Case study: awakening of an IT department

Most organizations are facing a multitude of challenges these days, including pressure on pricing and shorter lifecycles of new products. This requires organizations to become more flexible, focused on their core activities and enhance the capability to use new technologies to create or sustain a competitive advantage.

When the IT department is too sheltered

One of the companies busy transforming itself from a traditional, low IT density business model, to a highly digitalized business model is the company ‘Merchant’. It is a specialist in auctioning consumer products in high volumes (millions of items per day). To do so it has invested in an impressive amount of buildings which handle the inbound logistics, auction, outbound logistics and financial transaction.

In the last decade both producers and buyers of the products are increasingly looking for ways to improve efficiency, including the role of Merchant to align demand and supply. As a result are producers and buyers looking at Merchant for an improved service offering.

Traditionally, reliability and thus very thorough development, testing and operating procedures were the cornerstone of the IT department. A typical IT project would take at least a year from start to finish. And as the traditional business model required the physical buildings to perform the auction, it was Merchant (and subsequently their IT) which was calling the shots. Merchant had grown over the years into the largest company of its kind and the required investments in new physical infrastructure ensured a high entry barrier.

The introduction of the internet changed all that, even though Merchant was able to ignore it until quite recently. One of the ‘problems’ of the internet for Merchant is that it considerably lowers the barrier of entry. It allows the information flow required to auction a product to be disconnected from the physical flow. In the traditional business model, both flows were combined with documents travelling with the physical product. The internet also makes it easier for producer and buyer to find each other without the Merchant as a broker.

While the business very clearly saw these threats and scrambled to action, the IT department initially failed to appreciate the sense of urgency. During summer it was not uncommon that a project was on hold for three weeks because the developers were on a three week holiday. The difference in culture and economic model are depicted in the table.

 

	Traditional auction	Internet auction
Economic model	High fixed cost require high volumes to recover them. Economies of scale are crucial.	Increasing the number of users of the online system is crucial. The more producers and buyers the system use, the more attractive it becomes (‘positive feedback loop’).
Culture	Risk averse, efficiency focused.	Fight for talent to ensure own system is improved faster than competition’s offering.
Competition	Focus on costs and high level of standardization among business partners	Focus on attracting and retaining most talented employees.

 

Due to the lack of action from the internal IT department the business manager of Merchant responsible for the e-commerce domain engaged a third party supplier to build a pilot system. A pilot which was rolled out within three months. Since the introduction the transaction volume has grown exponentially and the system has become of strategic importance to Merchant. Subsequently the business has requested IT to insource the solution and incorporate it into the internal IT ecosystem. However, the ecosystem of Merchant was standardized on Microsoft and the external vendor used a non-compatible system from IBM. As a result will the system now be rebuild in dot-net.

Structural solution

The sense of urgency has in the meantime taken hold at management level within the IT department and several steps are undertaken to create a more agile and responsive department. Central in this approach is the need to differentiate based on the demand profile of the business (speed-to-market & innovation versus efficiency & reliability). More on this topic can be found in previous blogs, including here. The essence of the required change is however a cultural one. From a mindset of thinking in roadblocks to a mindset of thinking in possibilities.

Political unrest and economic trouble versus offshore outsourcing

The recent bomb attack on Mumbai, killing at least ten people and wounding more than fifty, is one in a series. According to Wikipedia are “as of 2006, at least 232 of the country’s 608 districts afflicted, at differing intensities, by various insurgent and terrorist movements. In August 2008, National Security Advisor M K Narayanan has said that there are as many as 800 terrorist cells operating in the country”. While India is not the only outsourcing destination which suffers from ‘political’ unrest, are this bomb attack and the 10 coordinated shooting and bombing attacks of 2008 of a completely different order than what is going on in most other countries (except for maybe Pakistan).

Also Egypt had its period of unrest when toppling over president Mubarak, and Malaysia recently caught the headlines with people demanding democratic reforms. And the Ministry of foreign affairs of Australia “advise you to exercise a high degree of caution in the Philippines because of the high threat of terrorist attack and the high level of serious crime”. While these last examples are magnitudes different from the situation in India, is it an indication that several popular offshore destinations end up in news papers in a less than favorable way.

