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Research note

outlook • strategy • research • 2010

outlook • strategy • research • 2010


Introduction Outsourcing Performance is the largest independent study into the market for IT outsourcing in the Netherlands. In 2009, for the seventh time clients have evaluated their outsourcing relationship with their service providers. The observations of CIOs, IT managers, vendor managers and other key decisionmakers in IT allow us to build a complete picture of what is happening in the Dutch outsourcing market.

The study’s aim is not only to measure the performance of service providers, but also to collect the experience gained by professionals. In this way, we can tell the story behind the figures. Sharing thoughts and practices is essential in this young market that needs to mature quickly. Few organisations are willing and able to backsource IT completely. It is therefore essential to understand what outsourcing means for your own organisation and what is needed to make it a success. One of the most heard complaints is lack of transparency. Unbiased market information is needed to mature the market. Outsourcing Performance provides clarity by determining trends and providing information on the position of specific service providers. The first two parts of this research note introduce the main research findings, consisting of a market analysis and our public Outsourcing Recommendation Index. There are no easy solutions and in recent years many lessons have been learnt the hard way. The third part of this research note provides a glimpse into the future of outsourcing based on the sourcing experience of seasoned CIOs combined with seven years’ worth of study material. The final part contains our interview with professor Venkatraman on the impact of outsourcing on the relation between business and IT.

contentS 1 Market analysis 

3

Summary of the main conclusions

2 Outsourcing Recommendation index 2009

8

Overview of clients’ willingness for recommendation per service provider

3 The future of outsourcing

11

Solutions from experienced CIOs for successful outsourcing

4 Success with sourcing demands a fresh look at alignment

15

An interview with professor Venkatraman

5 About the study and Giarte

Outsourcing Performance 2010

18

Research note  


1 maRket analysIs 1. rapid growth stalls in outsourcing organisations Two years ago, a majority of organisations that already outsourced expected to see continued growth in the use of outsourcing in all areas; only 4 percent expected to see a decrease. This year the growth projection is more balanced. Albeit the continuing trend to increase the use of outsourcing, the slope of the growth curve seems to fall. Growth will continue to be the greatest in Application Management (AM): 39 percent of the participating organisations plan to outsource more application work as opposed to 22 percent who plan to outsource less of this type of work. For Infrastructure Management (IM), the difference is much less significant: 32 percent expect growth as opposed to 25 percent who expect to see a decrease. It appears that most organisations are in a phase of reorientation with regard to End User Management (EUM): the group of organisations that expects to see a decrease is bigger than the group that expects to outsource more within this area. In other words, increasing the share of wallet at current clients is not enough for most service providers to grow. They need to acquire business within organisations that are not yet outsourcing.

Expected use of outsourcing for organisations that already use outsourcing in the mentioned domain

AM

7%

IM

6%

EUM

9%

0%

15%

39%

19%

29%

44%

24%

20% Strong decrease

24%

38%

40% Some decrease

OutsOurcing PerfOrmance 2010

10%

22%

60% Equal use

80% Some growth

7%

7%

100% Strong growth

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2. The economic crisis is not yet affecting plans to a significant extent A clear majority of the organisations indicates that they will continue with their current plans in terms of their sourcing strategy. This indicates that the current economic crisis does not have a significant effect on outsourcing plans that are already in place. However, the effect of the recession can be seen in the relatively high percentage of organisations (38 percent) who aim to make additional cost savings within current contracts.

Scenarios for current contracts 38%

We want to realise further cost savings within existing contracts

36%

We will be making no/few changes, we will serve out existing contracts without significant changes

13%

We would prefer to renegotiate contracts and extend them under favourable conditions

4%

We have made other arrangements

Scenarios for contracts that are coming to an end 41%

No contracts are coming to an end in the next twelve months

24%

We are going to tender the service again, as a result of which we may change service providers

16%

We are probably going to continue to work with the existing service provider(s)

9%

We are going to take specific parts of the work back under our own roof

4%

We are going to split the work into several lots and put these out to tender

2%

We are going to be taking large parts of the work back under our own roof (backsourcing)

4%

We have made other arrangements

Scenarios for current plans 62%

We are going to continue with our original plans

10%

We are going to outsource more IT than originally planned

10%

We are going to outsource significantly less IT than originally planned

10%

We have put the outsourcing of more IT on hold

5%

The emphasis will be more on the outsourcing of business processes (BPO) and less on IT

