1. Enable growth by redirecting funds. Many companies are shifting their spend from running the business to changing the business. It is not unusual to see manufacturers flip their build-to-run ratio from a 35 percent-to-65 percent ratio to a 65 percent-to-35 percent ratio. During a recession, many manufacturing companies delay investment in IT and then need to fund transformational programs to enable growth. Reduction in the cost of running the business lets funding flow to everything from streamlining the supply chain and expanding into emerging markets to using social media to improve the customer experience.

2. Create a clear integration strategy for multi-sourcing. While manufacturers might have once sought a single service provider to manage its infrastructure or application environments, many are now evaluating a multi-sourcing delivery model to seek best-of-breed providers for select functions. This approach can lead to reduced cost and increased capability, but it demands a clear service integration strategy to prevent creating disparate processes across service providers. Without it, companies risk increased cost and degraded service delivery.

3. Strike the right balance in the sourced-to-retained mix. One large manufacturing company has announced it intends to shift its outsourced-to-retained services mix from a 90-to-10 mix to a 10-to-90 mix. While we don’t expect a mass move toward insourcing, many companies are working to retain the right skills in today’s sourcing environment, including architecture, business requirements management and governance stewardship. Many are also retaining service integration functions to handle the growth in multi-sourcing.

4. Shift to managed services. Though manufacturing is a leading industry in outsourcing, 65 percent of the contracts we review use a staff augmentation delivery model. Many companies are considering a shift to managed services with defined requirements, built-in variability, defined service levels and fixed unit rate pricing with committed productivity improvements. Moving to managed services is almost always accompanied by a consolidation initiative to reduce the number of service providers. Smart companies are paying close attention to the subsequent cultural change from managing staff to managing outcomes and quality.

5. Make cloud computing part of the solution. Though it may be a buzz word in every sourcing discussion, the cloud is also becoming an important component in broader sourcing strategies for manufacturers. While the prevailing view is that cloud computing isn’t for large, complex manufacturing companies or defense contractors faced with regulatory restrictions, the reality is that many companies are already integrating cloud solutions from private and hybrid clouds to software-as-a-service solutions with Workday, NetSuite, SFDC and others.

Sourcing in manufacturing is no longer one-size-fits-all, and creating a sourcing strategy should not be a one-time event. ISG experts can help your organization understand if now is the time to rethink yours. Contact David Lewis to discuss further.

Today, SDN is re-emerging in broader but analogous discussions around cloud computing and labor automation.  Here, SDN refers to a physical compute resource that is logically constructed (via virtualization) to be hosted in the cloud.  Likewise, when labor is automated the “labor code” can ride on that same cloud.  The result: you can connect to the cloud via the network to leverage both the virtual computing and the virtual labor resources.

In this context, SDN merges the cloud with the network and says they are one in the same.  More accurately stated, the network incorporates the cloud into the network operating system.  When you plug into the network you get all of the functionality available on the cloud – rather than just a fat pipe. This is the utility computing vision that Nicholas Carr laid out in the book The Big Switch.

At this point, it’s mostly just that – a vision, one that exists primarily on PowerPoint presentations and is available only in limited custom rollouts.  The first true waves will focus on demonstrating the value of very high speed access/egress into an intelligent network (cloud) that logically delivers what today’s infrastructure and labor deliver in a physical sense.  Needless to say, these are radical changes.

While SDN is still primarily the stuff of futuristic visionaries, it’s not too early for businesses to start exploring the journey of convergence between network evolution, cloud computing, and labor automation.  All of these trends are moving and developing rapidly, albeit on separate tracks.  Ultimately, however, after the inevitable security, regulatory, political and other speed bumps and detours along the way are cleared, these three trends will converge. When that happens, the IT services landscape will be fundamentally transformed – from the way that commercial contracts are negotiated and written to the manner in which services are delivered.

In addition to practical considerations, there are some philosophical questions to consider; namely, what does the replacement of physical machines and flesh-and-blood people portend for the future?

The utopian point of view holds that labor automation will drive down the costs of delivering services and create heretofore unseen value.  Displaced workers will be retrained to acquire new skills and migrate to new areas; the economic pie will grow to the benefit of all.

From the dystopian perspective, wealth will increasingly concentrate into the hands of a few providers and business owners. More workers will chase fewer jobs in a losing competitive battle against low/no cost software platforms.   Income levels and living standards will decline as income disparity expands.