While the impact on the short run is likely to be very limited, may long term unrest in combination with continuing economic struggles in the United States and Europe have an negative impact on offshore volumes. In the United states some 8 million jobs were lost with financial services accounting for 800.000 of them. In Europe unemployment is not much better with especially Southern European countries suffering from rates up to 21,3% in Spain.

With the supply of skilled people surpassing demand in both the U.S. and Europe, wages tend to stabilize or even decline. Of the people who lost their job in the U.S. between 2007 and 2009, had 36 percent to accept a job which pay was at least 20 percent less than their previous job. At the same time are wages in India, Sri Lanka and Bangladesh expected to show a double digit increase in 2011.

In manufacturing this has already resulted in many American companies insourcing their production again. But “homeshoring” is also picking up in the service industry. Arise employs more than 7000 call center American agents who work from their living rooms and connect via telephone systems to national service lines. At the same time provides the U.S. government tax incentives to keep jobs at home and some states (e.g. Ohio) even ban offshoring. In Europe, the social security system prevents large wage fluctuation, but also over here are people accepting jobs with at lower pay grades.

Subsequently do I wonder whether we will see lower (growth) figures in new offshore contracts for the coming two or three years. Because a) the labor surplus in the U.S. and Europe will not be absorbed anytime soon even with economic growth slowly picking up, b) the battle for talent in India and other destinations will continue to push wages further, and c) the unrest in India, Pakistan, Philippines and other countries does not show any signs of subduing.

Simply stated: the financial benefit of offshore is getting smaller, while the risk profile is growing. Two trends which might result in corporate decision makers steering for (a larger share of) local outsourcing.

The need for a differentiated sourcing strategy

Technology is everywhere and is becoming of increasing importance to attract and retain consumers and engage with upstream and downstream business partners. It is changing industries, impact the roles of CEO, COO and CIO. Insurance companies are transforming their business model from selling though big, impressive marble decorated buildings and well paid sales men in Porsche cars, to a lean no fuss companies using internet as the primary sales channel. Physical newspapers are increasingly replaced by digital versions and we shop on the internet when it rains or just for our convenience. The part of the IT portfolio where time-to-market, intense business-IT interaction and innovation are the key success factors (Enabling IT).

While IT plays a key role in transforming business models, consists a large part of IT portfolio still of value propositions which core attributes include reliability, availability and efficiency (Factory IT). As this category still represents the majority of the budget within most companies, has it subsequently shaped the structure, culture, and capabilities of the average IT department. And subsequently its sourcing strategy.

With IT required to deliver both IT enabling the business to capture more market share or open new ones and provide more traditional IT services, the standard approach of centralization and outsourcing may have to be reviewed. Before providing some of my thoughts, first the basic organizational structures an organization can pick from:

• Centralized/shared. People and assets are concentrated within one department or unit, reporting hierarchically to the board. This ‘silo’ provides economies of scale regarding deployment of both labor and assets. The subsequent standardization and rationalization makes it also more prone of being more internally orientated with the business being dealt with through formal procedures, forms and reports. Its main benefits are efficiency and reliability.
• Decentralized. People and assets are allocated to the business units needing their capabilities. The distance between business and IT is here much narrower as IT and business staff daily bump into each other. Drawbacks are the inability to use economies of scale when providing services like a standard workstation environment and telecom facilities. Its main benefits are business specific differentiation and flexibility.
• Hybrid. By choosing this form it is possible to use the advantages of a centralized IT department (leverage on standard services) and decentralization (business specific differentiation). The drawbacks are additional cost due to coordination between the units, as all pieces of the puzzle will have to act as a whole. An increasing number of organizations are embracing this model to cope with the differentiated demand from the business.

When looking from a sourcing perspective at these three structures is it obvious that the traditional stronghold of outsourcing has been boosting the efficiency by increasing the economies of scale further than a company can by itself (supplemented by labor arbitrage). This kind of services are known as Transactional IT or Factory IT, and are depicted at the right side of the table.

The table shows some typical aspects of the highly centralized (and outsourced) Factory IT part of the portfolio. As mentioned before is the Business IT cooperation here highly formalized with many documents and procedures flowing back and forth. Subsequently is the relationship with the external service provider also highly formalized with thick documents, aimed at mutual risk mitigation. Actually, one of the key aspects of the whole right sight of the table is its risk-averseness. Risk in the form of budget overruns, disruptions, and security breaches.

