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ITO: Keeping up with the times
by John Sheridan, director – head of ITO advisory at Alsbridge plc
Thursday, October 17, 2013

Imagine this: you’re an IT leader and need to stay ahead of the game by adopting new and more efficient technology and associated delivery models, but your current IT outsourcing (ITO) contract simply won’t allow it. You’re tied into an agreement that offers little technological or commercial flexibility and leaves you effectively frozen in time or at the mercy of your service provider.

It should never be the case but sadly this is the reality for too many senior IT decision makers in Europe. According to our latest study, Terms of Endearment, almost two fifths (38 per cent) feel “stuck in the past” as new technologies emerge and existing ITO contracts signed under increasing cost pressure prevent them from taking advantage.

In fast-changing times, it is imperative that businesses can keep up with the competition; survival of the fittest springs to mind, or survival of the most technologically adaptable. IT leaders need ITO agreements in place that let them integrate new ideas and technological advances as and when the business needs them, not as a result of a lengthy, costly and potentially disruptive contractual renegotiation or re-tendering process.

According to the study, changing technology needs is the biggest driver for ITO renegotiation (54 per cent) and almost half of IT leaders (46 per cent) say the ability to integrate new ideas is one of the most important factors when choosing an ITO provider. If you’re not able to move your business into the future because your contract is too rigid or is silent on what this means and how it should be governed, then now is the time to consider what you and your supplier can do to change those relationships so that they meet your expectations.

However, it’s not just about cost and technology. The challenge goes to the heart of the client/supplier relationship and the extent and impact of collaboration and “innovation” that both parties expect throughout the contractual term.

Defining “innovation”

When we talk to our clients about innovation, they are generally divided into two camps; those who simply want their supplier to deliver the scope of service at the level they contracted for against a charging mechanism that allows them to predict cost; and those who expect the same service delivery and commercial obligation but also additional value through continual improvement and innovation.

This ‘second camp’ wants a dialogue with their service provider that enables them to work together collaboratively, as the business and technology needs change and the market evolves. However, this is not always what is contracted for – or defined clearly enough for this to work effectively in line with the client’s expectations.

One of the key challenges is in the definition of “innovation”. It’s not just about the application of new technology; the supplier has access to a much wider resource and capability pool and has the ability to leverage many more client engagements for lessons learned. Therefore, it’s also about sharing knowledge and IP, and connecting clients with others who are experiencing or have experienced similar challenges.

Creating the right environment

We’ve been talking about contracting for innovation for decades, but this is rarely, if ever, done well. Most ITO and BPO deals already embed a degree of innovation into the baseline delivery model and financials. The supplier has to deliver services differently in order to meet commercial targets, but that’s not what we are talking about here.

The key to accessing innovation on an ongoing basis is to ensure that there is an effective and collaborative governance framework in place that provides the right environment for dialogue to take place. Our research shows that signing deals under significant cost pressure can squeeze the life out of this collaborative dialogue process.

We are now entering an era of such rapid change that the absence of such collaboration and effective dialogue within complex and business critical relationships will have major consequences for Europe’s IT leaders.

Defining the future roadmap

The challenge is trying to second guess what your business requirements are likely to be three or four years into a multi-year arrangement, as well as how technology will change during that time.

While every case is unique, here are a few key considerations to bear in mind:

1. Getting your priorities in order

IT leaders will undoubtedly expect and receive a certain degree of innovation from their supplier regardless of whether this was discussed at the contracting stage. However, this “organic” innovation can fail to deliver on certain expectations, for example with regards to technological adaptability and competitive advantage.

IT heads must decide what’s necessary for them to achieve their goals, and bear in mind the implications that this has on their choice of service providers, services, service level agreements and price. These decisions will be further complicated as the multi-source revolution continues to gather pace.

2. Defining innovation

IT leaders must also decide what innovation means to them. In our recent conversations with IT professionals, we have heard everything from “Breaking away from standard industry practice” to “Strategic, Cloud-based services” and “Proactive suggestions for improvement”.

Crucially, they must appreciate the implications that this has on their ITO agreements. A solid ITO strategy and planning are essential to equipping yourself with the right information and skills – be it in-house or externally provided – to enable you to have this discussion with your supplier.

3. Enabling a two-way dialogue

The stronger an ITO relationship the more successful these conversations will be, and this comes from laying the foundations for an honest, open and two-way dialogue with the supplier. This also comes from creating an environment where suppliers communicate and collaborate with each other for the greater good of their mutual client. Co-operation between all parties can enable a deeper understanding of what their respective agreements are trying to achieve, and help you to put a firm structure in place to enable these ongoing discussions to take place as the business and market evolve throughout the term of your contracts.

Service delivery models still have some catching up to do in order to support this new, more dynamic relationship between the client and supplier, and across multiple suppliers. However, we are starting to see some strong indicators for change and there are some massive benefits to be had from setting the scene for a more flexible relationship moving forwards. Armed with the right information to have these well-reasoned conversations, all parties within these relationships can expect to reap some huge benefits from accommodating each others’ needs.

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