IT contracts with service providers have seen a changing phase in last few years. While the industry sought and leveraged various smaller and larger IT service providing firms for its generic and niche needs. It seems to be converging now. There is more and more push on Vendor Managers to deepen the relationship with larger service providers and procure mass of the required service mix through one window rather than negotiting with multiple firms.
If you have observed, most large IT procurement organizations have consolidated their requirements to negotiate through one window and usually sign one large master service agreements with chosen few vendors who they trust with provisioning 60-70% of their BAU services. The consolidation helps them create volume and get better prices, it also in a way leaves the smaller contracts' resposibility on service providers by pushing them to provide end to end services. Many IT service firms are moving to liasion with Data Centers, product vendors, to create services that they can provide under the MSA rates and that can help them gain larger share of pie and keep competition out. This has also made the larger service firms power centers and doorways for smaller, niche firms to co share the revenue pie in larger accounts.
Contractually, this is making power centers in IT industry. Brining in margin pressure and passing on the risk and responsibility on service providers. The volume presence and assured tenure of business gives service provider a timeframe to strategically setup the shop under MSA and further pass on similar terms on smaller players.
While the MSA's operate at the org wide level, based on the nature of business sub segments and their price and demand prerogative, some organizations leave the choice of choosing the vendors on business sub segments. The catalogus of firms to work with at a broad level is fixed at org level. Vendor Management assures that all terms and conditions are met, rate card is looked into and any new vendor is not onboarded unless the service can not be provided by the chosen few. This keeps the web simple for vendor management.
Does this mean, services industry game plan is changing?? The small niche vendors, even large product providers will have to rely on service providers. They will be the door guards for getting in the right technology at right price and with minimal risks. Service providers for large accounts will have to work on mutiple alliances, taking on the right level of risks on their books and provide end to end services without compromising on their final service catalogue and organziational growth strategy. Interesting unfolding of events and interesting will be to see at what level the appetite to take risks will have to be monitored. The risk content on balance sheets of the large service providing firms is something to watch for in coming years. Sales people have to be extremely cautious and make the decision which lead to safe yet meaningful selling.
Sunday, October 17, 2010
Sunday, October 3, 2010
Outsourcing Industry - Engagement Models
After having discussed the demand types, it is good to write on various engagement models that are prevalent in IT industry. IT industry essentially depended on technical know hows of its already set IT structure, or new ones to watch for. While some skills are available in abundance, for some the search is tougher as skills are scarce. Organizations have traditionally evolved in the way they give out work and manage them. We will discuss some that i can think of in order of maturity in this blog:
Staff Augmentation: The model is based on skill complementing for a firm. The overall responsibility of people and project management still stays with the outsourcing organization. This was essentially filled by independent consultants and contractors, but given the least strategic involvement, it is the safest bet to get started with outsourcing work without losing much control. This however, does not bring down the cost and also poses uncertainty related risks as vendor's liability and control is limited.
Managed Services: As the staff aug presence grows in a certain team, the management of uncertainty related to multiple lose ends from different organizations and their lack of liability to final aim, leads to project associated risks. There is requirement to take all contractors on the roll to give them common aim or to consolidate the staff aug under one umbrella which can manage the uncertainty, take the bottomline and collect the individual efforts to form a pool to provide robust back up and assurance to services. This type of engagement requires replication of a responsible organization, a small back up and one to one reporting and management with the outsourcing firm. While there is slight addition initially in terms of management overhead and pool, there are financial benefits drawn from more robust services, cross skilling and resilience. The services are more assured, focus of firm can move from staff hiring, managing and firing to final outputs.
Risk and Reward: Once the organizations mature under managed services, there is requirement to add "predictability" to services. This level of engagement has dependence on multiple factors like: fairness in vendor and outsourcing firm's relations, predictability in operations, mutual cooperation, clarity on roles and responsibility. All in all a long standing, stable vendor can take on the end to end management of its piece of work to deliver outcomes. The outcomes are reported to the outsourcing firm and if deviated from certain standards vendors are willing to take the risk and be penalised for it. This requires a very high level of working experience and stake holder management on vendor firm's part. This is increasingly becoming common in BAU services, where outcomes are of utmost importance.
Business Partnership: The engagement model expects financial commitment from both the vendor and the firm on IT initiates which they feel can be transformatory in nature. Vendor organization comes together with the industry and decide to co build a solution. There is fair level of financial investment and hence profit sharing to try a new idea which both organization feel convinced about. In such engagements vendors play a technical and cross industry expert role for its partnering firm, while firm provides industry process knowledge. The engagement is one to one with equal rights for both parties to drive the initiatives in right direction. Vendor organization has the right to share the IP and also market the same to recover its investments and gain more business in similar sectors. Most IT service providers gained early entry into government sectors and now in airline operations through these models. There could be partnerships in: taking on infra cost, setting up innovation labs, dedicated consulting teams, stake in captive enters or Go To Market together.
Advisory This probably is the highest level of engagement where by vendors take on the consultative role and participates with CIO organization in charting the future technology roadmap. The vendors play a key neutral role in providing the inputs on cost, efficiency, new technologies and also help firms move their BAU investment to new innovation portfolio. The vendors here talk to business, understand their drive and connect the requirements with technology. They participate in business case creation. The key is - vendors at this level, do not enter with aim of financial benefits only, they try to optimize the client organizations and drive their investments such that it directly impacts the revenue stream and hence justifies the IT cost. It has CIOs KPI on itself.