The reality will likely be a mix of utopian and dystopian outcomes.  The chart at left shows US workforce participation rates dating back to 1948; the steady decline in the curve begins around the year 2000.  We’re familiar with the loss of manufacturing jobs and the struggles of workers seeking to acquire new skills and find new employment.  At the same time, manufacturing automation has benefitted all consumers by decreasing the cost and improving the quality of many products.

Will the same thing happen in the IT industry?  Will this trend expand to other knowledge work?  It already is and we are seeing both positive and negative effects.

The challenge the industry faces is to find ways to embrace this inevitable progress and deploy it to maximize the utopian impact and minimize the dystopian.  The storm of labor automation is coming.  Prudent companies and workers are thinking about how to prepare to capitalize on the trend, rather than waiting to become victims.  Do that and you can end up on the utopian side of the market.

But IT leadership skills do not necessarily translate from the day-to-day workings of IT. ISG observes what leaders in IT actually do and has found these Top 5 principles to be common elements of successful practice.

1. Improve communication skills at all levels of your organization. Ensure all IT staff display good communication in every interaction with every client. Senior managers, account managers, the service desk, and even those IT people normally hidden away in darkened rooms whose knowledge really make IT work must commit to this approach.

2. Develop the skills and careers of your IT staff. Resist the temptation to cut costs by reducing the training budget for staff, even in tough economic times. Use workplace challenges to enhance the career development of individuals. Even if your organization is seen as a place to gain an education that can then be taken elsewhere, remember that if you think education is expensive, a short trial of ignorance as the alternative will prove that it’s not.

3. Align the IT strategy with the business strategy. Develop strategy parallel with that of the business units served, and communicate it frequently to IT staff and to the business units. The IT staff can then make decisions in their day-to-day work that are clearly aligned with corporate and IT strategy, avoiding persistent escalation upwards and, more importantly, allowing the entire organization to move forward in concert. Invite the business to take an active part in the ongoing IT strategic governance activities, particularly in information systems and information management.

4. Go to the theater. See Shakespeare’s Henry V and reflect afterwards on the fact that leadership in IT, as elsewhere, is ultimately a lonely profession. As Lao Tzu said, “But of a good leader, who talks little, when his work is done, his aim fulfilled, they will all say, ‘we did this ourselves.’”

5. Think task > team > individual. The three circles model (by John Adair) is a simple way to remind leaders that their responsibilities should be balanced across the development of the team, the care of each individual’s needs and the achievement of the task. Strong business process and strategy can support the transformation you desire, for all of the participants; metrics that emerge from these operational best practices are essential for continuing to develop your people and environment.

ISG has been helping IT organizations achieve operational excellence for more than three decades. Contact David Cousin for information on the ISG services that can help you achieve your IT management objectives.

What’s perhaps equally troubling is that responsibility for managing supply chain risk is equally nebulous.

In numerous discussions with C-level client executives and legal teams, ISG has found that many organizations recognize the extent of the supply chain risk management and mitigation problem, but they lack a clear sense of ownership for dealing with the problem.  Typically, execution of a supply chain risk management strategy flows through the procurement organization. But when asked who takes the leadership role in defining that strategy, a lot of businesses aren’t really sure.

The ownership of supply chain risk management often defaults to a shared hybrid role, comprising the Chief Procurement Officer, Chief Risk Officer, CFO and legal team.  While a range of perspectives is essential to addressing different types of risk, the potential problem here is that if no one is solely responsible for the risk mitigation strategy, no one is solely accountable when something goes wrong.  Moreover, a vaguely-defined leadership team with a mixed agenda is likely to be ill-equipped to deal with the myriad supply chain risks businesses face today.

Global organizations face the challenge of developing a supply chain risk management strategy that is broad enough to encompass the range of prevailing risks businesses must confront, yet focused enough to ensure accountability and clear lines of responsibility and ownership around defining, anticipating and responding to risk.

I would welcome reader feedback – how is responsibility for supply chain risk management handled in your organization?

Rather than marrying your next outsourcing provider, take them out on a date and see how things go from there.

The fact is, our current approach to outsourcing contracts is completely out of touch with the needs of a business world where the pace of change rapidly exceeds the pace of learning. Specifically, the hyper-granular 1000-page contract that takes six to nine months to complete still prevails as the industry standard for major initiatives. While this approach certainly facilitates mutual commitment, it’s designed to serve static operating models. This means that, in today’s dynamic environments, many traditional contracts are essentially obsolete by the time they’re signed, or shortly thereafter.

We need a new approach where the “contract” for services is an understanding and a framework rather than a formal document.  The 1000-page contract is replaced by a 100 pages and a “handshake,” resulting in a process to manage and evolve the relationship over time.

