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Insights from the NOA “Benchmarking” Special Interests Group with Everest Group
Benchmarking is a worthwhile endeavour. When conducted properly, the practice will give you a baseline indicator of where your business is currently, where it is headed on its current trajectory, where you need to be to maximise gains and how you can get there.
Benchmarking can also act as the catalyst for a more fruitful long-term outsourcing relationship, by highlight areas that must be focused on moving forward. On the other hand, it is not the solution to every problem that relationship might have. The term is frequently misunderstood and the practice is even more frequently misused.
At the NOA’s Special Interests Group on Benchmarking in association with Everest Group, benchmarking experts led a roundtable discussion on when benchmarking is necessary, how it is best carried out and what the practice does to help business relationships between clients and their providers.
Timing can be crucial. I recently blogged about trends that are powerful enough to drive substantial changes in the services industry, even to the point of restructuring the hierarchy of the industry. We at Everest Group believe these are very important trends and service providers must develop their strategies for reacting. Here is our guidance to avoid overreacting to the impending changes.
As a provider, if you react to the challenges by putting new emphasis on new models too fast, you will lose focus on your core business. But if you don’t change quickly enough or are not able to make the requisite changes, you run the risk of becoming a dinosaur. The industry saw this happen 15 years ago when the Indian ISPs with their labor arbitrage and factory models caused tremendous disruption in the MNCs that dominated the industry at that time (e.g., Capgemini, CSC, EDS, HP).
Organizations struggle when changing business models. It’s difficult to change a services organization without losing its identity and value. There are basically two strategy paths providers can take in dealing with the industry changes.
First, don’t fall into the temptation of trying to make your company be something it’s not. For example, most of the Indian ISPs are effectively talent companies; they manage and deliver talent. There will always be a need for talent. The kind of talent and the work the talent undertakes will change, but there will still be a need for talent. So one potential strategy is to stay true to your company’s identity and value and manage talent.
Another strategy is to try to develop completely new business offerings and intellectual property (IP).
However, this strategy carries several risks, and some companies that take this route run into significant problems. Some try to build a new business model but use philosophies and structures that evolved for the talent-pool model instead of digital-age models. Others rethink their philosophies and structures and also change their IP, investment model and pricing structure. They also must change their customer interaction model.
It is particularly instructive that there are very few examples where companies were able to develop their new IP in house. IBM is an example of changing IP numerous times, but they tend to do it through acquisitions, not through developing new vehicles in house. If that’s the strategy other providers adopt in reacting to the impending changes, we can look for a big spree of well-funded service firms buying software or as-a-service products.
However, providers need to change their acquisition strategies. Yesterday’s strategy was to buy tuck-in companies at low valuations and leverage them for customer access, but today it’s necessary to buy technology. Should you buy an early-stage startup that’s affordable but hasn’t fleshed out its business model and hasn’t honed its pricing structure or built market momentum; or should you buy one that has – and pay a premium for it? Obviously there is a huge difference in valuation. And the valuation can change in the course of three months for a fast-moving tech company. So the pace at which you make the valuations has to change, and the risk is different. As I mentioned earlier, timing is crucial.
Another acquisition issue: should you nurture the company and hold it separate so it doesn’t get cannibalized and shut down? Should you let them have an independent sales force and marketing arm, or should you roll them under your existing teams?
So there are substantial challenges and some daunting issues along the road to evolving to an IP-driven organization. There will be a huge learning curve at every level of change.
You basically have three choices in strategies for dealing with the impending industry changes:
All the necessary change I described above is a difficult and risk-filled proposition. But it’s even more difficult to try to sustain both models at the same time.
The consequence of option #1, to stay the course with talent, could be that your company ends up on the sidelines and has to watch your talent get commoditized, deal with reduced earnings and slower growth while other providers soar to huge valuations.
The consequence of option #2, shifting to the digital-age models, include a huge learning curve. Can you make that pivot fast enough to offset the revenue runoffs or the lack of growth from your shift in direction? Will it confuse your existing client base? Can you learn the new business model quickly enough to compete successfully?
The consequence of option #3, trying to maintain the old while shifting to the new, will feel and look schizophrenic. You’ll have a split focus in every aspect of your business. And all the while, each model will seek supremacy. If you allow that to happen, you’ll lose focus on the other model.
There is no obvious “right” answer to which strategy your company should undertake in dealing with the impending industry changes. Choose the one that you can best execute on and is the best choice for maximizing shareholder value and growth opportunities.
Sole sourcing can deliver multiple benefits, including reduced cost- and time-to-decision, elimination of the need to manage a large portfolio of providers, and likelihood of reaping greater value from a closer relationship with a single services delivery partner. Yet the sole-source process can quickly unravel if not carefully designed and managed by the buyer, even (or perhaps, especially) when a strong relationship between the buyer and provider already exists.
Several factors are critical to sole sourcing success.
While mutual respect, aligned interests, commitment, and trust are critical in any outsourcing relationship, they assume greater importance in a sole-source situation. Why? Buyers look to sole source to achieve collaborative, insights-based solutions, rather than merely receiving a table stakes collection of transactions. Buyers achieve this by openly sharing their desired outcomes and concerns, and building an outcomes-focused, value-oriented foundation during the solutioning and negotiation process. This depth of relationship must be nurtured throughout the tenure of the engagement. This applies whether looking to transform the relationship or simply update it. Alignment of both organizations to the objectives is key to a successful sole-source.
Senior leadership from both the buyer and supplier need to set the initial goals for the relationship as they deepen it, and then continue to reinforce the desired outcomes to their teams throughout the sole sourcing process. Institutionalizing these objectives will ensure that they become the parameters that guide behavior in all interactions. This takes significant and persistent effort at all levels, and will require some spot coaching to realign team members who fall back to the old ways of doing things.
