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.