Apart from the ones listed above, there are multiple other engagement models that get innovated under risk and reward. Outcome based has become a buzz word. How effective and right these are, depends on context, maturity and knowledge of outsourcing organizations. There is no one size fits all answer. One essentially has to go through all stages in an account development span and a lot depends on trust and human emotions at play. The IT industry will evolve interestingly to pass on more and more responsibility towards the vendors with maximum head counts. The questions at play will be how to empower vendor organizations to take on right decisions and how to handle the conflict of interest which shall change as responsibility shifts. The Vendor firms will have to evolve to run multiple IT businesses as its own. The risk portfolio for them will increase and variety in business ownership will build on the cost. Where to draw the line? Which side to stick on to? Which processes to put on business platforms and make generic for firms and which specific ones to take on rolls for specific firms?? All these questions will become critical in coming times. Interesting times for IT vendors to define its boundaries. In the end, it should not be running the same IT departments, with all risks, no authoritative role and a stick on head on costs. The industry will have to stand up to chart a role for itself.
Staff Augmentation: The model is based on skill complementing for a firm. The overall responsibility of people and project management still stays with the outsourcing organization. This was essentially filled by independent consultants and contractors, but given the least strategic involvement, it is the safest bet to get started with outsourcing work without losing much control. This however, does not bring down the cost and also poses uncertainty related risks as vendor's liability and control is limited.
Managed Services: As the staff aug presence grows in a certain team, the management of uncertainty related to multiple lose ends from different organizations and their lack of liability to final aim, leads to project associated risks. There is requirement to take all contractors on the roll to give them common aim or to consolidate the staff aug under one umbrella which can manage the uncertainty, take the bottomline and collect the individual efforts to form a pool to provide robust back up and assurance to services. This type of engagement requires replication of a responsible organization, a small back up and one to one reporting and management with the outsourcing firm. While there is slight addition initially in terms of management overhead and pool, there are financial benefits drawn from more robust services, cross skilling and resilience. The services are more assured, focus of firm can move from staff hiring, managing and firing to final outputs.
Risk and Reward: Once the organizations mature under managed services, there is requirement to add "predictability" to services. This level of engagement has dependence on multiple factors like: fairness in vendor and outsourcing firm's relations, predictability in operations, mutual cooperation, clarity on roles and responsibility. All in all a long standing, stable vendor can take on the end to end management of its piece of work to deliver outcomes. The outcomes are reported to the outsourcing firm and if deviated from certain standards vendors are willing to take the risk and be penalised for it. This requires a very high level of working experience and stake holder management on vendor firm's part. This is increasingly becoming common in BAU services, where outcomes are of utmost importance.
Business Partnership: The engagement model expects financial commitment from both the vendor and the firm on IT initiates which they feel can be transformatory in nature. Vendor organization comes together with the industry and decide to co build a solution. There is fair level of financial investment and hence profit sharing to try a new idea which both organization feel convinced about. In such engagements vendors play a technical and cross industry expert role for its partnering firm, while firm provides industry process knowledge. The engagement is one to one with equal rights for both parties to drive the initiatives in right direction. Vendor organization has the right to share the IP and also market the same to recover its investments and gain more business in similar sectors. Most IT service providers gained early entry into government sectors and now in airline operations through these models. There could be partnerships in: taking on infra cost, setting up innovation labs, dedicated consulting teams, stake in captive enters or Go To Market together.
Advisory This probably is the highest level of engagement where by vendors take on the consultative role and participates with CIO organization in charting the future technology roadmap. The vendors play a key neutral role in providing the inputs on cost, efficiency, new technologies and also help firms move their BAU investment to new innovation portfolio. The vendors here talk to business, understand their drive and connect the requirements with technology. They participate in business case creation. The key is - vendors at this level, do not enter with aim of financial benefits only, they try to optimize the client organizations and drive their investments such that it directly impacts the revenue stream and hence justifies the IT cost. It has CIOs KPI on itself.
Apart from the ones listed above, there are multiple other engagement models that get innovated under risk and reward. Outcome based has become a buzz word. How effective and right these are, depends on context, maturity and knowledge of outsourcing organizations. There is no one size fits all answer. One essentially has to go through all stages in an account development span and a lot depends on trust and human emotions at play. The IT industry will evolve interestingly to pass on more and more responsibility towards the vendors with maximum head counts. The questions at play will be how to empower vendor organizations to take on right decisions and how to handle the conflict of interest which shall change as responsibility shifts. The Vendor firms will have to evolve to run multiple IT businesses as its own. The risk portfolio for them will increase and variety in business ownership will build on the cost. Where to draw the line? Which side to stick on to? Which processes to put on business platforms and make generic for firms and which specific ones to take on rolls for specific firms?? All these questions will become critical in coming times. Interesting times for IT vendors to define its boundaries. In the end, it should not be running the same IT departments, with all risks, no authoritative role and a stick on head on costs. The industry will have to stand up to chart a role for itself.
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