3%

A different approach

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3. Satisfaction increasing This year, the average level of satisfaction has increased within all areas. This increased satisfaction particularly applied to AM: the average score increased by 6 percentage points compared to 2008 and no single service provider saw a drop in level of satisfaction. This is a significant difference and a positive signal showing that progress is being made in this market. Satisfaction also increased in IM and EUM, although the difference was less marked here. These figures also reflect the expected growth in the use of outsourcing which is greater for AM than for the other two areas. The Outsourcing Recommendation Index also confirms this positive trend. The percentage of Promoters, organisations who would definitely recommend a service provider, has increased to 30 percent. In 2007 and 2008, these figures were at 26 and 28 percent respectively.

Development satisfaction with service providers 2007-2009 Application Management

Infrastructure Management

62 55

’07

55

End User Management

55

57

54

’08

51

’09

’07

’08

Highest score in the service provider group Average score in the service provider group Lowest score in the service provider group

’09

’07

53

51

’08

’09

Each respondent rated his satisfaction for each of the three domains if relevant to his organisation. A six point scale was used to rank satisfaction. The scores for each service provider were translated into a weighed average. The highest, lowest and average score for individual service providers in the three domains are plotted in the three graphs. The distribution of all scores in Application Management are illustrated in the circle chart below. The size of the circles illustrate how many respondents chose that scale (no overlap exists).

Distribution satisfaction Application Management

Very dissatisfied

Very satisfied 2%

8%

5%

14% 35%

Outsourcing Performance 2010

36%

Research note  


4. Still a great deal of potential for improvement in terms of sourcing governance The effective management of supply and demand is an important determinant of any successful sourcing strategy. Organisations indicate that there is still plenty of room for improvement in terms of sourcing governance. Most managers point the finger not only at service providers, they were also very critical about their own organisation. It is notable that the biggest area where improvement is necessary concerns internal management – between IT and business. According to the majority of managers, management of supply and demand is still at an unsatisfactory level. More than half of the organisations rate the process by which the business provides input for IT sourcing as insufficient or mediocre. Without a proper system to manage demand and supply internally, it is an illusion to manage external relationships effectively. However, we have seen that in recent years most improvements focused on managing – some would even say micromanaging – service providers. Apparently, this paid off as managers indicate that improving the relationship with the service provider is slightly less problematic. Although most organisations believe there is still work to be done in this area, internal governance needs priority as a necessary condition for improving the quality of external relations.

Improvement space sourcing governance Demand management 54% 40% in the business

Input service providers

51% 44%

6%

5%

S

B

U

S

IN

E

S

S

U

N

IT

S

R

E S IC R V E R D E VI O

P

Outsourcing governance

PRODUCTION DIRECTOR CAMERA IN TE DATE GO RNA VE L RN AN CE

SCENE

TAKE

E AL RN ANC TE EX ERN V O G

IT U N IT S Legend bar charts much improvement possible some improvement possible

Supply 51% management 41% to the business

Vendor management

61% 30%

8%

9%

little improvement possible

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5. global sourcing Increasingly services are being provided not just from the Netherlands, but from global delivery centres spread around the world. This allows additional cost benefits to be realised and gives access to a greater pool of talent. Over recent years, service providers have been going all out to get these delivery centres up and running. However, the use of global sourcing is still not a given. In slightly more than half of all contractual relationships offshore delivery does not come into the equation, this percentage is even higher for local service providers. The big players and the Indian providers have the most experience in this study. The Indian providers perform well in the study. Satisfaction with service provision is at a high level. As a result of this they have seen their sales opportunities rising for several years. In contrast to many local service providers, it is precisely these providers who will have greater opportunity over the coming year to win more orders. Indian providers mainly do work for large Dutch multi-nationals. In general, satisfaction with offshore delivery among the Western players is good, although it should be noted that most clients do not currently use offshore capacities, even those with the most experience (see table). It is expected that this will rise sharply as global sourcing is a good way for customers and service providers to bring down costs within existing contracts.

