marketplace realities in strategic sourcingmarketplace realities in strategic sourcing although...

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R-17-7896L. Cohen, T. Berg

Strategic Analysis Report9 September 2002

Marketplace Realities in Strategic Sourcing

Although efficient IT operations continue to be a vital component of many outsourcing engagements,increasingly sophisticated enterprises are demanding new value from their outsourcing deals.

Management Summary

As customers’ IT and business strategies become more closely aligned, the decision to outsource haschanged from strictly tactical and cost-based (e.g., one where financially distressed companies sought tocapitalize on IT assets, reduce IS staff and improve their bottom lines) to one based on obtaining strategicbusiness value (i.e., where companies in highly competitive markets seek to gain the maximum valuefrom IT assets and IS staff to improve performance).

Continued tactical outsourcing will cause significant degradation of productivity and customer retention.The agile organizations of the future will skill up to the challenge of strategic sourcing. However, today'sCIOs and IS managers still struggle with horizontal, IT-based sourcing decisions in the attempt to providemore value at a lower cost. But the only answer to this very challenging equation is to focus, together withthe business units, on what really provides value to the enterprise. At the same time, market pressuresforce business leaders toward business-driven, process-oriented sourcing decisions that have anenormous impact on IT services. A disconnect between the two actions may seriously damage thebusiness. Therefore, better communication, alignment and consensus during the sourcing strategy phaseare required.



CONTENTS

1.0 Introduction................................................................................................................................5

2.0 The New IS Organization ...........................................................................................................5

2.1 Shifting the Skills Mix................................................................................................................7

3.0 IT Services Maturity ...................................................................................................................7

3.1 New Service Models ..................................................................................................................8

4.0 The Competitive Landscape......................................................................................................9

4.1 How Many Vendors?................................................................................................................10

4.2 IT Services Value Chain...........................................................................................................11

5.0 The Sourcing Life Cycle ..........................................................................................................12

5.1 Developing a Sourcing Strategy .............................................................................................13

5.2 Sourcing Governance..............................................................................................................14

6.0 The Sourcing Value Proposition: What Is the Point? ............................................................15

6.1 Renewing the Value .................................................................................................................16

6.2 Measuring Sourcing Value ......................................................................................................17

6.3 The Role of the Contract .........................................................................................................18

6.4 Sourcing Management Competencies ...................................................................................19

6.5 Ready for Strategic Sourcing?................................................................................................20

7.0 Conclusion ...............................................................................................................................21



FIGURES

Figure 1. New Realities: IT as Broker......................................................................................................5

Figure 2. Gartner’s Checklist of 25 IS Competencies ............................................................................6

Figure 3. The Skills (R)Evolution.............................................................................................................7

Figure 4. IT Services Maturity Model.......................................................................................................8

Figure 5. Radically Different Engagement and Pricing Models Emerge...............................................9

Figure 6. The Emerging Competitive Landscape .................................................................................10

Figure 7. One or Many ESPs? Look Within. .........................................................................................11

Figure 8. The Services Value Chain Emerges ......................................................................................12

Figure 9. Gartner’s Sourcing Life Cycle................................................................................................13

Figure 10. What Is a Sourcing Strategy? ..............................................................................................14

Figure 11. The Shape of Things to Come: The Sourcing Office..........................................................15

Figure 12. Three Types of Service Expectation....................................................................................16

Figure 13. Partnerships Change Over Time: Know When It Is Time to Change.................................17

Figure 14. What Matters Most?..............................................................................................................18

Figure 15. Importance of "the Contract" vs. "the Relationship" in Partnering ..................................18

Figure 16. Different Contract Arrangements Stress Different Competencies ....................................19

Figure 17. Be Ready for Strategic Sourcing .........................................................................................21



1.0 Introduction

External service providers (ESPs) are becoming strategic just by the nature of the work they are doing.Thus, it has become crucial for enterprises and the ESPs with whom they work to understand that thenature of the relationship required is highly dependent on the type of service to be delivered, fromefficiency focused through effectiveness focused to competitive advantage.

Most ESP contracts being written today use the standard-utility-type deal structure that focuses onefficiency (i.e., price and service-level checks). For the newer types of relationships, these contracts areout-of-date almost from the date they are signed.

