Outsourcing contract: Ideal opportunity for innovation
Innovation and flexibility become increasingly more important when renewing outsourcing contracts. Anyone ignoring this fact runs the risk of being left behind; established Frank de Vries and Arno IJmker. There are opportunities galore, when renewing existing contracts. Over the last few years, ICT outsourcing was mainly used for saving costs. Recent research shows that cost reduction is still the main reason for having parts of ICT activities in an organization taken care of by an external supplier. However, in doing so organizations often overlook the fact that outsourcing also has to help innovate business processes and make ICT services more flexible. Anyone who does not include this in his considerations, will be stuck with an out-of-date outsourcing contract and runs the risk of being left behind.
Since late 2005, the state of the economy has significantly improved. At this improvement of the economy, innovation and flexibility are these days high on the agenda. ICT providers respond to this with concepts such as 'on demand', 'mobile enterprise', 'agility' and marketing terms that all start from dynamics and adaptability in the provision of services. It is for example increasingly more easy as a customer to just pay for exactly what you use and outsourcing suppliers are able to absorb flexibly and very quickly large amounts of ICT activities.
When renewing an existing outsourcing contract ideally a number of types of innovations take central stage (see box). When outsourcing it is the Demand Supply Organization that supports the business and ICT management on the one hand by mapping the needs from the operational management and on the other hand intelligently procuring and monitoring the corresponding ICT services and products as supplied by internal and external providers. At securing of innovation and flexibility this intermediary organization encounters a few problems. These problems can be divided into three categories, namely: incorrect governance from the Demand Supply Organization, hindrances in the current portfolio of contracts and lacking records of innovations and flexibility in the actual contractual agreements.
To start with (demand - supply) organizations sometimes govern on the wrong things. The credo 'you get what you govern for' also goes for innovation. Governing a programme aimed at cost reduction does require different governance elements than governing on innovation. Unfortunately, many organizations do not even think about the subject innovation when setting up their ICT Demand Supply Organization. Innovation has to be actively promoted by the management of the business organization, the management of the Demand Supply Organization and ICT organization.
Many organizations do not even think about innovation
Next, the issue needs to be addressed in the daily management of ICT (demand supply) organizations and the internal and/or external ICT suppliers. This is done by means of linking specific objectives with departments, including these in individual function profiles and periodical evaluation moments. Besides, a number of questions can be asked that often remain insufficiently answered in every day life simply because these have not been thought about. How often do product management, marketers of the organization meet people from the ICT department for discussing innovative (im) possibilities? How is the innovative know-how of commercial suppliers utilized? Are tendencies in the market and the market segment in question proactively shared? Does the Demand Supply Organization screen off all contacts between suppliers and the business organization or are the latter also allowed to proactively suggest innovations to the business organization without intervention of the Demand Supply Organization? After all, many employees in the Demand Supply Organization are explicitly selected on their analytical and control competencies and they are perhaps not the right people to support and/or assess innovative propositions.
Secondly, the current portfolio of contracts, known as the sourcing legacy, may impede on innovation and also on the flexibilisation of the ICT service provision. As a result of contracts being spread across many different external ICT suppliers, changes or new types of contract sometimes need to be attuned to a large number of parties. The outsourcing strategy should enable innovation and flexibilisation and the necessity of short time-to-market at innovation should not be hindered by rigid contracts or suppliers who do not want to or cannot cooperate. In order to minimize this risk in future it is a good idea to look at the validity and dates of expiry of agreements and gear these to each other in order to remove any possible impediments for innovation and flexibilisation. The Demand Supply Organization should also knowingly deal with: which ICT service is marketed (division strategy), to how many suppliers this ICT service is outsourced and to which type of supplier (suppliers policy).
Thirdly, innovation and flexibilisation are not always sufficiently recorded in the final outsourcing agreement. Innovation can be contractually promoted by shifting the emphasis. It is for example possible to agree on a no claims bonus that is also aimed at innovation instead of just focusing on traditional service levels. When a supplier is considered to be able to offer more innovative functionality by means of alternative software, then the contract should offer the possibilities to do so. When an ICT supplier has agreed on being allowed to supply all hardware services but a small niche player is able to contribute to innovation,then there should be room in the contract for hiring this niche player for this specific part. In addition, some organizations do consciously include a budget that has to be spent on innovation. Exploitation and reporting on this then takes place at the highest level in the organization. At contract level, the Demand Supply Organization also has the possibility to hire flexibility. A simple example is agreeing on tariff based prices per unit or actual use of applications. In case of changes in the operational management, ICT services can move along with this without this having to lead immediately to large investments or having to break open the contract. It is important to make sure that contracts do not include guarantees regarding volume of trade or compensation orders in case of a drop in volume, which would mean that the price model, belonging to the outsourcing contract would become like a fixed price after all.
In brief, expiring outsourcing agreements are a perfect occasion to re-evaluate the entire strategy with regard to sourcing. This will offer plenty of opportunities for including innovation and flexibility, just like cost reduction, as an integral part of the outsourcing strategy. In order to prevent disappointments, definition of a realistic transition to the new situation is a requirement, for both the Demand Supply Organization as well as the ICT suppliers. By securing innovation and flexibility concretely in the portfolio of contracts, in the individual outsourcing agreements and in the control of the (Demand Supply) Organization, these do not remain myths but instead become reality.
The price structure in many existing outsourcing contracts by tradition are not very dynamic to say the least, amongst other things because a few years ago the state of the art would not allow price units to be distinguished flexibly within the business model as used by suppliers at the time. Outsourcing contracts were often concluded based on a set price. In the meantime, it has become possible to define price units at all levels (price per server, price per Tb storage, price per message, price per active Lan-port et cetera) and flexibly handle settlement of the services agreed without guaranteed turnover. Furthermore, most outsourcing suppliers these days also have large, common and strongly rationalized infrastructures that may lead to considerable cost reductions. Offshore scenarios also contribute to an innovative cost model because both the customer as well as the supplier may benefit from placing services in the most favourable location.
Outsourcing for the first time or renewed outsourcing of application maintenance/management is an excellent opportunity to re-evaluate the application landscape and portfolio as well. They may involve extension or optimisation of the existing application environment and its rationalisation. In many organizations, a true patchwork quilt of applications was created through take-overs and mergers. Within the framework of renewal of contracts, supplier and customer may investigate to what extent consolidation into one single one is possible. In addition, in cooperation with the supplier it is possible to find out whether the functionality of standard applications on offer can better support the organization, which prevents the wheel being invented over and over again by means of tailor-made applications.
IT infrastructure innovation
In most existing outsourcing contracts, SLA’s are agreed per platform or infrastructure component (Unix, mainframe, AS400, desktops, network et cetera). This 'division-oriented' approach has its limitations because it does not cover the entire chain and requires more coordination effort from the Demand Supply Organization. However, at the current state of technology with service provision becoming increasingly more of age, suppliers are able to offer services on the basis of an end-to-end service level, making use of large, common and strongly rationalized infrastructures. To an end user it is ultimately not important which element within the infrastructure causes a disruption but how quickly certain functionalities are available again meaning that the operational management can be continued within the agreed service levels (for example the availability of a financial application in the workplace meaning that the financial department is able to do its job).