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by Jennifer Beck

IT Services Outsourcing Goes Strategic

Feature
Jul 19, 20028 mins
CSO and CISOData and Information Security

Introduction

For more than 30 years the high-tech industry has experienced a series of long stretches of promising productivity, interrupted by moments of harsh reality. In this “post-e” era of uncertainty, user organizations are re-evaluating initiatives and attempting to define the elusive business value they desperately seek from their IT assets. Service providers are re-inventing their companies to take advantage of the massive adoption of the Internet and prepare for the next battle of value propositions that are being constructed around business process and vertical industry solutions.

Gartner Dataquest has set forth a series of challenges in an Industry Manifesto that users and vendors must accept, if they expect to see meaningful business value from IT investments. The Manifesto consists of three tenets. The first is that continued tactical IT outsourcing will cause significant degradation of business productivity and customer retention and satisfaction over the next three years for the user’s customer. The second tenet is that this relatively immature industry is already showing signs of industrialization. Even mission-critical services have become commodities, and customization is giving way to an “80 percent good enough” standardized offerings designed for the shared environment. The third tenet is the inevitable blurring of buyer and seller and the emergence of what Gartner Dataquest calls the Business Services Value Chain. The Business Services Value Chain is a construct that redefines roles, outlines new opportunities for joint ventures, and creates a new platform for the creation of high quality, reliable, business process-specific solutions.

A Sense of Urgency This Time

Technology vendors have been making false claims for the last 30 years. It all started with the need to “break the code” during World War II. Then it was all about automating tasks, soon to be followed by connecting the “islands of automation.” Users looked for their technology return on investment (ROI). Then the cry was about applying technology, not just supplying it, a concept that paved the way for thousands of service providers that claimed they could deliver on the promise of technology.

Remember client/server? Decentralizing was the next crisis, followed by downsizing that gave birth to the first outsourcing. Just when we thought it was safe time ran out and the vendors’ answer to year 2000 was to upgrade. So every competent chief information officer (CIO) secured sufficient budgets to discard old technology and bring in the new. Then came “e” and what a ride that was while CIOs attempted to lay track in front of a “runaway train” namely, their business units and executive teams. “If you don’t become part of an e-marketplace you are going to die,” shouted the Big Five in billboards in every major metro airport.

And now, at the turn of the 21st century, no one is dead. But vendors are still not delivering on the promise of technology nor are they clearly able to articulate their real value-add. CIOs are still chasing after some measurable ROI while struggling to translate the demands of their businesses into effective IT strategies.

As the United States regains its balance after Sept. 11 and the world economy struggles to recover its momentum, vendors and users are left with two choices: entrench or innovate.

A combination of market forces have forever changed the mission for IT services as follows:

  • The challenge of IT has shifted from delivering information to exploiting it when there is precious little cash and immediate gratification is not soon enough.
  • Wall Street is focused on long-term profitability again, more than growth rates, yet preoccupation with the quarterly numbers forces short-term decision making at the expense of long-term viability that strategy is about to fail.
  • IT operations are being viewed as the “business enabler,” and enlightened organizations realize IT is an investment, not just an expense. Meanwhile 50 percent of all CIOs now report directly to their chief financial officers (CFOs).
  • Technology assets must be applied to business goals for operational efficiencies, as well as for business transformation.
  • Two-thirds of enterprises have fallen behind in technology adoption, and there is a lag in the practical application of true enabling technologies such as Web services and wireless.
  • New real-time enterprises built to address the challenges of global competition must answer some fundamental questions about business trust, as they become increasingly open, extended and connected.

IT Services Sourcing Goes Strategic

Gartner projects that nearly half of Fortune 1000 global enterprises will choose not to own their IT assets, but instead will derive business benefits from shared IT utility infrastructures owned and operated by service provider hybrids. Every organization now has its own vision of being a highly integrated and virtual enterprise “on steroids.” Speed and agility are everything, because nothing is certain and change is constant. “I have to design for the troughs, not the peaks,” says one CIO.

Many CIOs realize they may have all the wrong deals in place with their services providers. They built them to be cost-efficient and provide business enhancements. Even though 100 percent of CIOs say they cannot do it alone and are willing to accept a multi-sourced environment, less than 1 percent have a strategy to engage with external service providers (ESPs) or have the skills to accept the new roles and responsibilities before them.

Gartner’s Sourcing Practice, designed to provide governance models and help broker better deals for the industry, outlines a four-phase life cycle approach to IT outsourcing. Phase I begins with the questions of business strategy and goals. One thing all CIOs agree on is the challenge of aligning IT and business strategy. Gartner exposes this objective as a good place to start on the path to reinventing the approach to managing a multi-sourced environment. Because cost will continue to drive decision making and limit options, more users and vendors are exploring their offshore and near-shore options.

Phase II of the life cycle provides a decision framework for evaluating vendors. Based on a study of 170 enterprises, Gartner sets forth evaluation criteria that reveal new process efficiencies, the fundamentals of the request for proposal (RFP) process and the upgrade on vendor selection. Phase III research helps users construct the right contract and negotiate the right deals.

Contracting and Managing for Innovation: Is it Possible?

Clayton Christensen from Harvard University describes innovation as nonlinear change rather than day-to-day incremental improvement. But if you put 10 people in a room and ask them to describe what they mean by innovation, each person will give a different answer. Gartner defines best practices and distinct roles for the user and vendor to achieve what the boardroom recognizes as true innovation. Added to that view is the characterization of three types of outsourcing deals: utility, enhancement and transformation. Innovation can occur within all three, but to achieve meaningful and measurable changes, it is imperative to perfect the art of linking the right relationship and contract to the right service provider. With the massive adoption of the Internet, the assumptions around service delivery to a single enterprise that owns all of its IT assets have changed. As enterprises lurch ahead at lightning speed, basic connectivity leads to dynamic access to technology, to other enterprises and new markets.

Phase IV of Gartner’s Sourcing Practice lays out rigorous measurement and management methodologies to help users and vendors define and realize bottom-line business benefits from their outsourcing investments. Gartner argues that traditional command and control style management techniques are not optimal for dealing with the people-intense issues and new cultural dynamics of the multi-sourced environment. Also, Gartner has identified a disconnect between the information systems and business unit approaches to managing service providers. Often these two groups work in uncoordinated efforts and in the worst cases they work at odds with one another. Many enterprises have failed to build a skills base to meet the new challenge of managing their multi-sourced environment and are therefore vulnerable to low return on service value.

As buyers began to evaluate their providers based on high-touch client care, general satisfaction and cultural fit, Gartner Dataquest published the results of a February study of more than 300 IT user enterprises. Seventy-five percent of the respondents were adding a new vendor selection criterion to their considerations: the likelihood of forming a trusted partnership. Gartner suggests a new attitude toward working with ESPs that will make it even more imperative to have a sound sourcing strategy to articulate and share among all participants.

Bottom Line

Gartner Dataquest believes a new category of ESP will emerge and offer standard, industry-proven solutions from shared IT utility infrastructures that will power the e-economy. These global business networks, or technology franchises, will own and operate the technology grid that powers the e-economy and provides compute power for the real-time enterprises.

We’re moving into a new era of outsourcing where the truly successful services providers and services receivers recognize the necessity of, and pursue only those relationships where, the opportunity for mutual benefit and enduring relationships exist. “Reasonable profitability” for the services provider, commensurate with the value delivered and risk assumed, is a cornerstone for any enduring outsourcing relationship that ensures that the service recipient “gets what it pays for.”

For more information about sourcing, please visit gartner.com/sourcing.