Consequently, successful enterprises will embrace the idea of a multisourced environment to support theirbusiness needs and will re-skill IT to effectively manage and optimize external provider relationships.

The outsourcing market continues to evolve. As customers’ IT and business strategies become moreclosely aligned, the decision to outsource has changed from strictly tactical and cost-based (e.g., onewhere financially distressed companies sought to capitalize on IT assets, reduce IS staff and improve theirbottom lines) to one based on obtaining strategic business value (i.e., where companies in highlycompetitive markets seek to gain the maximum value from IT assets and IS staff to improve performance).Although efficient IT operations continue to be a vital component of many outsourcing engagements,increasingly sophisticated enterprises are demanding new value from their outsourcing deals

ESPs are trying to respond to this demand by developing new process expertise and business solutions.Combined with their knowledge of technology and IT infrastructure management skills, outsourcing ESPsare focusing more on delivering business value in the context of the outsourcing relationship. Ultimately,this change in emphasis will result in different types of deal structures, different partnerships and differentpricing models and metrics. As a result, enterprises must continually focus on the business benefits ofoutsourcing, and link their outsourcing objectives to business outcomes based performance metrics andESP compensation.

2.0 The New IS Organization

The new IS organization must be more-flexible, business-oriented and capable of fast reactions tochanging conditions. In such an organization, structure and functions are of secondary importance. Thevital concepts are the roles performed by the IT professionals (see Figure 1).

CIO

Retainedinternal IS

competencies

ESP primecontractor(s)

Best-of-breed subcontractors

IT managementand governance

IT core value

Outsourcing, insourcing orjoint venture

Source: Gartner Research

Figure 1. New Realities: IT as Broker



These IT professionals will be IT planners, brokers, integrators and managers, as resources from outsidethe IS organization take up former IT responsibilities (e.g., the end users) or deliver the services that werepreviously executed by the IS organization (i.e., ESPs). Managing end-user relationships and managingESPs are new disciplines that must be developed.

From work done by Gartner’s Executive Programs and People3, a Gartner subsidiary specializing in IScompetencies, Gartner has developed a list of 25 competencies (see Figure 2). Six of them are technical,nine are business-based and 10 are behavioral.

Business (B)

B1 Understanding businesspractices and approaches

B2 Understanding businessorganization, politics and culture

B3 Behaving commercially

B4 Understanding andanalyzing the competitive situation

B5 Managing projects

B6 Managing change inthe business resultingfrom IT applications

B7 Planning, prioritizingand administering work

B8 Communicating or listening and gathering information

B9 Focusing on customers

Behavioral (H)

H1 Leading, inspiring and building trust

H2 Thinking creatively andinnovating

H3 Focusing on results

H4 Thinking strategically

H5 Coaching, delegating anddeveloping

H6 Building relationships orteamworking

H7 Influencing and persuading

H8 Principled negotiating

H9 Resolving conflicts and problems

H10Being adaptable

Technical (T)

T1 Understanding presentsystems and technology

T2 Designing and developingapplications

T3 Applying procedures, toolsand methods

T4 Integrating systems

T5 Designing technicalarchitecture

T6 Understanding emergingtechnologies

Six Nine 10


Figure 2. Gartner’s Checklist of 25 IS Competencies

These are the competencies necessary to manage in the new, highly multisourced environment and thetransition to a more business-oriented IT services operation. Notice that these competencies are muchmore heavily weighted toward business and management vs. technology. In addition, an emphasis mustbe placed on recruiting or refining the behavioral competencies necessary for:

• Consulting with end-user organizations

• Deriving business requirements and linking them to technology initiatives

• Arbitrating priorities

• Developing strong partnerships with customers and suppliers of IT

Although this list of competencies is unlikely to fit every enterprise, it should serve as a useful startingpoint. It should be regarded as a guide — a starter list — from which enterprises can develop their owntailored set of competencies.

Strategic Imperative: The new IS organization must be more-flexible, business-oriented andcapable of fast reactions to changing conditions.



2.1 Shifting the Skills Mix

Tactical Guideline: The evolution of strategic sourcing as a core competence presents amanagement challenge that requires an entire new class of managers with a general "business ofIT" awareness.