	Enabling IT	Factory IT
Business-IT cooperation	Intense daily interaction, joint team	Client-supplier relationship
Importance speed-to-market	High	Medium to low
Importance reliability	Low to medium	High
Innovation orientation	Joint product innovation	Business and IT process optimalizations
IT management orientation	Strong leader, creative stars	Manager plus administrators
Sourcing orientation	Enhance innovation and speed-to-market, volume flexibility, minimize investment risk.	Sourcing decisions based on drive for efficiency and reliability.

The left side of the table is very different. Here the business wants to deploy IT as a means to increase its market share and IT needs therefore to be much closed to the business. Here IT is decentralized (if hardly any shared services, rare) and/or part of hybrid model (most common model). For this part, risk taking is part of the game, with the business expecting IT to come up with innovative ideas and high speed-to-market. External service providers are deployed here to enhance the innovative profile of the internal IT function, resource flexibility and reduced investment risk (e.g. through PaaS or IaaS). It requires a different contract and engagement model between client organization and external service provider to work. Here resources from the external service provider are part of the joint Business IT team translating the business vision into an actual product or service. Here not the procurement department has the last say (like with Factory IT contracts), but the content specialists and creative stars. In these cases are attitude, drive and energy the attributes the client is looking for.

One of the issues is however that in many cases the fundamental difference between Factory IT and Enabling IT is not made when looking for external service providers. It is still the procurement department which ensures the lowest bidder gets selected. Only when the business and IT join forces, a too narrow minded (and elaborate) contract can be avoided. When product cycles are measured in months instead of years, bickering two months about the cost is a recipe for loosing losing the continuous battle for market share. For enabling IT, it is about value, not about cost.

CobiT, ITIL v3, ISO 27002: Benefits and risks

By the beginning of the 1990’s an increasing number of IT departments started using process oriented models like ITIL, ISO/IEC 9000 and CMM(i). Later on substituted by CobiT, ISO/IEC 27002, ASL, BiSL, ISO/IEC 20000 and many more. That these models helped professionalize IT and transform themselves from a technology playground to a more business and service oriented procession is without a doubt. A survey among 503 companies on the benefits of ITIL shows that with the increased maturity of the IT function, also the realized benefits increased, while the perception of implementation challenges decreases (2010[FZ1]). From a strategic standpoint is the added value however limited as ITIL implementations can be easily imitated by competitors, leveling the playing field again. Furthermore is there a considerable risk implementations will end up in a swamp due to over-engineered procedures, templates, PPI and KPI reports and lack of fundamental understanding of the concept behind ITIL. A risk especially prone to materialize with the introduction of version 3 which is even more complex and extensive than the previous version. As a result companies got disappointed with the outcomes of implementations.

Investigating two American and two Australian companies which implemented ITIL (version 2) provide some pointers however to the increase the chance of a positive return (2009[FZ2] ): executive management support, interdepartmental communication and collaboration, use of consultants, training and careful software selection. Besides these more generic critical success factors, they also found three specific ones: creating an ITIL-friendly culture, process as a priority, and customer-focused metrics. In my experience is especially the ITIL-friendly culture an important one as the implementation of a service and process-orientation in an organization that is used to think in functional silo’s has a considerable impact on both staff and managers. And changing a culture is a time consuming process and may thus collide with ambitious targets like ‘we are going to implement ITIL within the next six months’. Hence, the disappointment in some cases.

Some of the same risks and challenges may arise when implementing (parts of) CobiT and ISO/IEC 27002, as these are also extensive frameworks. CobiT covers both strategic governance (e.g. IT value management) and more operational IT management (e.g. managing service calls). ITIL’s original focus was more on the operational aspects of IT (the ‘service support’ and ‘service delivery’ processes), but with version 3 the framework also added more strategic topics, resulting in even more overlap with CobiT. While both CobiT and ITIL cover security management, provides ISO/IEC 27002 much more detail and is therefore widely adopted by any IT function where security is considered to be a risk factor which has to be mitigated. More information on the overlap and alignment of CobiT, ITIL v3 and ISO/IEC 27002 can be found here. It is a management briefing of 130 pages which gives an indication of the extensive scope and complexity of these models.