Satisfaction with delivery outside the Netherlands

No use of offshore

11%

Unable to judge satisfaction 9%

3%

Dissatisfied 4%

Somewhat dissatisfied 54% Somewhat satisfied 19%

OutsOurcing PerfOrmance 2010

Satisfied

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2 Outsourcing Recommendation Index For service providers, success in outsourcing means more than just carrying out a specific service. The total approach, including strategic direction of the company and soft skills such as attitude, is important. As an ultimate test to capture this, every year we ask whether customers would recommend their service provider to someone else. The result of this test is published as the Outsourcing Recommendation Index (ORI). The scores in this index do not reflect actual levels of satisfaction with specific services. A lower score in the index does not say anything about the capability of that service provider to provide a certain service, while a higher score is not an absolute guarantee for success with that service provider. Rather, the scores provide an indication of the ‘fit’ between service providers and their current clients. Results can be used as input for discussions. It should be noted that using only this data as the sole input for vendor selection is inadequate.

About the Outsourcing Recommendation Index Each respondent was asked the question “Would you recommend this service provider if someone asked you to suggest a partner for IT outsourcing?” The service provider could be rated on a six-point scale. The score in the Outsourcing Recommendation Index is determined by the number of positive answers divided by the total number of evaluations. Only service providers with fifteen or more evaluations are listed in this public index. This is the minimum number of contracts required to assess performance over recent years. Accenture and Schuberg Philis have the fewest evaluations in the index this year, with sixteen each. With 45 evaluations Atos Origin has the most contracts in the benchmark study. Because the index is an unweighted average, the score may vary widely from year to year. To address this, a distinction is made for each service provider between three client groups: the Detractors, the Passives and the Promoters. Seen over several years, this distribution is more stable compared to the score in the index. ot ly n t n i no ta cer inly a t t s r Ce Mo

Detractors

ot yn abl b Pro

Passives

es yy abl b Pro

es ly y ain t r Ce

st Mo

es ly y n i ta cer

Promoters

Scores on these scales count for the Outsourcing Recommendation Index

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Research note  


Outsourcing Recommendation Index Accenture

100% 97%

Sogeti

95%

Imtech ICT

94%

Schuberg Philis

89%

T-Systems

85%

Centric 77%

Logica

76%

Simac

74%

Fujitsu Services

73%

Atos Origin

70%

Capgemini

68%

IBM Ordina

67%

HP Enterprise Services

67% 51%

Getronics 0%

20%

40%

60%

80%

100%

This year, Accenture takes first place in the index. The organisation received no negative recommendations whatsoever from their client group. Sogeti and Imtech ICT are in second and third place, the same ranking they achieved last year, but both with a higher score. The highest scoring newcomer is Schuberg Philis in fourth place. T-Systems, who came first last year, has dropped to fifth place, but still finishes higher than two years ago when we started using the index. Centric, at number six, is the last participant to get an 80%-plus score. Ordina, HP Enterprise Services and Getronics, all organisations that have recently been the subject of mergers, takeovers and demergers, came lower down in the ranking. Customers are quick to notice when the focus moves, even momentarily, away from them and onto the internal organisation. A large ‘middle group’ has come into being in relation to all these three providers: the clients in this group are carefully watching the direction the company will take. The Outsourcing Recommendation Index is an unweighted average. This means that the scores may vary widely in successive years. Atos Origin and Getronics are good examples of this. Atos Origin replaced their 2008 score of 56% for a score of 73% this year while Getronics witnessed a decline in their score from 64% in 2008 to 51% in 2009. For this reason, we also look at the distribution of the evaluations in three groups: the Detractors, the Passives and the Promoters. Those in the latter group are also referred to as the ‘fans’ of the service provider.

Outsourcing Performance 2010

Research note  


Recommendation groups per service provider 2009 Accenture

44%

Atos Origin

9%

Capgemini

8%

Centric

56% 67%

24% 78%

4%

14%

50%

46%

HP Enterprise Services

11%

72%

17%

Fujitsu Services

10%

74%

16%

Getronics

12%

IBM

11%

76% 57%

Imtech ICT

Schuberg Philis

35% 82%

4%

18%

79%

17% 94%

6% 62%

Simac

38%

38%

Sogeti T-systems

32%

65%

Logica Ordina

12%

62% 42%

5%

0%

10%

20%

53%

30%

Detractors

40%

50% Passives

60%

70%

80%

90%

100%

Promotors

Schuberg Philis, included in the index for the first time this year, has the biggest group of Promoters within its client group. Last year Sogeti was in this enviable position yet, they too, have increased their own group of Promoters compared to last year. Centric has made the biggest leap: last year a quarter of their clients were Promoters, this year the figure had nearly doubled to 46 percent. This is a good step towards keeping a high score in the ORI. Atos Origin, Capgemini, HP Enterprise Services, Fujitsu Services, Getronics, Logica and Ordina continue to be relatively vulnerable to wide variations in the ORI-score due their large group of Passives.