The evolution of strategic sourcing as a core competence presents a management challenge. Thatchallenge fits into a more-general trend, the characteristics of which include:

• The IT broker role

• An IS "lite" organization

• The business/IT fusion

Thus, the new IS organization requires an entirely new class of managers with a general "business and ITawareness," high corporate behavior, specialization into one of the needed coverage areas, together witha high degree of teamwork and ability to cooperate (see Figure 3).

Share of IS StaffSkills

(%)

0

10

20

30

40

50

60

70

80

90

100

2000 2001 2002 2003 2004

Product and technical skills

Business management skills (e.g., consulting,or marketing, core business processes and financial

analysis)

IT management skills (e.g., business requirementsmodeling, project management, technology integration

and vendor management)

Thebusiness“IT partner”and sourcinggovernance


Figure 3. The Skills (R)Evolution

This is part of a general evolution for connected organizations: more management capabilities in the coreareas and fewer "production" capabilities where activities are sourced externally. This long-term trendtoward a reverse ratio between technical vs. management competencies, which Gartner forecast in 1997,is aimed at installing a better capability to understand how IT can be leveraged for business advantageand, accordingly, drive the business evolution. On the IT and sourcing side, it can result in a bettercapability to implement, integrate and deliver end-to-end services built on an extensive vision of what theIT market can provide.

3.0 IT Services Maturity

Everything has its life cycle, and IT services are no exception. Understanding the relative maturity of eachtype of IT service available enables enterprises to establish reasonable expectations for the cost andquality of services to be delivered. As each new service is "spawned" by ESPs, it will flounder during itsearly evolution until methodologies and standard procedures can be repeatedly tried, tested and refined



(see Figure 4). Once service delivery has been perfected to the point of reliable and repeatableprocesses, the market begins to mature, costs begin to stabilize, prices drop and quality increases for thevendors.

Complexity

Price andrisk

Serviceperformance

Time• Lack ofunderstanding

• Bleeding-edgetechnology

• One size fits allor overlycustomized

• Price pressure• Customerdisillusionment

• Vendorinvestments

• Methodologiesemerge

• Economies ofscale

• Improvedcustomerknowledge

• Improvedtechnology andmethodologies

• Best practices• Serious pricecompetition

• Lower margins• Vendorconsolidation

• Commoditization

Infancy Adolescence Midlife Maturity


Figure 4. IT Services Maturity Model

As more ESPs catch on to these best practices, the service line becomes "commoditized" and costsdecrease further; but margins begin to decrease as well, with increased competition. Soon, vendors loseinterest and begin to focus on newer, more-lucrative service lines; and the cycle begins again. Yet, thereare times when the market is so anxious for new services that vendors offer new, immature services andsolutions at discounted prices, even below cost, to gain notoriety and capture a market. This is riskybusiness for ESPs, causing some to exit the market or certain service lines due to extensive losses intrying to stay profitable while learning the business. Customers that are early adopters of these servicessuffer from a lack of results, cost overruns and even business interruption. New services in danger ofcommoditization before their time include e-commerce and application service provider outsourcing.

Ultimately, today’s IT services market offers virtually everything but maturity. Therefore, risk assessmentis fundamental to every IT sourcing evaluation.

3.1 New Service Models

It is no longer enough to view IT service opportunities strictly in terms of traditional IT service lines (e.g.,consulting, development, integration and management). Nor is it accurate for defining the marketpotential, or addressing changing enterprise needs.

To survive, enterprises will employ distinct services to accomplish specific business objectives:

• Management: Enterprises’ foremost concern is optimizing the value of their capital investments viaapplying resources and processes to ensure a maximized return on their IT assets.

• Access: Enterprises do not want to own technology or assets or build up large IT staffs but, rather, willprocure the needed functionality to ensure maximized operating income.



• Optimization: Enterprises are focused on their competitiveness — how to most-effectively availthemselves of the best sources to maximize market share through applying best-in-class expertise totheir organization.

• Creation: Enterprises are seeking wealth creation — return on equity — via achieving connectedrelationships in virtual marketplaces or being connected in supply chains (see Figure 5).