Embedded in the broad scope and complexity is one major strategic risk: compliance to the model itself tends in time to overshadow the original purpose of the implementation. So much effort and time is invested in the implementation that IT becomes inward looking while the core of most frameworks is making IT more externally focused. The risk of internal focus is given momentum by two other factors: the CFO tightening the resource tap and the increased dynamics and complexity of the business demand. Less resources means paying a lot of attention to initiatives to enhance internal efficiency, while the natural defense against contracting forces is building a (paper) shield. In the words of Minzberg (1991[FZ3] ): ‘Organisations that have to reconcile contradictory forces, especially in dealing with change, often turn to the co-operative force of ideology or the competitive force of politics’. And this is not without pitfalls as Mintzberg continues that an ideology encourages the members of an organisation ‘to look inward – to take their lead from the organizations own vision’.

What does not help is the focus on most frameworks on activities and accompanying forms, reports and other pieces of paper. While the business is mostly interested in results. Result from a business perspective (99,9% of transaction processed flawlessly), not IT perspective (e.g. we closed 20 incidents today). Also Schaffer and Thomson (1992[FZ4] ), and Mastenbroek (1997[FZ5] ) are convinced that improvement programs that focus solely on structures and systems (= frameworks and tools) don’t necessarily lead to increasing performance. In the words of Mastenbroek: ‘the more the organisational change is linked to improvements in the output, the better’. Schaffer and Thomson distinguish within this context between ‘activity centered’ and ‘result driven’ transformation. Some of the typical characteristics of both approaches are summarized in the table.

 

‘Activity centred transformation’	‘Result driven transformation’
Often too ambitious, large-scaled and diffused. Not oriented towards archiving specific outputs, resulting in misleading performance measurements.	Forces management to prioritise its targets and the necessary means to archive them.
Preference for orthodox approach instead of empirical.	Empirical tests show what works and what doesn’t .
Focus on long term, not on results.	Frequent reinforcement by the management provides the transformation with new energy
Controlled by staff departments and consultants.	Management creates an ongoing learning process by leveraging on lessons learned in previous phases and use new insight when designing and implementing the next phase.

As a result have many IT departments entrenched themselves with formal procedures and templates to structure the communication with the business. A business which is the ‘client’ and IT being referred to as the ‘supplier’. Good and well in a static environment, but a recipe for an out-of-business-signboard in a highly competitive one as the Entrepreneurial IT requires a fundamentally different approach.

[Note: this is another small piece of the book I’m writing]

 

---

Literature:

---

[FZ1]ITIL and the creation of benefits: an empirical study on benefits, challenges and processes, 18th European Conference on Information Systems, Marrone, Mauricio, Kolbe, Lutz M.

[FZ2]Justifications, Strategies, and Critical Success Factors in Successful ITIL Implementations in U.S. and Australian Companies: An Exploratory Study, Carol Pollarda; Aileen Cater-Steelb, Information Systems Management, Volume 26, Issue 2, 2009, Pages 164 – 175.

[FZ3]The effective Organization: Forces and Forms, Henry Mintzberg, Sloan Management Review, Winter 1991, Volume 32, number 2

[FZ4]Successful Change Programs Begin with Results,
Schaffer R. H., Thomson H. A, Harvard Business Review, January-February 1992.

[FZ5]Mastenbroek, W. Verandermanagement. Holland Business Publications, 1997.

Benchmarking becoming obsolete?

Today I was asked to give my opinion on the proposition “when outsourcing is benchmarking required to prevent a failure” by an editor of an IT magazine. My first thought was: of course it is, as including a benchmark clause in a contract was standard practice when I drafted a contract. But then I thought again and come to a less back-and-white conclusion.

Benchmarking before or during the contract period is common good and big business for companies like Gartner, Alsbridge and Compass, but given the increased complexity and tailoring of the solutions provided I wonder whether their usage is not restricted to a limited set of services. Services which soon get so common that many just buy them out of the cloud. Let me explain.

Many organizations outsourcing for the first time did not know what to expect from a supplier and often also have no clue about the cost of a workspace or server. They just knew the total IT budget and had a target to reduce it by 5% before next year. The benchmark company helped these companies in two way: allocate the aggregated budget to individual services and provide the average cost in the market for that same service. That way the organization knew whether there would be a positive business case.