t no t nly i no a ert nly c i a t s rt Ce Mo

Detractors

Outsourcing Performance 2010

ot ly n b a b Pro

Passives

es ly y b a b Pro

yes nly i a rt Ce

yes nly i a ert st c Mo

Promoters

Research note  10


3 The future of outsourcing Solutions from CIOs for successful outsourcing In theory, the outsourcing of IT takes place for strategic reasons, with lower costs being one of several outcomes. With many deals cost savings are achieved, but at a price: the strategic aspect takes a back seat. This is a cause for concern, because organisations are about to enter on a period in which the risks associated with IT can only increase. It is tempting, in these difficult times, to opt simply for cost cutting. However, a glance at the American automotive industry is lesson enough that financial tricks alone will not save the day: the years ahead will tell us which organisations have successfully thrown off the shackles of the past and are ready for the digital future. In the years to come, outsourcing success cannot be left to chance. Therefore, it is important to look at what, in the view of senior managers, are the most important lessons we can draw from previous experience. These are CIOs who already have years of experience and have lived to see several generations of outsourcing. Their experience combined with the stories accumulated since the start of Outsourcing Performance provide useful insights to help us boost the quality of outsourcing in the future and identify the most important elements of each deal: the cost structure, a clearly agreed transformation, a transparent playing field in multi-vendor sourcing, mature sourcing governance and relevant innovation.

1. It’s about cost, not price Even if organisations do not set off down the outsourcing route with the sole aim of making cost savings, one of the aims is usually to achieve a lower price. The whole tendering process is organised to achieve this end. Essentially, in ‘negotiations 1.0’ a client, who sets off with specific optimistic assumptions, negotiates with several bidders who steadily reduce their price in knock-out rounds – from the request for information to the best and final offer – in order to win the contract. The one who comes out the winner is the one with the lowest price, borne of many over-optimistic assumptions and a heavy dose of opportunism. The customer is focusing on the supplier’s price, but should instead pay closer attention to the cost structure in their own organisation. Getting a lower price at day one is worth nothing on its own if the real costs and cost drivers of the original situation have not been identified. Having a clear picture of what the costs and cost drivers are before putting out an RFP is essential to avoiding getting into troubled waters later on. For example, complexity arises if the infrastructure and applications are too old and diverse. The operational costs just to ‘keep on the lights’ will be relatively high, even if the service provider tries to organise the work more efficiently (e.g. by relocating the work to offshore locations). But how would the situation be if the outdated environment was changed? In this case, many of the current costs could simply be avoided. Increasingly, the strategic choice is between direct cost reduction versus structural cost avoidance. Structural reduction of costs demands transformation.

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The costs of transformation are often included in the prices for the entire term of the contract and, as a result, there is no longer any visible investment for the client. This is not useful: clients do not take full co-ownership of the transformation from which they are benefiting. The price of the service must always reflect the costs – for the simple reason that the relationship will be doomed to failure if the provider is not able to make a fair profit on the contract. Both parties must be aware of this principle. Statements that certain services can be done ten percent cheaper should always be accompanied by detailed explanations how the savings are realized. And don’t stop asking questions too soon. If a service provider states he can realise savings because of economies of scale, ask how this affects your situation precisely. Economies of scale in IT cannot be realized without a certain amount of standardisation, meaning that things will also have to change within your organisation. Possibly at some costs that will offset part of the savings. Real savings are the result of choices that are chiefly about working smarter. Many SLAs have been set up with a risk profile that no longer reflects current times. Not all systems are equally as critical and require round the clock support, fixed maintenance contracts are not always necessary and, in too many cases, requests for changes are merely cosmetic. In this case, any reductions in costs through outsourcing are a pyrrhic victory: you get your savings when signing the deal, but you end up paying too much.