Sharedenvironment

IT efficiency

Business outcome

Enterpriseenvironment

Management

Optimization Creation

Access

Delivery

Value

One-to-one

One-to-manyOne-to-one

One-to-many; many-to-many

Predictable pricing

Pay for performance Business transaction

Rental approach


Figure 5. Radically Different Engagement and Pricing Models Emerge

Market analysis: New service provider models, characterized by the access and creation worlds —e.g., application service providers, managed service providers (MSPs) and Internet marketplaces— have shaken up the market, calling into question the relevance and cost-effectiveness of theone-to-one engagement model and, instead, favoring a leveraged one-to-many model.

4.0 The Competitive Landscape

Strategic Planning Assumption: Through 2005, the adoption rate of the access and creation models willpermanently reshape IT provisioning, which will result in a shift of technology asset ownership to serviceproviders (0.8 probability).

Mapping the various IT service categories to the sourcing matrix reveals the complexity of offeringsenterprises will procure to enable various outcomes. The management and optimization quadrants reflectthe more familiar services to support the traditional economic values. In the access and creationquadrants, new Internet-based services emerge that are less mature but nevertheless requisite if anorganization is considering how to evolve an e-commerce-based business. Management and accessprovide the IT infrastructure underpinnings to enable the value that optimize and create respectivelypurport to deliver (see Figure 6).



Sharedenvironment

Enterpriseenvironment

Businessoutcomes

IT Efficiency

CreationOptimization

Management Access

Service provider (e.g., TSSP and SSP)

ASP

BPR or change management

Applications outsourcing

Enterprise operations

IT Outsourcing

Virtual “Net” Marketplace

Transaction Processing

Hosting - Internet data center

Product Support

Consulting

Integration

Development

BPO

Desktop

NetworkHelp desk

BSPI-BPO

Exchanges or portals

MSP

ERP

ASP: Application service providerBPO: Business process outsourcingBPR: Business process re-engineeringBSP: Business service providerERP: Enterprise resource planning

I-BPO: Internet business process outsourcingMSP: Management service providerSSP: Storage service providerTSSP: Technology service support provider


Figure 6. The Emerging Competitive Landscape

In the future, enterprises will segment sourcing strategies in terms of the services needed to enablespecific outcomes. Gartner advises the following when the outsourcing option is chosen:

• Business imperatives should lead in selecting the type(s) of service required.

• Different evaluation criteria for ESPs must be applied to determine sourcing strategies for differentservice categories.

• Multiple ESPs will be chosen to ensure "best-in-class" services provision.

Action Item: Service delivery models cannot be selected merely because they are available. Risks mustbe assessed and mitigation techniques planned when adopting new or emerging services.

4.1 How Many Vendors?

Strategic Planning Assumption: While "multisourcing" will remain the dominant sourcing strategy through2004, 40 percent of large enterprises will adopt a prime or general contractor to manage the ESP chaos(0.7 probability).

As enterprises become more dependent on ESPs, they face the decision to build a sourcing strategyaround a single, external source or multiple, integrated sources. This decision effects the enterprise’sability to deliver value, yet it is often made without recognizing the internal factors driving the decision. Asingle-source approach works for enterprises that can manage a single, complex contract but lack the



capability to manage and integrate multiple suppliers. Certain internal characteristics will indicate whichvendor management model best suits an enterprise’s needs (see Figure 7).

✓ Strong suppliermanagement andintegrationcapacity

✓ Needs topperformance fromselected suppliers

✓ Cannot attract asinglelarge vendor

Best-of-breed

✓ Adequatesuppliermanagement

✓ Lacks theresources andinfrastructuresformultisupplierintegration

✓ Wantsflexibility forsupplierselection

Generalcontractor

✓ Understandssuppliermanagement

✓ Lacks theresources andinfrastructuresformultisupplierintegration

✓ Wants to selectkey suppliers

Primecontractor

✓ Inexperiencedwithmultisuppliermanagementandintegration

✓ Protractedprocurementprocess

✓ Can attracta singlelarge provider

Single source


Figure 7. One or Many ESPs? Look Within.