Since than many things have changed. For starters have most organizations learned that selecting the cheapest suppliers is not always the best decision. The damage caused by crappy services and the invoices send for additional work ensure many business cases end up in the archive, together with the responsible IT manager. Both not to be seen again. As a result know companies that outsource for a second or third time what to expect and go for a more balanced contract. And as they have the price sheet of their existing supplier, it is easy to calculate any benefit by choosing a competing supplier.

At the same time are many standard IT services commoditizing to an extent that it is as easy as going to a grocery store. Server capacity, storage and a continuously increasing list of applications can be bought out of the cloud on a pay per use basis. How much price transparency do you want?

That leaves the company specific solutions and technology. Solutions which key business value are for example improving flexibility or speed-to-market of the business. How are you going to benchmark those qualities? How do you ensure you use the same definitions per company? Everybody can easily agree on a definition of ‘availability’ or ‘response time’, but defining ‘flexibility’ is already more complex (e.g. volume, service mix, time). The same applies to the cost. How do you create a peer group if there are maybe one or two companies which have similar services? In other words, the validity of the outcome of a benchmark deteriorates fast when complexity and tailoring increase.

As a result I believe that the relevance of benchmarking will decrease over time with a) companies leveraging experience from past deals, b) standard services becoming so commoditized that benchmarking does not add any value, c) IT services retained by companies become to specialized to benchmark as the peer group is too thin.

No shares in benchmark companies for me I guess ;-)

Run your datacenter on paprika’s

The Netherlands has traditionally a leading position in agricultural (Tulip anyone?), but due to the climate many crops are grown in greenhouses that have to be heated during winter. The engines used run on gas and the resulting heat and carbon dioxide are used to create the optimum growing conditions. These ‘micro combined heat and power engines (Micro-CHP) produce also electricity however, and much more than needed to provide artificial lighting during the night hours. One options to feed the access power back to the grid or to feed it directly to nearby houses and company buildings. One such initiative includes using the power of 35 engines used to heat 220 hectares of greenhouses to power a new datacenter. The access heat produced by the datacenter is in turn fed back to the greenhouses. This initiative is an example of the increased emphasis on sustainability within many industries and at the role of technology as an enabler (e.g. smart grid).

Reducing the environmental footprint of information technology has its origin in the Energy Star initiative launched by the U.S. Environmental Protection Agency in 1992. Through this program manufacturers of energy-efficient monitors and other equipment could distinct themselves from less environment-focused competitors. Since then, ‘Green’ has seen a steady rise on the priority list of governments and companies all over the, including the implementation of legislation. In the United States the American Recovery and Reinvestment Act (ARRA) legislation allocated $90 billion to be invested in projects aimed at improving the energy efficiency of IT itself (‘green for IT’) and the use of information technology to increase the level of sustainability within other industries and the society as a whole (‘IT for green’). In France and Australia the adaptation of more efficient technologies is pushed by the government by the introduction of a carbon tax. In France companies with more than 500 employees have to report on their emissions and take action to reduce them and in Australia a ‘cap and trade’ system will be implemented by 2012. For the European Union as a whole both new legislation is underway and funds are freed for initiatives like Green Active Management of Energy in IT Service centers (GAMES). It is a research project aimed at developing best practices, methodologies and supporting tools to improve the energy efficiency of future data centers. Other organizations focus on creating standards and guidelines. Some more generic standards are:

• ISO 26000 (social responsibility), ISO 14000 (environmental systems) and ISO 19011 (auditing of environmental management systems) from the International Standards Organization (ISO).
• BS EN 16001 (Energy Management Certification) from the British Standards Institute (BSI).
• Global Reporting Initiative (GRI),which publishes a widely adopted set of reporting standards on topics like human rights, environmental, anti-corruption and other sustainability related subjects.

Besides these generic standards there are also many aimed specifically at technology. Some are directly related with the manufacturing of the components while others focus on the deployment of them.

• Manufacturing. The IEEE P1888 Working Group is developing UGCCNet (Ubiquitous Green Community Control Network) standard which allows various building components to interact with each other to improve energy efficiency. The IEEE P1801 is a standard for the design of low-powered integrated circuits, and IEEE 1680 specifies how to quantify the green properties of electronic devices like computers, printers and scanners.
• Deployment. The Green Grid is a group of international companies which aim is to improve energy efficiency of data centers by introducing metrics and indices, allowing mutual comparison on both operational efficiency and maturity level. The CompTIA Strata Green IT and Information Systems Examination Board’s (ISEB) Foundation Certificate in Green IT are certifications aimed at IT managers and professionals who want to advance their knowledge on ‘green computing’.