This radically new approach to contracting and procuring services – which can be termed “Evolutionary Contracting” – obviously requires new approaches from clients, providers and advisors.  Rather than a strictly defined procedural interaction, the contracting process has to be more nuanced, sophisticated and intuitive.  Trust is imperative for all parties, as is transparency.

Moreover, all parties need flexibility to continuously adjust the scope and commercial terms of the relationship on an ongoing basis.  The “on ramps and “off ramps” to engage with providers need to be easier to navigate. Put differently, an outsourcing relationship can start with a date, not a marriage.

The idea of Evolutionary Contracting is closely linked to the concept of the “Request for Solution” (RFS).  In contrast to the traditional RFP, which is based on a highly specific and prescriptive set of requirements, the RFS states a broad problem – which might have more than one solution – and solicits responses on how that problem might be best addressed. By definition, this approach significantly enhances the potential for innovation and creativity, since the basic question becomes, “What do you think?” rather than “How will you deliver what I’ve told you I want?” (For more info on the RFS concept, download this new ISG white paper.)

To ensure that you benefit from the best market prices for all your outsourced services, ISG recommends a keen focus on removing risk from outsourcing deals. These Top 5 points identify ways to reduce the level of complexity and uncertainty, and therefore, the key drivers of risk.

1. Buy standard services wherever possible. Risk is a reality when you are buying non-standard services. Standard services, which are well-defined and predictable, are available from most IT service providers through a price book, rather than a custom-built and often complex financial model. Before any major outsourcing venture, take time to understand the IT requirements of the business, and value any non-standard services or constraints so you can make a decision based on its relative importance when compared to the market standard.

2. Follow a clear process. Being clear and engendering trust in a process reduces uncertainty in the mind of the person responsible for pricing the services. Be specific and consistent in your communication about the Request for Proposal (RFP) process, and ensure you understand and support the service provider’s due diligence requirements.

3. Articulate service requirements in terms of outputs. Describe your service requirements, or the “what,” in output-based terms, and let your service provider worry about the “how.” In addition to allowing the service provider greater control to leverage economies of scale across multiple clients, you are removing a layer of complexity in the solution.

 4. Understand your business demand. Because many IT organizations don’t fully understand the business needs that the outsourced IT services must fulfill, they often focus on installed units rather than utilized services and have to “re-baseline” their volumes during the outsourcing process. Constantly updating volumes part-way through a sourcing transaction can heighten confusion and uncertainty. Understand your consumption of IT services: the number of active devices, utilized ports and the amount of occupied storage. If you don’t already measure your consumption, start measuring it, and return to the business units to ensure it is what they really need today and in the future.

5. Fight for the “A-Team.” Every organization has a group of people who they consider to be the best – the “A-team.” These employees bring with them experience, certainty and confidence in a solution and price. To get the best team assigned to your organization, approach the right service providers for specific IT service bundles. Your service provider must want your business and consider you an important client. Conduct a market analysis, and initially spread the net wide to test the appetite of potential service providers. Then ask for the A-Team. If you don’t ask for it, you won’t get it.

For more information on how to reduce risk in your outsourced contracts, contact Jessica Kane or Robyn Singlehurst.

Indeed, over the past two years, retailers around the globe have scrambled to implement Wi-Fi infrastructures to enable free, high-speed internet access within their stores.  This infrastructure is being used to support and manage a wide range of applications. Examples include:

• Discount coupons and advertising promotions sent to smartphones when accessing in-store Wi-Fi
• Mobile check-outs and payments
• Loyalty programs
• Social network campaigns to build communities around a retailer’s stores or products
• Using purchasing preferences to enhance CRM database and, conversely, to target customer preferences

Today, simply giving away free Wi-Fi access in store locations isn’t enough. Rather, retailers seek to identify and deliver the mix of services that aligns with business strategy and customer demographics, optimizes benefits, and addresses major risks.  The challenge lies in finding that sweet spot in a relatively immature market where many players are struggling to find their way.

In this environment, CIOs have an opportunity to step up into the role of a true business partner by facilitating a dialogue with marketing executives around how to develop an effective “click-and-mortar” enterprise – one that leverages online technology to enhance rather than replace the in-store experience.  Marketing teams have to define what customers want and what the business would, ideally, deliver in terms of on-line offers, promotions and targeted campaigns that draw people into stores, keep them there to make purchases and then keep them coming back.

To clarify that business vision, CIOs need to explain what’s feasible from a technology perspective and what’s cost-effective.  Retailers have for years deployed hand-held bar code scanners and wireless-based logistics, supply chain and inventory systems to manage backroom and warehouse operations. The question now is how to apply those capabilities to applications that deliver value-added options to customers.