Enterprises with protracted procurement processes that want to avoid constant market tests can alsobenefit from a single-source approach. As the enterprise’s understanding of multiple suppliers increases,as well as the processes to manage and integrate them, a prime or general contractor approach isbeneficial for obtaining a mix of suppliers without the job of managing the suppliers directly. A primecontractor assembles a relatively fixed team, whereas a general contractor selects team members basedon requirements over time. Enterprises with strong supplier management and integration capabilities canbenefit from a best-of-breed approach, which works best in organizations that have invested in developingsourcing competencies.

Action Item: Be certain the single or multisource decision is made with full recognition of the enterprise’sbusiness competencies to manage the relationships, contracts and integration requirements.

4.2 IT Services Value Chain

Market analysis: Enterprise preferences for risk mitigation, reliability, and timely and cost-effectivesolutions will hasten the adoption of the services value chain, resulting in new service deliveryimperatives for ESPs.

Three basic assumptions underlie the IT services value chain:

• Convergence of vertical-specific business processes and mass-customized applications

• Optimization of a common infrastructure to support the customized process framework

• IT services becomes the "builder" for bringing all facets of the process solution to the enterprise (seeFigure 8)



Business solution aggregator

= New roles

Business process

Business applications

Infrastructure

Business strategy

ProcessArchitect

Application integrator

Infrastructure provider

Solutionarchitect

The “Foundation”

The “Appliances”

The “Frameworks”

The “Blue Print”

The “Builders”

Vertical expertise

Business services

value chain

Business best

practices


Figure 8. The Services Value Chain Emerges

There will be three primary layers in the IT services delivery model of the future.

• A common infrastructure layer, based on open standards, delivers the "industrial strength" foundation.It includes the infrastructure backbone, which is fully customized to support the specific applicationand deliver the bandwidth requirements and all the services providers involved.

• The business applications layer acts as the appliances. It includes a customized and packaged suiteof applications, operating systems and middleware, as well as application development andintegration skills.

• The business process layer is where business processes are designed and optimized and innovationtakes place. Service players here have the role of designing the framework, which the businessapplications and common infrastructure support.

5.0 The Sourcing Life Cycle

Gartner expounds the notion of strategic sourcing as a life-cycle activity in which a sourcing strategy leadsto an evaluation-and-selection process, then deal negotiation and relationship management. Asenterprises begin the transition to this way of working, each of the four phases of the life cycle poses achallenge. Needs are being defined in Phase 1, transformed into tactical requirements in Phase 2,evolving into contract and relationship principles in Phase 3 and ensconcing themselves as managementprocesses in Phase 4 (see Figure 9).



Sourcing Strategy• Identification•Criteria development•Organization fit•Selection process•Partnership opportunities

•Governance model•Metrics•Payment models•Terms and conditions•Provision for changes

•Relationship•Performanceassessment

•Goals: reach businessobjectives, efficiency,quality and innovation,

•Transition

Evaluation and selection

Contract developmentSourcing management

•Alignment•Organization assessment•Core competencies•Market scan•Make-or-buy decisions•Risk analysis

Strategic

Phase 1

Phase 4Phase 3

Phase 2

Tactical


Figure 9. Gartner’s Sourcing Life Cycle

Once the discipline of strategic sourcing has been engaged, however, there is generally little statetransition under way (e.g., from internal provision to outsourcing); and the cycle condenses to a continuingand fluid mapping of sourcing strategy to the governance principles needed for relationship management.Where enterprises have a virtual structure and are highly dependent on their partner networks, thesourcing strategy will be fused into their business strategies, which become extremely relationship-based.

Consequently, the sourcing life cycle is the key to successful business operations, and the sourcingstrategy is the enabler of the business strategy.

5.1 Developing a Sourcing Strategy

Tactical Guideline: Building a sourcing strategy is about looking beyond today’s tactical internaldelivery problems to map out how business objectives will be fulfilled among an array of internaland external service-delivery options.

Sourcing is about defining who will fulfill various parts of certain objectives. Business strategy is clearlythe first step, but then what is the next step — IT strategy or sourcing strategy?