Even though initiatives to increase the power efficiency of data centers and IT systems in general can have a substantial impact on both the environment and the electricity bill, are the largest (future) gains in be expected in the area of IT for Green initiatives. By implementing smart meters in houses, local CHP systems, supply chain optimalization or teleworking, scarce resources are used more efficiently. These technologies are often combined with initiatives to better inform consumers on their usage patterns, enabling them to change their behavior and thus benefits of the technology. Trackulous allows consumers to track their own impact on the environment, while GreenScanner provides information on the environmental impact of products . Information which will get increasingly detailed and complex with the introduction of Life Cycle Assessments. These kind of assessments allows companies to determine per phase in the value chain both the current impact on the environment, and the potential benefits that can be achieved.

The adaptation rate of green technology will in the end however be determined by the price and the value of the efficiency gain it enables. The illustration shows the relationship between the price of the more environmental friendly product and the number production volume required to become a competitive substitute for existing technologies. It shows that new technologies (e.g. ‘green’ data centers) can initially be substantially more expensive than established ones, but that initial support (e.g. ARRA funding), legislation and carbon tax can even the odds quickly for newcomers. This combined with the rising prices for fuel , raw materials and almost any other commodity, the value of the efficiency gains offered by new technologies will push the economic breakeven point increasingly to smaller production volumes.

The consumer as a micro-supplier

The interconnections between companies and their external stakeholders become more intens by the day. The world's leading provider of lithography systems for the semiconductor industry, ASML, is a company where several hundred  external business partners are very closely integrated in the design, development, integration and servicing of the systems used to make CPU’s, GPU’s, memory modules and other advanced microchips. Up to 90% of the total system costs are supplied externally and business partners several tiers deep in the supply chain have access to relevant technology and product development information from ASML. It allows ASML fast access to new innovations created throughout its value chain, without the need to invest themselves in all these areas. ASML focuses on the high value-added integration role, including product competence and manufacturing cycle times while the business partners design and manufacture specialized subsystems.

But not only suppliers become part of the companies’ eco-systems. With the internet entering homes and mobile phones, the companies’ communication, distribution and sales channels end literally before the eyes of the consumer. The opportunity to tap the knowledge and creativity that becomes available this way is capitalized on my an increasing number of companies.

Companies that integrate consumers into their value chain are among others LEGO, shirt retailer Threadless and Unilever’s Ponds Institute. At LEGO consumers are invited to submit their idea’s for new products and are even financially rewarded if their idea proves to be a commercial success. At Threadless consumers are invited to interact very closely with the design department to shape the new collection while the Ponds Institute seeks your views about your look and feel in order to personalize the skin care they provide to you. Being it capturing new design idea’s, sourcing subassemblies from external business partners or test prototypes with consumers, an increasing number of companies embrace an ‘open’ innovation and cooperation model, contrary to the closed, vertically integrated approach companies like IBM, Bell Labs and Xerox are famous for.

In the future, everybody will have the opportunity to become part of a companies value chain. And not just because the company wants to have a share of your wallet, but because you as a consumer can have a tangible effect on the companies long term success. We can all become micro-suppliers.

Make way for new suppliers on the block! Part II

Imtech is an example of a (Dutch) Tier 3 supplier which has been successful in closing several considerable IT deals (e.g. deal of 124 million euro). One of their success factors in my opinion is their diversification strategy. They are not only strong in IT, but also in engineering disciplines like Mechanical and Electronics. This has three benefits:

• Delivering engineering services to for example companies active in the automotive industry ensures Imtech has solid knowledge of that vertical, which can be leveraged on by the IT discipline.
• The disciplines Mechanical Engineering, Electronics and IT are fusing increasingly together within many types of industry, requiring cross functional knowledge to deliver maximum added value as a company (or partner with other suppliers).
• Having a contract with a company to provide electronic systems to control the chemical processes of a company, ensures there is an existing relationship the account managers of the other disciples can build on. Increasing the work scope with an existing client requires in general much less effort compared to establishing a relationship with a new client.

Does this mean that all suppliers should follow this strategy? No, of course not, but it is certainly one of the strategies smaller supplier can use to compete with the big IT suppliers as IBM, Accenture, Atos Origin, CSC, TCS, Wipro and so on.