While the technology involved is relatively straightforward and within the realm of basic blocking and tackling, retailers are developing highly innovative applications. For example, ISG worked with a major retailer on deploying in-store Wi-Fi on a global scale for its bigger stores.  The uses the retailer contemplated for in-store Wi-Fi ranged from in-store 3D “sat-nav” applications to help customers find the right product in the right aisle and shelf, to applications that facilitate in-store shopping, such as a shopping list app, mobile scanning and mobile wallet technology.

In this instance, the CIO challenges include finding the right technology and the delivery model for a worldwide deployment. While the 802.11n standard is today’s preferred choice, providing business-grade SLAs for Wi-Fi – including end-user support for customers – on a worldwide basis requires careful planning.

An effective CIO/CMO dialogue can lead to a better understanding of how retailers can take advantage of in-store Wi-Fi to gain a competitive edge. Such a dialogue is also essential to understanding the market, defining options and building a business case to quantify the benefits of new initiatives and to sell the organizational change needed to implement innovative new programs.

For more information contact John Lytle, Director, ISG, or Julien Escribe, Partner, ISG, who contributed to this report.

Jones: One area that is really interesting to me is that in the traditional sourcing world, customers “trust but verify” – the verification oftentimes taking place via an on-site audit. As you are well aware, providers of multi-tenant cloud solutions often won’t allow this because it potentially breaches the confidentially agreements of other customers. So my question: how do customers “verify” in a world of standardized, shared platforms? How do customers know where there data is and verify that it is safe?

Helms: In short – buyers don’t verify, they only trust. This is largely because “verification” related to data storage is often not really feasible. With the exception of a dedicated, private cloud, most cloud solutions are largely distributed in nature. Data is stored across various computers, SANs and physical locations. There are often multiple data stores with a hot or warm backup in another location. Some customers demand to know where there data is stored, at all times. This is understandable, but not always realistic. Often, the best a customer can do it to understand the cloud system architecture, location of the provider’s data centers and the platforms used to provide the solution.

Jones: How do you account for these new distributed architectures in your contracts? What are the protections you recommend?

Helms: When representing a customer, we try to include general audit rights in the contract and an obligation for the provider to store customer data at a specific data center. We will then try to get “step-in rights” allowing the customer to take over the data, right where it sits, if something goes terribly wrong. However, as you note, providers often push back on audit rights and step-in rights arguing that confidentiality prevents one customer from auditing or taking over a leveraged system. I am somewhat skeptical of this argument and believe this is largely just an excuse to avoid a having these rights in a contract.  Cloud providers almost always logically segment customer data. Therefore, an audit or step-in by one customer would not violate the confidentiality of another customer. However, that does not mean that this is easy for providers. It is not and there is not yet a typical market solution for this issue.

Jones: Let’s talk about exclusivity, minimums and termination rights. How have you seen these issues change over the past 10 years? What will contracts look like in five years?

Helms: As discussed above, the outsourcing market and outsourcing contracts have changed dramatically over the last ten years. Many early IT outsourcing contracts were exclusive – obligating the customer to use only one provider for all technology services for the duration of the contract term. Over time, exclusive arrangements fell out of favor but were replaced by minimum commitments. Termination rights for the customer were also very limited. Providers had to make significant up front investments at the start of the outsourcing arrangement and therefore had to lock in customers for a long enough time to recover that investment.

Today providers can ramp-up an outsourcing arrangement with limited investment by utilizing standard solutions and leveraged platforms. Customers understand this and are demanding more flexibility.  As a result, contracts are never exclusive, minimum commitments are decreasing and customers have broader termination rights. In five years, if the current trends continue, I would expect that minimum commitments will be almost nonexistent and customers will have broad termination for convenience rights.

Jones: I’m interested in your thoughts on the RFP process and how you see it changing from the attorney’s perspective – what are some of the key levers clients can pull to expedite the process?

Helms: I think the days of early provider meetings, followed by an RFI, followed by a 100-plus page RFP are substantially over. A long RFP process was often necessary to explain all the aspects of the customer’s systems and process that the provider was expected to take over. Because more and more customers are willing to accept the provider’s standard solution, there is no need to have a detailed and elongated RFP process. In fact, we are in favor of an expedited and flexible RFP process. For example, we believe the RFI/RFP can be replaced with one RFS (Request For Solution). This can be a ten to 20 page document detailing the business requirements and requesting providers to propose a solution. This document should not dictate a solution or spend much time explaining the existing environment.  It should however explain the customers’ business problem and invite providers to get creative is proposing a solution. Additionally, we encourage customers to not force an apples-to-apples comparison in the solution, even for the pricing model. Rather, allow providers to propose their standard solution and structure the deal in the manner that they believe is most efficient. That is better for the providers and ultimately more cost efficient for the customer.