The classical, prescriptive world has been based on the sourcing logic of "do that for me, this way," andfollowed the sequence of business, IT and then sourcing strategy. In a less-monolithic and more-dynamicenterprise, the second step is strongly oriented to define who will ensure the result, with less emphasis onhow to achieve it. This makes sourcing strategy the second step, to quickly select the internal/externalentities that will carry out a project, a service or a process that is part of the global objective. The ITstrategy will be worked out later on, involving the service providers selected.

A sourcing strategy is the starting point for mapping disruptive business change into effective changes tothe operational environment (see Figure 10). However, the strategy should be revisited frequently toensure that no misalignment is allowed to develop.



Performanceimprovement and

development plan forretained functions

Implementationplan

Organizationalrestructure and skills

acquisition plan

Change plan forsourcing governance

model

Stage 3:Implementation

planning

Outsourcing objectivestatement and

action plan

Detailedsourcingstrategy

Strategic gapanalysis

Emergent strategy feedback loops

Stage 1:Discovery andidentification

High-levelmarket and pricing

Assessment ofchange capability

Initial riskidentification and review

Assessment andalignment of

business and IT needs

Assessment ofcompetencies,capabilities and

knowledge capital

Baseline assessment(i.e., review of operational

status and strategy)

Establish sourcingalternatives

Stage 2:Analysis and strategy

determination

Establish and determinestrategic sourcing

principles

Identify mostviable alternatives

Select risk-optimalsourcing alternatives

Embody strategicsourcing principles in

business case

Businesscase

High-levelsourcingstrategy


Figure 10. What Is a Sourcing Strategy?

In businesses far more virtual than today’s typical organizations and highly dependent on their partnernetworks (e.g., what an Italian industrial district is doing already), each single organization’s value will befar more related to those of its partner network than to its own only. For this kind of organization, thesourcing strategy will be an integral part of — or practically fused into — the business strategy, whichmust be highly relationship-based.

5.2 Sourcing Governance

The sourcing office has three active roles:

• Service sourcing

• Coordination

• Evaluation

These roles are supported formally by committees and informally by communities. The governancestructure for sourcing is composed of three elements:



• Operations committee

• Strategy committee

• Technical committee (see Figure 11)

It is the natural consequence of the successful experience of the project office, with broadenedresponsibilities to include all internal resources — employees and competence centers — and externalresources (e.g., free agents and service provider organizations).

Servicecoordination

Servicesourcing

Serviceevaluation

Strategycommittee

Technicalcommittee

Operationscommittee

Supporting communities


Figure 11. The Shape of Things to Come: The Sourcing Office

The sourcing office does not actually manage either continuous services or projects. It does not doresource management (e.g., career development) either. The sourcing office is responsible for planning,specifying, acquiring, deploying, controlling and evaluating the resources from the various sources thatare needed to deliver services to the enterprise. If the "service" provided was the making of a movie, thesourcing office would be responsible for casting the actors in their various roles. It acquires them basedon the desired characteristics, coordinates them in their work and evaluates the delivery of services,generating feedback for the enterprise’s resource management and outside service providers.

Strategic Imperative: Mastering sourcing governance and management is critical to successfulbusiness operations.

6.0 The Sourcing Value Proposition: What Is the Point?

Strategic Planning Assumption: Through 2003, 50 percent of ESP projects will be consideredunsuccessful by senior executives because they have not delivered the anticipated value (0.7 probability).

Gartner research has shown that three broad types of relationships exist between ESPs and buyers ofthose services:

• Utility relationships focus primarily on cost reduction, with the goal of maintaining consistency in thedelivery of services.

• Enhancement relationships have productivity as their goal.



• A transformation relationship is characterized by a partnership focused on innovation and newbusiness, changing the very nature of the basis on which an enterprise competes. Although it mayappear that the goal for an enterprise is always to establish a transformation deal, this may not be thecorrect approach for the particular circumstances (see Figure 12).

Effectivenessfocused

Efficiencyfocused

Competitive advantage

Relationship Complexity

80%

15% – 17%

3% – 5%

Where theservice volumes

are now

BusinessValue

Enhancement

Utility

Transformation


Figure 12. Three Types of Service Expectation

Understanding and choosing which relationship best fits an enterprise’s business strategy, and the "value"it wants from the deal, lays the groundwork for all subsequent decisions on how the deal is managed.