As stated in the previous post is an important USP of smaller suppliers their agility and capability to deliver new innovations to the market faster. With companies looking increasingly for solutions which allow them to become more competitive in the market place instead of solely looking for solutions op optimize the efficiency of back office processes (e.g. ERP), many opportunities are out there which the Tier 1 and 2 players find difficult to provision. This is why many (even larger) companies these days make two adjustments in their sourcing strategy:

• Mix large, efficiency focused contracts and single vendor contracts, with smaller contracts allocated to multiple suppliers (‘multi vendor’)
• Engage with niche players which can provide in the companies need to improve its flexibility, agility and speed to market

The main differences between the traditional ‘old school’ supplier and the ‘new kids on the block’ suppliers in my opinion:

• Economics for old school suppliers is based on high fixed cost make large volumes essential to achieve low unit cost; economies of scale are key. Culture shaped by the continuing battle for scale; rapid consolidation, a few big players dominate. Competition is cost focused; stressed standardization, predictability and efficiency.
• Economics for new entry suppliers is based on focusing on early market entry with new solutions enables charging premium prices and acquiring large market share, speed and innovation are key. Culture shaped by the battle for talent, low entry barriers, many small players can thrive. The competition is employee centered, coddling the creative stars which create the new solutions.

The trick for the company which wants to outsource is to create a sourcing strategy which can leverage on the strong points of both types and the capability to integrate the offerings within the internal organization.

Make way for new suppliers on the block! Part I

A side effect of globalization and informed customers is a shorter lifecycle of products and services. The competitive pressures introduced by globalization and buying behavior of customers in combination with the fast past of technological advances, shorten the payback time of investments in R&D and new production facilities. This requires organizations to become increasingly flexible and agile in order to quickly adjust production volumes and product mix.

The increasing complexity of services and products in combination with the ever higher investments required to improve quality, lower cost and renew the product and service portfolio, increase the entry barrier for new players.

Within the banking and insurance industry several new players have gained considerable market share over the last couple of years by leveraging technological advances and the desire of customers for a bigger bang for a buck. Think of web-based brokers which allow consumers to trade stock, derivatives and other financial instruments without expensive dealing rooms as intermediates. Or start-ups which offer pension products at considerably lower prices than traditional financial institutions. In both situations plays IT a crucial role. The new kids on the block use it as a key enabler to capitalize on business opportunities while the legacy IT of established banks and insurers limits the ability to adjust the business model to the changes in the market place.

One of the effects of the previously mentioned trends is the need as a company to specialize. Where General Motors used to own the whole value chain required to build a car, are many individual chains now allocated to sub-contractors. The benefits are lower cost through economies of scale and freeing up funds that can be invested in strengthening existing capabilities or innovation. Specialization however also means making choices. Choices about retaining which activities, assets and employees. And that brings me to the subject of the external supplier

‘Old school’ suppliers
‘Agile’ is a term which gained in popularity when the software development community introduced the Agile (SCRUM) concept. But not only in software development is often more agility required, the whole IT function has to become more agile to cope with the trend described in the previous paragraph. And that is an area most ‘traditional’ IT service providers don’t excel in. They are the masters of operational excellence: lowering cost through economies of scale.

As a result the big players find it difficult to response on developments like cloud computing, and ‘as-a-service’ solutions with truly agile solutions. Yes of course they advertise that they also can deliver it, but when looking beyond the marketing fluff one sees in most cases that the underlying technology and organization is still largely the same as used to deliver the traditional services.

Everything is ‘virtualized’, but short speed to market is only available if you stick to the standard solution of the supplier. There is typically no room for flexilibility in these concept other than in volume. You have to upgrade when they upgrade, you have to stick with their support and maintenance windows, you have to follow their patch policies, you have to…

	New school suppliers	Old-school suppliers
Economics	Early market entry enables charging premium prices and acquiring large market share, speed and innovation is key.	High fixed cost make large volumes essential to achieve low unit cost; economies of scale are key
Culture	Battle for talent, low entry barriers, many small players trive	Battle for scale; rapid consolidation, a few big players dominate
Competition	Employee centered, coddling the creative stars	Cost focused; stressed standardization, predictability and efficiency

And worse of all, it is in most cases the same service organization that supports it. An organization that is organized in functional silo’s with their concrete processes and procedures. The organizations that take ages to comes back to you when you have an issue and excel in ping ponging tickets between departments.