Given their role as stewards of an enterprise’s activities, boards of directors may balk at the idea of sole sourcing. To avoid delays and additional fact gathering expenses – and even the requirement to tender an RFP to multiple providers – the buyer should present the opportunity to its board as early as possible in the process. The buyer must understand the concerns the board might have around the value of a competitive process, and address them through external benchmarking, leveraging current market information about suppliers and services, and a thorough understanding of the value of the current relationship. An early confirmation from the board that this is worth considering will avoid wasting time, resources, money, and momentum.
As one of the key advantages of sole sourcing is time-to-execution of the agreement, buyers need to focus on three factors during the sourcing process: a strong, solid, and accurate business case that is easily explained to the organization; confidence (through benchmarking and external validation) that the service provider, scope, and pricing are market-competitive and aligned to the desired outcomes; and a robust contract that focuses negotiations on the most relevant terms.
To attain buy-in from senior leadership, the board, and the overall organization, the buyer’s business case must include: a baseline to demonstrate the full current service delivery costs; projections for the contract duration; dynamic modeling for real-time solutioning; an accounting of direct cost, business, and strategic benefits; and multi-dimensional risk measures. The business case must include a comparison to a competitive process, ensuring that the organization understands the value of the sole-source. And while it must cover all these bases, the resulting information must be presented in a clear, simple, direct, and compelling manner.
The onus is on the buyer to ensure that the scope, pricing, and value are reasonable. As the buyer, you need to know what you want from the provider’s services, and how they’ll help you achieve your goals. After analyzing all through a market-comparative lens, you should work hand-in-hand with the provider to set specific (and quantifiable!) solution targets, making it clear that under-achieved goals may re-open a multi-provider sourcing process.
By taking ownership of the engagement process to set specific milestones and goals, the buyer maintains control of the decision and problem solving involved in reaching the goal, and eliminates any ambiguities relating to timing, scope, responsibilities, metrics, and targets. But a bit of buyer beware: Everest Group has identified 31 relevant contractual terms that sourcing negotiations should address.
For more specifics on attaining sole-sourcing success, please read our paper, “Sole Source Outsourcing – Ensuring a Successful Outcome.”
The cloud experiment is over and the debate in enterprises about its benefits and risks is settled. We know it works, it’s more flexible and cheaper, and it makes it easier for IT to align with business needs. So should buyers put their applications into a cloud environment?
My advice: Don’t rearchitect your legacy applications that were designed and implemented in a legacy environment and port them over to the cloud. Organization of all sizes have been waiting for providers’ porting solutions. Unfortunately, that’s sort of like the Samuel Beckett tragicomedy play, “Waiting for Godot,” in which two characters wait days for Godot even though they don’t know where or when he might arrive. Buyers wait, thinking cloud porting solutions will arrive in the market, but it just doesn’t happen. That’s because porting is really expensive and really risky.
I’ve blogged in the past about CSS Corp Cloud Services and Redwood Software platforms for easily migrating legacy apps to the cloud. But as we get further into the cloud story, it looks like replatforming offerings will be far rarer than we anticipated. I’m not saying they won’t exist; I’m just saying they won’t be the dominant model.
As the smoke clears from cloud experimenting and pilots, the best-practice dominant model for moving into the cloud is shaping up as follows:
This strategy of adding virtualization and automation may get your legacy environment into a private cloud, but it doesn’t get you into the agile low-cost public cloud environment. However, it allows you to improve the efficiency and resiliency of the existing legacy environment without the huge cost and risk of rearchitecting.
The strategy also helps CIO organizations regain some of the influence and credibility they’ve lost with business units as they’ve addressed new functionalities enabling where the business is moving. It enables the organization to be more agile, better aligned and do so with lower cost, which significantly relieves the tension of having to get a huge amount of funding for a set of high-risk legacy projects.
The fact is for many legacy applications the best you can do is make incremental progress. You can move them out of dedicated hardware into virtualized hardware. And other than some potential cost savings, there is little to no business benefit from taking on the risk of reengineering them for a public infrastructure or shared environment.
We saw this same best-practice model happen with distributed computing; new applications went into distributed computing and eventually we reached a tipping point where we needed to move legacy apps. I anticipate the new functionalities, new work will similarly drive the shift from legacy to cloud.
Going forward until the tipping point occurs, put all your efforts into standing up your organization’s new environment to take full advantage of the business alignment, flexibility and cost that the cloud family offers and just make incremental changes to your legacy environment. If you wait for a huge re-platforming surge of cloud porting solutions, I believe you’ll be waiting for Godot.
In a recent blog I noted that there is a new wave of shared services activity. But don’t dismiss that news with an assumption that new starts in shared services just means taking a slice of business away from third-party service providers. Here are my tips for shifting this potential business loss to a new revenue stream.
Tip #1: Be patient
If a company has decided to go down the shared services path, your trying to convince them to use purely outsourcing is not likely to succeed. However, we know that over time companies that decide to embark on a shared services journey later decide to use third-party providers in their shared services mix, to a lesser or larger degree. So be patient. These activities take years to develop.
Tip #2: Be an ally
Don’t be an enemy of their decision to take the shared services path. Instead, be an ally and assist them on their journey. You can help them build out their shared services approach and use that relationship to identify where they could use a third party for part of of the services.
Tip #3: Cede control
At some point a shared services unit probably will adopt a hybrid approach to services. Even so, companies moving to shared services inherently favor maintaining control; so the types of services you offer them should be designed to allow them to exercise control.
Much of the outsourcing model is about giving the provider control so the provider can operate in an efficient manner and give the customer a low price. That approach won’t work in a hybrid shared services model. Instead, take an approach along the lines of “Let us help you craft control” so you can participate going forward.