Action Item: Enterprises must take the lead in determining the sort of outsourcing or sourcing relationshipthat best meets their business needs and how to assess the success of that relationship.

Strategic Imperative: Enhancement and transformation deals require greater flexibility for theservice recipient and the service provider to keep pace with ever-changing businessrequirements.

6.1 Renewing the Value

Long-term arrangements with ESPs must be built for change, rather than "built to last." Flexibility is thekey to successful long-term service supplier and buyer relationships (see Figure 13).

Over time, changes in the business and evolutions in technology will create a need for contract "renewal."Recognizing these inflection points will be critical to the long-term success of an enterprise's sourcingstrategy. Contracts with suppliers must be assessed continually at these change or inflection points todetermine how the terms and conditions and service metrics must be adjusted to create the next level ofvalue. Once things stabilize, it is necessary to go back again and review these contract structures toadjust to that stabilized operation and bring the relationship back to the utility range until the next"renewal" is called for.



Time

Goals

Key:

= Planning or negotiation and vendor evaluation

Utility

Enhancement

Transformation

= Peak performance

= Inflection points = New or revised contract

Stage 1enhancement

Stage 2enhancement

Complexity


Figure 13. Partnerships Change Over Time: Know When It Is Time to Change

Tactical Guideline: A well-designed sourcing agreement will make the provision for adjusting theperformance criteria as the classification of the relationship (i.e., utility, enhancement andtransformation) changes.

6.2 Measuring Sourcing Value

The four factors that define "a good deal" — alignment and vision, contract and relationship, customersatisfaction, and service level and pricing — will vary in importance from deal to deal, and as therelationship develops. For a utility deal, service level and price will be the dominant factors and willtypically carry a weighting of more than 50 percent in the evaluation process. Customer satisfaction willtypically focus on the end user. An enhancement deal will place more emphasis on the relationship andon contract flexibility (i.e., value will depend more on success in these areas than in a utility relationship).Customer satisfaction will focus on business managers, as well as end users (see Figure 14).

Price and service level will continue to be important, but they will carry a lower overall weighting than for autility deal. In a transformation deal, vision and alignment will be critical to success. The deal will focus onbusiness benefit or the development of new business, with the direct price of the services delivered lesscritical to the meaning of value. Customer satisfaction will include business executives. The combinationof the four factors, and the relative importance assigned to each, represents a set of common goals forthe enterprise as well as the ESP.



EnhancementUtility Transformation

Pricing andservice levels

Customer satisfaction

Contracts and relationships

Alignmentand vision

Soft metrics often failed to be measured

Hard metrics (e.g., benchmarks and service-level review)


Figure 14. What Matters Most?

6.3 The Role of the Contract

Strategic Planning Assumption: Through 2003, fewer than 30 percent of enterprises will have formal plansfor managing long-term relationships with their ESPs (0.8 probability).

In the outsourcing market, as in most business arrangements, enterprises rely on a legal contract todefine terms and conditions; however, the dynamism of business and technology makes it imperative thatflexibility exists in any outsourcing engagements (see Figure 15).

Contractualmanagementdominates

Relationshipmanagementdominates

Enhancement

Utility

Transformation

Relationship impact

Businessvalue

Key:

= Relationship management

= Contractual management= The partnership

Thecontract

Thecontract

Thecontract


Figure 15. Importance of "the Contract" vs. "the Relationship" in Partnering

The combination of contractual management and relationship management defines how the partnershipworks. Specifically:



• In utility deals, the contract is dominant. It prescribes technical performance levels. The relationshipmanagement aspect is also critical to act as a buffer to accommodate change and adjustperformance. The criticality of a "good contract" serves both parties well to ensure clarity ofunderstanding in expected outcomes, service-level agreements and other aspects of the deal.

• In enhancement deals, the contract remains an important guide to specifying outcomes, and processteams will rely on it to set and monitor performance. However, equal importance is given to therelationship management component, largely to accommodate flux in business cycles.

• In transformation deals, relationship management dominates. The contract provides basic structure.The partnership becomes the tool for ensuring the value of the relationship.

Tactical Guideline: The staff competencies for managing these three varied engagement typesdiffer dramatically.

