The current way we buy complex services through a purchasing department is to come up with elaborate detailed requirements, which often can only be implemented over several years. We put these out to bid, forcing the vendor community to respond with far more detail and waterfall project plans laying out in excruciating detail how they will architect and migrate this environment to the new desired state. We then conduct the services version of the limbo dance – how low can we go – where providers compete the price of the solutions. But there is a huge fallacy in this procurement methodology.
We have a long history of unhappy results from this methodology, a body of work spanning 10 to 15 years demonstrating that these procurement efforts mostly result in unmet expectations, cost overruns, and evolving service levels. This is insane. Insanity is doing the same thing again and again and expecting a different result.
By using this methodology, we effectively try to articulate a transformational journey in an overly precise way even though we have only a limited understanding of both the existing and future environments. The result is exercises in creative writing with overly precise work plans and cost estimates. The only thing we can be sure of is that the plans are wrong because of the lack of information (no matter how much time we spend on the plans), and the fact that the world changes during this timeframe. So we’re guaranteed to be wrong.
Therefore, our preferred way to purchase services is flawed. It pretends that we know with precision things we don’t know and it does not adequately accommodate for the nature of change in technology, business process and business conditions.
For years VCs have faced a similar problem. How do they develop breakthrough, compelling new technology products, fund them, manage them cost-effectively and, most importantly, how do they get to great offerings?
They achieve these objectives by accepting that, although the vision for the journey can be had, the length of the journey is unknown, the amount of money required to accomplish is unknown, and the exact nature of the end product is also unknown.
This is very similar to the problem we find in most service transformations. We know the direction we want to head, but we can’t describe accurately and precisely where we’ll end up, can’t quantify how much it will cost, don’t know how many resources it will take to get there or how long it will take to get there. All of these factors vary. Yet, using the procurement methodology, we pretend we know these details and set up artificial constructs.
Why don’t we do what the venture capitalists do? First of all, they break the project down into a series of gates. The only detailed road map is the one between where you currently are and the next gate. That requires a detailed plan. One of the parts of the plan is to develop a plan for the next gate.
Using VC principles, the vision and the dimensions of what you want to accomplish are clearly stated. For example, “I want to bring the cost of IT down by 40 percent” or “I’m going to standardize my components and move them into an elastic or consumption-based model, and I’m going to develop agile vehicles to integrate the components.” But how you will do that and how it will involve your current environment is unknowable.
All that is knowable is how you develop a proof of concept and how you move from POC to rapid implementation. You can fund each step much like VCs do (Series A, Series B, and Series C funding) and break it down to create funding associated with milestones that get you to the next gate.
This is a broad application of the VC philosophy, and there’s much more to it. But I believe by applying these principles, we can change how we drive transformation. We can dramatically lower the interaction costs of the purchasing process, and we can spend that money and time instead on the actual transformation. And we can deal with our providers or ecosystem partners in a much more transparent and direct way.
It’s best to apply this VC-based methodology where the benefits of design and architecture drive the value, instead of price reduction as the driver. You can still get lower unit prices, but the old procurement process is dead. That process is useful if you’re trying to take a stable environment and reduce its unit price. But it is not useful where you are driving a transformational agenda, which cannot be precisely defined. Using the old methodology for a transformational agenda tends to waste time, frustrate ecosystem partners and create false promises.
Digital technology adoption remains high priority, but piecemeal adoption rather than end-to-end transformation prevails due to cost pressures.
DALLAS, November 24, 2015 —In 2014, the number of new, large application outsourcing (AO) deals in the insurance sector declined 31 percent over 2013, and the total contract value (TCV) of those deals declined 81 percent, falling to a five-year low. IT cost-cutting measures are to blame, according to Everest Group, a consulting and research firm focused on strategic IT, business services, and sourcing.
However, Everest Group expects that IT outsourcing spending by global insurance firms will grow in 2015 and 2016 as insurance companies invest in digital technology themes to address the evolving customer needs of the growing technology-savvy generation.
“To date, the overall digital technology adoption rate in the insurance industry has been relatively poor compared to other industries,” said Jimit Arora, vice president and leader of the IT Services research practice at Everest Group. “Insurance buyers tend to focus their investments on a few technology areas that offer strong ROI in one of two ways: cost savings or revenue enhancement. Accordingly, the major IT spend areas for insurers in 2015-2016 will be risk and regulatory compliance, big data analytics, and automation of back-office functions. But, as the competitive landscape intensifies, we will increasingly see insurers investing in mobility, social media, and cloud-based solutions to enhance customer experience, gain cost advantages and reduce time to market with new products and services.”
Other key findings in Everest Group’s recently published IT Outsourcing in Insurance – Annual Report 2015: The Digital Frontier include the following:
The report provides an overview of the application outsourcing (AO) market for the insurance industry, including key trends in market size and growth, emerging priorities of buyers, areas of investment, and the future outlook for 2015-2016.
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Key trend to watch: Global In-house Centers elevate role in enterprise through digital adoption
DALLAS, NOVEMBER 24, 2015 — Global outsourcing demand was robust in Q3 2015 as buyers sought to cut down their operating costs amidst economic slowdown. Most service providers reported sequential quarterly growth in revenue and operating margins, according to research recently published by Everest Group, a consulting and research firm focused on strategic IT, business services and sourcing.
Twenty-eight major deals were signed in the quarter, including a mega deal between HP and the United Kingdom Ministry of Defence with a total contract value exceeding US$1 billion.
“A significant trend we witnessed in Q3 is the continuing, expanding role of Global In-house Centers in the digital transformation of enterprises,” said Salil Dani, vice president at Everest Group. “GICs are increasingly supporting enterprise digital initiatives—including analytics, cloud, mobility, social and interactive and robotics process automation—particularly as technologies mature and offshore cost benefits decline. However, a majority of GICs are still in the initial to mid stages of maturity, with significant potential for impact remaining. Analytics is the exception; among the digital services, analytics is fairly established among GICs, with multiple GICs having scaled operations with sizeable headcount in this function.”
These results and other findings are explored in “Market Vista™ Q3 2015.”
Market Vista Q3 2015 includes data, analysis, and insights on transaction trends, major outsourcing deals, global in-house center market dynamics, trends in offshoring emerging destinations, and service provider development. The report also includes the Standard Locations Database, which tracks 23 leading offshore locations.
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Sign up here to download the Everest Group webinar “Global Locations Update: Plus Market Vista Q3 2015 Global Services Update.” This one-hour webinar featured Everest Group experts discussing key market developments and shifts in the delivery locations landscape in 2014 and H1 2015. As a special topic, Everest Group subject matter experts also evaluated the impact of digitalization, specifically Robotic Process Automation (RPA), on delivery location strategies of companies.
Service lines driving IT demand across demand categories
Convergence is driving the entire HC spectrum to focus on systems integration, decision support, and financial system transformation
Payer technology focus is data security, analytics, legacy modernization, and digital initiatives
Payer ITO deal activity largely driven by regulatory pressures. Key payer IT themes in large deals: ICD-10, HIX, claims transformation, Medicare, infrastructure modernization.
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