2. Transformation must be visible and tangible As said, structural reduction and avoidance of costs demands transformation. This is exactly the phase that rarely goes according to plan. For both the client and the supplier there are too few incentives to bring about the necessary changes. The client benefits immediately from the lower price after signing the contract and transformation costs are invisible because they are spread out and already calculated. For service providers, it is more profitable in the short term to leave things as they are and earn money on out-of-scope activities. There are numerous examples of deals where the budget for the transformation had already been used up before the start of this phase. Too many deals get bogged down when it comes to long-term transformation. The principle of ‘no pain no gain’ applies: it is best if this period is kept as short as possible. The programme needs to be carried out with military timing and precision on both sides. This means that the client must get their own organisation on side and make clear choices. Service providers should not have to get decentralised business units or countries to buy in to the deal all over again if a strategy of centralising a new infrastructure and rationalising the application landscape has already been agreed. To ensure that both parties have an interest in completing the transformation as quickly as possible, the right incentives need to be in place. For example, part of the savings at the side of the client can only materialize after the transformation. Also, the service provider’s margin must be higher after the transformation (an additional reason to focus more on cost rather than price). The service provider must not use the budget for the transformation to gap other holes and, therefore, this budget needs to be separate from other operational budgets.

3. Multi-vendor outsourcing demands a transparent playing field It is clear that the trend towards multi-vendor outsourcing is here to stay; best of class outsourcing is leading the way. Increasingly, the parties interface with one another in a chain of business processes and are dependent on one another for the end result. The question is who takes the lead? In some cases, there may be a subcontractor, but for many service providers there is no hierarchical relationship between them; they each have a contract with the customer. To promote successful cooperation between the different parties, operational level agreements (OLA) are now frequently being used that specify how the parties should work together. An OLA is more a statement of intent than a contract. Practical experience shows that, where parties are not working together successfully because the economic incentive is not there, an OLA will not make a difference to the outcome. A transparent playing field is needed to bring the interests of all parties into line. It is also important to get prior agreement on the process, ideally on the

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basis of an industry process framework, and on the tools that will be used within the operation. This provides for a single reference framework. Many problems with multi-vendor arrangements come down to the absence of such a framework. If the organisation opts for a fixed group of service providers, it needs to be made clear that they are not competing with one another to get more business, but only with providers from outside the group. With falling client budgets, the total turnover that service providers can realise will also fall. The core group should get a bigger and bigger slice of the cake – on the basis of good performance – to build the necessary commitment. A CIO office can monitor whether the parties are working together successfully, with the main focus being on day-to-day issues. Often, operations are neglected by CIO offices and seen as non-strategic. This is a big mistake: sitting down to a three-monthly strategic meeting will be of little benefit if there are hidden tensions at the operational level. Working with a fixed group of suppliers demands transparency in terms of costs and margins. Margin control is still a developing discipline for many customers. In all too many cases, it appears that service providers achieve better margins through bad rather than good behaviour. It is not just that the commercial incentives in the contract are wrong, customers have insufficient insight into their service providers’ cost structure and margin structure. In this way, over time the contract may cease to reflect the relationship between the costs and margins. Transparency in costs is necessary to keep a handle on both quality and saving programmes.

4. Greater focus on sourcing governance The natural response of many vendor management groups is to throw themselves into managing the suppliers. There is nothing unusual in that: most people in these groups were responsible, in their previous career, for the work that has been transferred to the service provider. A consequence of this is that some groups raise a wall between the business and the service providers and see themselves as the intermediary and the only one that has contact with both parties. There is a risk that a bureaucracy will come into being that is focused on contracts, KPIs and relationship management, but that may mean nothing in terms of day-to-day operations. What is needed is a management organisation and sourcing governance structure that can help the business to take the right decisions about IT, but that can also evaluate what the consequences of this will be for the service provider in operational terms.

“Recent years have taught us that applying a raft of rules and SLAs does not work, nor does setting up dashboards with series of KPIs” IT is too important for it to be seen simply as an add-on to the business. In recent years, organisations have taken the steps required to be able to manage service providers. Now is the time to place more of a focus on effective demand management within the company. If vendor managers want to be a reliable partner to the services provider, they need to ensure the business adequately fulfils the role of customer. The effort involved in this should not be underestimated. It takes time and some experimentation to get the right relationship between the new sourcing management roles and the business. In the business, there are often information management (IM) roles that have not been clearly delineated. The appointments to these roles and ensuring there is sufficient authority attached to the role are very important aspects. However, this is no longer primarily the responsibility of IT, but of the business – and, as a result, IT – management can only act in an advisory capacity. For this reason, it is important that the CIO is able to influence the quality of IM. Without a fully fledged counterpart in the business, IT management in general and sourcing management in particular cannot function properly. Therefore, some CIOs have a right to veto new appointments and to determine the bonus for IM together with the business.