6.4 Sourcing Management Competencies

What competencies are required by staff to manage the delivery of IT services? The staff competenciesnecessary for managing these three varied engagement types differ dramatically.

In utility contract arrangements, technical, business and behavioral competencies are about equallyimportant. In particular, the technical aspects of understanding established systems and technology andintegrating systems are key. In the business area, behaving commercially, managing change in businessresulting from IT applications and focusing on customers are important. The behavioral aspect involvesfocusing on results and principled negotiation (see Figure 16).

Businessvalue-add

Relationship

Cost efficiency

Transformation

Utility

Technology

competencies

Business

competencies

Behavioral

competencies

ComplexStraightforward

Contract Management

Enhancement

Behavioralcompetencies

Businesscompetencies

Technologicalcompetencies


Figure 16. Different Contract Arrangements Stress Different Competencies



Transformation contracts are more demanding. Business and behavioral competencies are particularlyimportant, and some stand out:

• Understanding business practices or approaches

• Understanding business organization, politics and culture

• Behaving commercially

• Managing change in the business resulting from IT applications

• Focusing on customers

Behavioral aspects include:

• Leading, inspiring and building trust

• Thinking creatively and innovating

• Focusing on results

• Thinking strategically

• Building relationships or team working

• Influencing and persuading

6.5 Ready for Strategic Sourcing?

From time to time, it makes sense to assess how well the enterprise is progressing in tackling the fourmain challenges of strategic sourcing (see Figure 17).



Donepoorly ornot at all

0

Donesomewhat

poorly

1

Donesomewhat

well

2

Done well or

completely

3

1. We generate our IT sourcing needs directly from the business strategy.

2. We differentiate our sourcing needs on the basis of different kinds of IT service.

3. We identify our IT service sources on the basis of objective criteria.

4. We routinely evaluate potential sources inside and outside the business, using the same criteria.

Diagnosingsourcing

needs

Evaluatingand

selectingbest

sources

5. We complement built-to-last contract items with built-to-change items.

6. We co-manage contract arrangements on a formal basis.

Managingcontractchanges

7. We have joint procedures in place for resolving conflicts in contract management.

Total score:

8. We evaluate the staff competencies needed to manage IT sourcing.

9. We record and monitor the competencies we require of sourcing managers.

10. We recruit, develop and promote staff showing the appropriate competencies.

Providingsourcing

managementcompetencies


Figure 17. Be Ready for Strategic Sourcing

The chart in Figure 17 is designed to help. First, work through the chart and add up the score. Then,check the score against the following rating table.

• 24 or more: Strategic sourcing is a critical competency.

• 17 to 23: Need work in developing specific sourcing competencies.

• 9 to 16: A start, but needs improvement. Sourcing is tactical and reactive rather than strategic.

• 8 or less: Sourcing is a function of procurement; not a competency of the IS organization.

Finally, take the necessary action.

7.0 Conclusion

There are many reasons for the current instability in the outsourcing environment. More enterpriseexecutives are looking at service providers as a way to obtain proven expertise to solve complex issues. If



it is done incorrectly, using service providers can be a swamp of sub-par performance, plunging moraleand lost business opportunities. Business objectives that are not clearly communicated, unanticipatedchanges in the business environment, unrealistic user expectations, metrics that are not based onbusiness objectives, the failure of senior management to sponsor the relationship and political influenceswithin the enterprise can, by themselves, cause significant problems. Together, they will almost certainlykill any outsourcing project. Enterprises and providers must work together to clearly understandobjectives, set expectations, and sponsor and manage the project. This can be accomplished through theuse of best practices, including properly selecting service levels for the outsourcing function, and knowingwhat to pay and how the charges are built.

Successful enterprises will embrace the idea of a multisourced environment to support their businessneeds and will re-skill IT to effectively manage and optimize external provider relationships. Ultimately, theIT services market offers everything, but maturity. Risk management is fundamental to every IT sourcingevaluation.

The sourcing life cycle is the key to successful business operations, and the sourcing strategy is theenabler of the business strategy. Thus, mastering sourcing governance and management is critical toseamless business operations

marketplace realities in strategic sourcingmarketplace realities in strategic sourcing although...

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