Value chain-based sourcing of IT, part 2
In the first part of this post I stated that the continuous drive to reduce IT cost by standardization will come to a point where the reduced IT cost are outstripped by the ‘damage’ it causes to the business. The drive for standardisation is further increased by the commonly used method to scope outsourcing contracts. In this post I provide an scoping approach which I believe will gain substantially in the coming years: selective sourcing contracts with a scope derived from differentiated business demands.
The importance of accountability towards the Business regarding the quantitative and qualitative added value of IT will only increase more and more. The Business demands to know how IT supports the opportunities and risks the Business faces due to increasing complexity, competition, globalization and other trends. It is up to the Business to provide insight in the opportunities and risks it faces, while the IT organization is responsible to translate them into IT value and risk drivers. These drivers guide the IT organizational change, investment decisions and sourcing strategy.
One should look more from a business perspective towards the IT value chain and subsequently provides concrete adjustments which allow for sustainable improvement (including definition of the sourcing strategy). This is the first step leading to a fully transparent business IT alignment (see illustration).
The transparency of Business IT alignment is the foundation to connect the performance of the IT organization with the actual demand of the business processes. The results of this approach: more added value for the Business and a more cost-effective IT organization, which invests in innovations which really count. Tomorrow’s IT organization is able to demonstrate accountability over its performance as an integral contribution to the overall performance of the company. An example:
The IT department of a high tech company thought it could reduce cost by applying the same service levels for both R&D and Manufacturing. By doing this they overlooked the elemental differences in demands of both functions. The R&D departments got higher availability service levels than required, but were not able to get access to the latest state-of-the-art hardware to design and test their new products.
In this example the R&D departments were supplied with higher than required service levels at the cost of the capability to innovate, outsourcing was the catalyst. By the introduction of generic IT services it would be easier to find a suitable vendor, allowing the IT organization to meet its cost saving target. The negative impact on the business however, was estimated as being zilch until it was too late.
Outsourcing without making an adequate assessment of its impact on the organization as a whole, opens the door to a disappointment. For this reason one should look from the initial start beyond a superficial business case. It necessary to benefit as an organization as a whole in terms of more value and a lower or equal risk profile. Only then an outsourcing contract can be truly successful. A concrete example is the usage of Real Options for assessing sourcing scenario’s. Real Options allow the dynamics of both Business and IT to be quantified, providing a more realistic estimation of the potential value of the business case. Balancing IT value and Business value is depicted schematically in the illustration below.
The importance of accountability towards the Business regarding the quantitative and qualitative added value of IT will only increase more and more. The Business demands to know how IT supports the opportunities and risks the Business faces due to increasing complexity, competition, globalization and other trends. It is up to the Business to provide insight in the opportunities and risks it faces, while the IT organization is responsible to translate them into IT value and risk drivers. These drivers guide the IT organizational change, investment decisions and sourcing strategy.
One should look more from a business perspective towards the IT value chain and subsequently provides concrete adjustments which allow for sustainable improvement (including definition of the sourcing strategy). This is the first step leading to a fully transparent business IT alignment (see illustration).
The IT department of a high tech company thought it could reduce cost by applying the same service levels for both R&D and Manufacturing. By doing this they overlooked the elemental differences in demands of both functions. The R&D departments got higher availability service levels than required, but were not able to get access to the latest state-of-the-art hardware to design and test their new products.
In this example the R&D departments were supplied with higher than required service levels at the cost of the capability to innovate, outsourcing was the catalyst. By the introduction of generic IT services it would be easier to find a suitable vendor, allowing the IT organization to meet its cost saving target. The negative impact on the business however, was estimated as being zilch until it was too late.
Outsourcing without making an adequate assessment of its impact on the organization as a whole, opens the door to a disappointment. For this reason one should look from the initial start beyond a superficial business case. It necessary to benefit as an organization as a whole in terms of more value and a lower or equal risk profile. Only then an outsourcing contract can be truly successful. A concrete example is the usage of Real Options for assessing sourcing scenario’s. Real Options allow the dynamics of both Business and IT to be quantified, providing a more realistic estimation of the potential value of the business case. Balancing IT value and Business value is depicted schematically in the illustration below.
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