cost reduction, defect reduction, productivity increases, and shorter time-to-market. Then they focus on setting objective measurements for the desired results rather than requiring the service provider to meet them in a certain way. After all, a provider is already motivated to establish methods that will optimize performance in an achievable manner, since this result is necessary to establish a long-term relationship with the company.

CONCLUS ION

To remain competitive in an increasingly dynamic operating environment, great IT leaders are restructuring their organizations to leverage outsourcing opportunities and manage them more effectively. Defining a sourcing strategy and applying it is an effective way to improve the bottom line, and will help protect an organization and its stakeholders from global instability and other external pressures. Let Wavestone US support your IT sourcing strategies and free you up to focus on core competencies. Visit us at wavestone.us or give us a call at (610) 854-2700 to learn how we can help you.

About Wavestone US

Wavestone US is the North American arm of global management and IT consulting firm Wavestone. We have supported the transformations of more than 200 Fortune 1000 companies across a wide range of industries, leveraging a strong peer-to-peer culture, offering a practitioner’s perspective on IT strategy, cost optimization, operational improvements, cybersecurity, and business management. It is our mission to help business and IT leaders successfully deliver their most critical transformations and achieve positive outcomes. We drive change for growth, lower cost, and risk, and create the trust that gives people the desire to act.

www.wavestone.com

In a world where knowing how to drive transformation is the key to success, Wavestone’s mission is to guide large companies and organizations in their most critical transformation projects, with the ambition of a positive outcome for all stakeholders. That’s what we call “ The Positive Way ”.

Wavestone brings together 3,000 employees across 8 countries. It is a leading independent player in the European consulting market. Wavestone is listed on Euronext Paris, and recognized as a Great Place To Work®.

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