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5. Innovation must have a definite place There are often complaints about the lack of innovation during the term of the contract. But what do we mean by innovation precisely? An arrangement that the service provider’s price will go down every year by a fixed percentage does not seem like the best way to encourage innovation. For innovation to succeed, the service provider is partly dependent on the extent to which the customer is willing to abandon old principles and working practices. The service provider has to give up old income that may even be defined: not exactly an incentive. That things can be done more cheaply through innovation is an oft-repeated mantra, but in practice changing the current situation and doing something new is not easy. Both the client and the service provider will have to make choices and distance themselves from the old way of doing things. If costs are transparent and, on top of the supplier’s margin, the new savings are shared with the supplier, then challenging the status quo will be a good proposition for both parties. In addition to translating innovation into lower costs, there are other benefits on the part of the business if successful innovations take place. For example, the ability to integrate and unwind business units quickly if the company is the subject of mergers and takeovers. It is best to make innovation as specific as possible within the strategic direction of the company. It is never completely certain where a company is heading, but there are always scenarios, expectations, trends and success factors that are key in a sector or market. However, there are also factors that no one can allow for. For this reason, it is best to make it clear that fighting tooth and nail to keep the status quo is not an option.

Closing a deal is easy, but without the strong will to cooperate it cannot succeed Taking the above five points into account, what goes to make outsourcing a success? Whatever else, recent years have taught us that applying a raft of rules and SLAs does not work, nor does setting up dashboards with series of KPIs. Rules can be bypassed, not so principles. For this reason, it is best to translate strategic aspirations into a clear collaboration agreement, and to analyse where interests may be in conflict and where they are compatible. There are too few examples of the consistent translation of business aims into a sourcing strategy. Without this, there is no clear basis on which to make the outsourcing operation a success. Examples include a lack of understanding who has the responsibility for a specific target and what competences are essential for the business strategy in the years ahead. This is a pity, because formulating a sourcing strategy on the basis of business goals provides opportunities for the relationship between sourcing management, the business and the service providers to grow into a productive partnership. Success or failure cannot be placed solely in the hands of an external partner, not least because change will have to happen in the organisation itself for all the benefits offered by outsourcing and new forms of IT to be enjoyed. Outsourcing demands that choices are made in which all parties move together to achieve the desired results. Henry Ford put it well: “Coming together is a beginning. Staying together is progress. Working together is success.” The following people contributed personally to this article: Peter Bakker, Rob de Haas, Frans Haverkamp, Gerard Helmink, Aloys Kregting, Age Miedema, Jan Muchez, Fred Peters, René Steenvoorden, Thijs Vervaat and Corry Wouters.

Outsourcing Performance 2010

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4 Sourcing strategy asks for a fresh look at alignment An interview with prof. Venkatraman Many organizations still struggle with the relation between IT and the business. While it is increasingly difficult to define exactly where business stops and IT starts, it is useful to determine current pitfalls and what needs to change. Making the relation between business and IT work is often referred to as the process of ‘alignment’. Outsourcing provides an extra dimension to alignment: there’s not only the business and IT, but also the service provider. Professor Venkatraman laid the foundation of alignment with the article ‘Strategic alignment: leveraging information technology for transforming organizations’ that he co-authored with professor Henderson. This paper illustrated how the worlds of IT and business can be bridged. Since then, professor Venkatraman has published numerous articles on the impact of technology on business processes and models. Now he calls for a new way to look at alignment. What is his vision on the relation between business and IT in combination with outsourcing? Outsourcing Performance [OP]: You call for a new approach towards alignment that creates ‘shared vision and joint responsibility’ between the business and IT. Previously, we would say that IT/IS strategy follows from business strategy. Why should we change this view?

Venkatraman [V]: By framing that IT strategy follows from business strategy, we assert that business strategy can be formulated today without consideration of the recent developments in information technology. This is simply limiting and myopic. We have seen significant technological progress in the last decade and now, I believe that business strategy is more impacted by information technology than ever before. Look at the Internet; look at mobile apps on the iPhone platform. Look at cloud computing – not as delivering technical functionality but as business cloud – delivering next generation services to consumers. These developments and opportunities simply compel us to look at business-IT strategies that should be co-evolved with joint responsibilities. Let me explain what I mean with joint responsibilities. Often, IT responds to the business requirements based on the belief that business knows how best to use IT and the prime responsibility for IS managers is to support the chosen strategies and execute it efficiently. In such cases, the responsibilities are clear. Business specifies what is needed and IS responds. However, now we need a changed set of specifications of responsibilities because IT/IS may be able to sug-

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gest ways that business strategies could be created because of specific IT functionality. This may happen with IT managers being part of the business strategy formation team or IT managers working alongside new product development activities. I am not only suggesting joint decision-making because joint decisions can sometimes be costly and cumbersome. I am suggesting that IT/IS managers take on an expanded set of responsibilities, whereby they could suggest ways that the business can better leverage IT functionality. A good example is how Netflix uses data mining to suggest movie recommendations. IT managers are in a better position to assess how good their recommendation engines can be and figure out ways to enhance customer service offerings.