New school suppliers
As described in the previous post, are the traditional service offerings excellent for a large part of the typical service portfolio of an organization (e.g. Key Operational services), but especially for the services related to the quadrant High Potential, the offering has to be truly agile, quick and innovative. And that is why especially in cloud and as-a-service solutions new players can be successful. They fulfill a business need both the internal IT organization struggles to fulfill and which traditional service providers are also not capable to deliver.

The newcomers allow the internal IT organization to ‘rent’ their innovations and new capabilities and incorporate them into their own service portfolio. This in term allows the internal IT organization to finally transform itself from delivering business process automation services and other low added value solutions. More on these new kids on the block in the second part.

Outsourcing and innovation: a contradiction or not?

Outsourcing IT to improve the capabilities of the IT to innovate and improve speed-to-market looks at first a contradiction. Typically outsourcing is used to reduce IT cost, with standardization and less responsiveness regarding new business demand as a side effect.

However, outsourcing can actually help an IT organization to improve their speed-to-market and ability to deliver new services that add value to the business. A business that wants to grow again after a period of economic downturn and expects IT to act accordingly. There are two basic keys to achieving this goal.

First key

The first part is understanding that the dynamics to manage on speed-to-market and innovation is fundamentally different from delivering reliable (standard) solutions at high availability levels. The first type of service requires agility, flexibility and a general focus on benefits. The second type focuses on reducing the change of an operational risk materializing. In other words: solid build, test, acceptance and operation procedures, checklist, manuals etc. Not an approach that facilities innovation…

Realizing the required differentiation starts with a better understanding of the dynamics of the services provided by the IT organization. Classification based on the portfolio model of Ward et al (1996) can help this. This model maps services to four quadrants accordingly to their contribution to the primary business objectives and the extent to which business processes are dependent on them for their day-to-day operation (illustration).

• Strategic. These services are critical to maintain the existing competitive advantages and to develop them further. IT investments in this quadrant are used for innovation that contributes to the maintaining and developing the current competitive advantage.
• High Potential. In this quadrant are services that have in most cases no yet yielded a positive contribution to the financial result, but show a lot of potential. The services in this quadrant have a high level of investment risk and should be managed as such. In this quadrant focus is on innovation and speed to market.
• Key Operational. In this quadrant are the services that are crucial for running the current operations of the business. The underlying IT systems enable the organization to execute its business processes in an effective and efficient manner. The focus in this quadrant is on reliability and availability.
• Support. The added value in this quadrant is limited to the automation of business processes in order to execute them more efficiently.

The dynamics between the quadrant High Potential on one side and the quadrants Key Operational and Support on the other side differs fundamentally. Within the High Potential quadrant, the speed-to-market of new features and innovations the primary focus. Within the quadrants Key Operational and Support, the emphasis is on high reliability and availability figures.

Second key

From business perspective, the services in the Support quadrant add the least value, so the trick is to minimize the budget of this quadrant and transfer the achieved reduction to the quadrant High Potential (= the innovation quadrant). In short, source standard solutions for the Support quadrant, which are build and operated by external vendors.

 Additional financial room can be created by applying specific sourcing strategies to the other quadrants. The outline of these sourcing strategies could be as follows.

Financial room (both CAPEX and OPEX) can be unlocked by deploying cloud-based solutions for the services in the High Potential quadrant. An additional advantage of using cloud services in this quadrant is it reduces the investment risk. Not every service in this quadrant will reach ‘adulthood’ and move to another quadrant. For many another exit strategy will be necessary. Another reason to work more with external parties for services in this quadrant is the disruption caused by the dynamic of innovation on building and managing systems in the Key Operational quadrant.

In the Key Operational quadrant there are possibilities to outsource parts of the infrastructure layer, provided they are not too intertwined with the application layer. Suppliers will have the least work in the Strategic quadrant, given the importance to the organization. Here is would be best to work only with hiring of capacity where necessary.

The approach outlined here gives only part of the puzzle. The difference in dynamics among the different quadrants impacts also aspects like HR management, processes, architecture and the like. Only from a holistic approach, the IT organization will be able to actually roll out new innovations faster.