IT modernization: Fool’s Gold for Transformation and Gainshare | Sherpas in Blue Shirts

Posted On February 1, 2018

Contracting exemplars for digital transformation are not to be found in IT modernization deals

If your enterprise is expecting digital transformation from a service provider and the incentive in the contract is based on cost savings, you’re likely barking up the wrong deal tree. Why? Because it likely signals that the provider will be approaching it as a legacy IT system modernization engagement, rather than a true digital transformation.

And there’s a big difference between the two, as Everest Group’s Founder and CEO, Peter Bendor-Samuel, talked about in a recent Forbes blog post. He explained that while big IT deals may contain transformational elements such as moving legacy infrastructure to the cloud or DevOps adoption, they are IT modernization programs, not digital transformation, unless they are motivated by fundamental business model change.

Don’t get me wrong: although IT modernization programs are important and big, they are not transformational. And in a competitive environment where experience and reputation count, enterprises need to be able to spot the differences between reference projects driven by the need to modernize or integrate infrastructure and those that genuinely transform their business models.

Here’s some food for thought

At an analyst briefing a few days ago, a senior executive from a global service provider described its firm’s recently completed multi-year transformation project for a major European banking client. I asked him afterwards about the delivery incentives for contract that was inked back in 2014. Had he, the service provider, been incentivized on business model transformation, or just cost take-out? Was there any element of shared risk or outcome-based incentive?

He was delightfully candid: to his knowledge, there isn’t a single major ITO contract in Europe or North America in which a service provider has accepted a gainshare incentive, and his case was no different. Programs of this sort that are being completed now are all about modernization. They are cost reduction exercises, albeit on a huge scale, but they are not business transformation.

Indeed, exemplars of shared risk incentives are few and far between. Even those in the public domain, including IBM’s 10-year, $700 million contract with Etihad in 2015, and ACS/Atos’s 10-year $500 million contract with Allscripts Healthcare in 2011—which had significant transformation scope such as data center consolidation or private cloud implementation—may have shined with the fool’s gold of transformation, as they were likely driven and funded by cost reduction, not business model transformation.

There is one public domain deal that is a genuine transformation exemplar: IBM’s 10-year $1 billion deal with Banorte in Mexico, which started in 2013. It is a top-down, long-term vision, driven by a strategy to deliver value through a customer-centric focus, rather than a requirement to upgrade creaking technology and save cost. The original press release hints at shared risk, and a joint venture-like governance model, in the way it was to oversee the project and measure progress.

But Banorte is an exception. In Everest Group’s own experience of analyzing dozens of ITO contracts over the past three years, gainshare constructs are exceedingly rare in the digital transformation space. And the evidence base of completed digital business transformations, as opposed to completed IT modernizations, is pretty much non-existent.

To gain deeper insights into digital transformation contracting incentives, we will be conducting extensive research among enterprises over the next few months to investigate the mix of output versus outcome-based pricing metrics. Keep your eyes on this space to read more about how the best enterprises are evolving their outsourcing models in this new digital frontier.

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