[OP] Many organizations struggle with these joint responsibilities and the way to define demand and supply. What do you see as the major hurdles that organizations currently face?

[V] I see three major hurdles. First, there is the recognition of the changed role for IT. Most managers have been schooled to think that IT strategy is a functional-level strategy that responds (reacts, follows) to business strategy. They need to shift their frame; they need to recognize the shifts and respond accordingly. Second, there is the issue of IT competencies. Even if there is recognition, there may not be adequate IT competencies to make this alignment shift happen. IT competencies may focus more on implementation and execution than innovation and experimentation. That often creates the mismatch between what the business managers expect and what the IT managers can realistically deliver. And the organizational positioning of IT is the last hurdle. If IT is positioned within Finance or operations, there are different types of hurdles that limit the ability to make this alignment happen. For example, if IT is part of

“IT managers should realize that their role and value within an enterprise is not managing technology infrastructure but in making their contribution to supporting today’s strategy and operations while possibly creating future strategies and valuecreation” finance, there will be more emphasis on quantification of tangible, short-term financial benefits. This is perfectly acceptable when IT is seen as a cost center but this approach may be too limiting if IT is seen as driving innovation and growth – where precise quantification and justifications using NPV or ROI equations may be difficult. Also, if IT is part of operations, then the COO may be better leverage IT to enhance or redesign processes or make improvements that may be seen as part of the larger organizational changes. In such situations, the emphasis is less on justifying IT expenses or IT investments separately but on looking at how IT is part of the process design and changed objectives. There is not one best IT positioning that works for all organizations. I advocate companies to experiment with more than one type of positioning so that the reporting relationships are aligned with the company objectives and the joint responsibilities lead to bottom-line efficiency as well as top-line innovation and growth.

[OP] As you say, current Business-IT conversations should be reframed to focus on business value of IT and design of future business models. Often, the relationship between IT and the business is perceived as a wicked problem. IT proclaims that it cannot deliver if the business does not specify what it wants. The business complains that IT does a poor job in explaining what is possible and that IT doesn’t deliver what is promised. Do you see a more fruitful approach?

[V] I see improvements over the last decade – more and more business managers recognize the importance of IT as part of their strategies, tactics and operations. They are able to articulate their requirements better than ever before.

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Research note  16


Similarly, IT managers see that they need to communicate what they deliver not as technical functionality but as IT-enabled business functionality or services. This is helped by newer generation of managers occupying the role of business analysts – at the intersection between business and IT. The greater availability of external services also helps in this regard. IT managers should realize that their role and value within an enterprise is not managing technology infrastructure that is decoupled from business operations – which could be done by third-party vendors – but in making their contribution to supporting today’s strategy and operations while possibly creating future strategies and value-creation.

[OP] You look at the challenges from two different angles: implementation and innovation. Why is this distinction important?

[V] These two angles are very different. Innovation is about the future while implementation is about the present (and extending from the recent past). Innovation is about dealing with uncertainty while implementation is about perfecting the routines and activities to maximize profits in the short-term. Innovation is about dealing with greater ambiguity and tolerance for risk than implementation. I have often found that managers that excel in innovation are not as effective at implementation – they call for different set of skills and orientation and require different set of metrics.

[OP] Many organizations outsource the development and implementation of IT to outside service providers. There are relatively few problems with defining implementation. Typically, client and service providers argue about what innovation means and who should deliver it. Is the distinction between implementation and innovation also relevant for the sourcing process of IT?

[V] Yes, we need to separate goals, objectives, incentives and contracts within the same relationships. If we do not do so, the dominant view – namely cost center metrics – will operate and innovation in sourcing will suffer. This is what I mean by the differences between innovation and implementation – they imply different philosophies and requirements. Think of these as two separate contracts even if you do business with the same firm, say IBM or Accenture. Make sure that there are separate managers dealing with these two. Make sure that the meetings and reviews are done separately.

