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The Danger of Staying the Course: Your Next IT Sourcing Contract Should Take a New Tack

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by Clay Calhoun
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Top-5-100x81Co-authored by Jamie Burke

The goal of business? Engage more customers. Meet them where they are. Understand their preferences. Deliver what they want. This is true for healthcare providers just as much as it is true for retailers. And manufacturers and financial services and even the public sector.

The goal is simple enough. But accomplishing the goal is tricky. In many cases, becoming more customer-centric today means becoming more digitally savvy, which – for most large enterprises – is like turning a giant ship in the middle of an ocean voyage.

For one, IT organizations have to figure out how to move from being a function that supports the business to being the business. This means leveraging technology to serve business needs: adopting cloud-based computing, automating where possible and practicing agile methodology to improve efficiency and quality of operations. In fact, 50-70 percent of enterprise workloads are now as-a-service. According to the ISG Automation Index™, automation is taking on as much as 40 percent of the labor required in back-office functions and IT processes. And enterprises are modernizing large legacy apps so they can be agile enough to respond to today’s constantly changing market.

What does this all mean? For many, it means figuring out what is possible – what solutions the market has to offer and what your environment needs. It means learning how to source and manage a whole new array of services, many of which are delivered in unfamiliar ways. The opportunity is huge. But there’s no resting on the proverbial laurels. In fact, one of the most dangerous things you can do is renew an existing agreement with a service provider. The market changes too fast; by the time you’ve signed a traditional contract, the capabilities and pricing are practically out of date.

Instead, orient for the future. Take action now by outfitting your sourcing contracts with the following Top 5 elements:

  1. Create a position on platforms. New industry- and service-specific platforms continue to hit the market every day. These platforms can improve productivity in a big way, and – since many are built with business requirements in mind – they can be indispensable in helping achieve specific goals – even complex ones like folding in a new acquisition or bringing new products to market. With so many strong contenders available, building your own platform from scratch to solve business problems may no longer make good business sense.  
  2. Modernize your applications with agile and DevOps lifecycle management. Top-performing development teams map value streams to validate their relevance to the end product and make sure they will create a positive user interface. The number one area of focus for these teams should be improving the customer experience. Metrics about how the products are performing and being used should be the guide. To create a more agile enterprise that can truly leverage the latest IT capabilities in the market, IT must shift from a plan-build-run operating model to an integrate-orchestrate-broker operating model.
  3. Seek agility in your sourcing initiatives. Transitioning to agile methodology specifically and becoming a more agile enterprise in general requires a deeper understanding of value streams and dynamic workflows. Be sure to ask who is really doing what, when and why. Remove any redundant teams, roles and hand-offs. Digital portfolio segregation – which is to say handling both old and new technologies and pricing models and managing the points of intersection – is key to balancing agility and stability. When improving standardization of mature business processes in applications and systems of record, create synergy by bundling to optimize costs, and rethink the model by moving to cloud-based solutions or platform-as-a-service. When exploring new territory, be sure to adopt fail-fast practices, test the market with pilots, and co-develop intellectual property with niche experts from your service provider.
  4. Find the right partnering models. Rely on data that reflects the market today – not how it might have looked 6-12 months ago. Find out what your industry peers are doing to modernize their workplace, how they are using data labs, for example, and which workloads they are migrating to the cloud. Determine the pricing construct – whether fixed, as-a-service or another creative alternative – that is right for your current and future business objectives. Enterprises and service providers are designing new ways of partnering all the time, so sticking with yesterday’s ideas may turn out to cost you.
  5. Be technically relevant. New offerings, market capability and commitment to innovation require partnerships with providers that are headed in the same direction you are. Recognize and incentivize fresh thinking. Upgrade technology, integrate new capabilities and contractually obligate your providers to do so as well. Deals that do not reward relevancy and innovation are a thing of the past. To work, contractual innovation clauses need teeth – in the form of penalties, yes, but also in the form of opportunities to co-invest.

If succeeding in the digital era means reimagining the role of IT so it, in fact, becomes the business, sourcing agreements that support IT also need reimagining. Resist the urge to source IT the same way you always have. Sit down with current and potentially new providers well in advance of a contract renewal and ask them to map out how they will incorporate the above elements into your next set of sourcing initiatives.  

Don’t do it yourself. ISG can help. Contact me to discuss further. 

About the authors

Clay leads ISG’s Sourcing Advisory service line, a division of Digital Advisory Services, for the Americas and Australia. He brings more than 25 years’ experience in IT consulting, strategy, service delivery, and advisory services. His experience includes leading, managing, and supporting Global 2000 client engagements which consider solutions that maximize the benefits from internally optimized and sourced service delivery operations. With ISG, Clay has advised on more than 50 engagements totaling more than $25B of contract value.

Jamie helps clients define strategy, capitalize on cloud, analytics and digital technology trends and implement target operating models. Recently, he assisted several Fortune 100 and 1000 clients in sourcing their global transformations to the Microsoft cloud, next generation networks and data center co-location solutions. ITIL certified, Jamie has a BA in MIS from Notre Dame and an MBA with a concentration in Portfolio, Program and Project management from the University of Texas at Dallas. He served as an Airborne, Air Assault and Ranger qualified US Army Field Artillery officer. His military decorations include the 1998 Gen. MacArthur Leadership Award.

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