[OP] Outsourcing is not going to decline and – as you say – the success of IT largely defines the success of the organization. What does this mean for the conversations between business and IT: for example, should service providers be included?

[V] This is a key issue that the enterprises should think about. As I see it, there are three ways to go about. In the simplest variation IT forms the strategy and simply involve the vendors through standard contracts and incentive clauses in SLAs. The second way is that the IT organization and the vendors work together in thinking about what they need from each other to deliver world-class IT to the business operations. Here, the IT vendors take on the role more as a partner and you create what you might call an extended IT organization. In the last variation the business, IT and the vendors work in a tripartite way to define and deliver. This requires greater trust and understanding than typical sourcing arrangements but can prove effective in certain conditions where the business is intricately dependent on world-class IT.

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Business should ask themselves what their principles are to assess the value of the service provider. It is quite easy to determine rigid, technical SLAs but the question is if it will help you to success in a situation where IT has a significant business impact. When contracts are made up, I think managers should ask themselves some though questions before signing the final agreement. For instance, if the vendors execute on the stated criteria perfectly, would you be satisfied? And would the business excel with minimal disruptions to processes? If this is not the case, how can you redefine the criteria to better specify the tasks and delivery requirements that are important to the business? The length of contracts plays a role as well. Have you created SLAs in rigid, static terms with no possibilities for changes in multi-year contracts? And under what conditions would you want to redefine the criteria and have you allowed for this possibility? And lastly, performance is an issue. Have you provided incentives for the vendors to improve on the SLAs? And are the SLA criteria focused with an external marketplace benchmark? These kinds of questions allow you to define whether you want an SLA as standard contracting approach or to put a SLA in place that is more partnership-focused with flexibility to adapt and includes an incentive to further excel. And with regards to the conversation between business and IT: just as industry boundaries are blurring – what business is Apple in? Computers? Communications? Or Media and entertainment? – The role definitions between business and IT will morph and blur more and more. To me, that is a healthy sign. The future IT organization should understand how IT supports and shapes business strategy and operations and be the single point of responsibility and integration to deliver what is required—sourcing it from multiple locations globally and ensuring that they are integrated as part of the fabric of the business. If it moves away from business strategy and operations, the IT organization will be marginalized and outsourced.

About N. Venkatraman N. Venkat Venkatraman is the David J. McGrath Jr. Professor in Management at the Boston University School of Management. He has been on the faculties at MIT Sloan School of Management and visited at London Business School. He has won numerous awards for his research and has been recognized as one of the most cited researchers in management over the last decade.

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5 About the study and Giarte About Outsourcing Performance This research was carried out in the period March 2009 to May 2009 in Giarte’s research community DigitalBoardroom. Participants in DigitalBoardroom are decision-makers in the field of information technology, such as CEOs, CIOs, CTOs, CPOs, COOs, CFOs, and outsourcing VPs. The focus is on the top 500 companies and government organisations in the Netherlands. In total, 306 people from 277 different companies took part in the study. The table below shows the development of the number of respondents, the number of unique companies and the total number of unique relationships (between service providers and respondents) since 2005. This research note covers the general results of the study* plus a selection of articles from the Outsourcing Performance 2010 booklet. The booklet is available (in Dutch) to order free of charge at www.digitalboardroom.com. *The specific results for each supplier are intended solely for the participating service providers and, for this reason, have not been published.

Development study response 2005 to 2009 2005

2006

2007

2008

2009

Number of respondents

265

250

274

275

306

Number of companies

221

221

240

242

277

Number of unique relationships

522

535

550

674

646

Contract value*

1,9

2,1

3,0

3,5

4,4

*Estimation based on annual contract values, in billion Euros

About Giarte Giarte is a research bureau that focuses on the strategic aspects of information technology. Success with sourcing is one of the main research areas with Outsourcing Performance being the largest study. As independent party, Giarte develops and supplies services to monitor end-user satisfaction on a continuous basis within sourcing arrangements (either being inhouse or outsourced to one or multiple providers). www.giarte.com

Outsourcing Performance 2010

Giarte visiting address: Jacob Bontiusplaats 9 1018LL Amsterdam Postal address: P.O. Box 890 1000AW Amsterdam phone +31-20 622 3444 email info@giarte.com

Research note  19


Outsourcing Performance 2010