Jones: Outsourcing is a mature market, and most organizations have executed at least one large outsourcing transaction. As a result, many companies have internal legal counsel and procurement teams that are quite experienced in sourcing. Given this, have you seen a decrease in demand for outside outsourcing legal experts and consultants?

Helms: It’s a good question. We have not seen a decrease in demand, but I think some have. The reality is many companies do have strong internal resources.  However, these deals are changing and the level of complexity is not decreasing. In fact, many would argue that, although the deals are smaller in value, they are increasing in complexity. This is primarily driven by multi-sourcing. Having many providers in the environment leads to complications in responsibility, reporting, governance and many other aspects of running an IT department. There is also an emerging trend to have one provider serve as a “service integrator” bringing together service delivery from multiple providers. This allows multi-sourcing but provides the customer a single point of responsibility. Making these new arrangements work is quite a challenge and getting some outside counsel is often helpful for organizations – regardless of their internal resources.

Furthermore, cloud computing and the other market dynamics discussed earlier are simply changing how outsourcing deals are done. Therefore, if a company had experience from just three years ago, this is somewhat dated. I think outsourcing consultants are needed just as much now as they were 20 years ago – not because companies don’t know how to do an outsourcing deal, but because outsourcing has changed. Sourcing consultants have a wealth of information and a market view that cannotbe matched by a company’s internal resources.

Jones: Terrific insights Shawn. Thank you for your time!

But the growth of India-heritage providers has also been slowing. The compound annual growth rate of their annual revenues has gone from 32 percent in 2005-08 to 16 percent since then. It will be difficult to maintain even those lower growth rates, especially as accompanied by margin pressure in a very competitive environment.

So how can India-heritage providers keep growing?

• First, they need to win the U.S. restructuring market, which represents 35 percent of the country’s total ACV. They’ve already grabbed second- and third-generation deals but will need to capture even more to sustain growth. Incumbency isn’t what it used to be, and many restructurings are indeed shifting away from Western-heritage providers. But there’s a catch: As clients become more comfortable with switching providers and managing the associated costs, the business hard-won by the India-heritage providers will itself come under threat.
• A second, and less challenging, growth opportunity is BPO, in large part because the India-heritage providers have had less catching up to do. Their case studies and proof points are nearly as robust as those of their Western competition. Still, with their market share at just 36 percent, there is plenty of opportunity for expansion in what appears to be a bright segment of the outsourcing market right now. Still, sustained growth will require not just success, but dominance.
• Third, they will need to crack the Public Sector globally. Already, TCS, Infosys, HCL and Cognizant have won deals ranging from $15 million to more than $500 million. Protectionist behaviors are natural in this space and will continue to inhibit growth in market share, but workarounds exist. These are large, complex deals, and they are expensive to win, but they also are sticky and profitable.
• Fourth: Continental Europe. In the last three years, only 60 percent of the transactions ISG advised in the region had offshore scope. While that is nearly a 20 percent increase from the prior three-year period, it still leaves plenty of room for opportunity.
Long term, the best defense may be a good offense. Many Western service providers simply can’t maintain their historically high overheads and still remain competitive. But India-heritage service providers will need to look to some other growth engines to stay on their trajectory, such as the mid-market and emerging technologies. In the short term, we feel that the four points above hold the key to sustaining their double-digit pace.

1. Know your company’s strategy. Being clear on what the enterprise wants to achieve in support of the corporate and functional objectives will ensure project money is spent in support of the overall strategy. Take time to develop a financial base case that maps your current costs to deliver the services (in- or outsourced) to an industry standard approach so that your sourcing activities are performed with deliberate strategic objectives in mind, rather than being ad-hoc acts of contracting.

2. Know your own organization’s skills and competencies. During the sales process, the service provider will collaborate and cooperate to define the scope. Your company’s maturity in negotiating market terms and conditions, as well as pricing, will lag significantly behind those of the service provider. The lack of comparison to other bids will deny you the data you need to negotiate effectively. Knowing specifically what your organization can and can’t do will help you to get expected results from a sole-sourced approach.

3. Increase your knowledge of current market capabilities. You may not always know market capabilities at any given point in time as well as you think you do, and you may be doing a disservice to your organization. The absence of competition prevents you from having key market knowledge to discuss scenarios and alternatives with the eventual selected service provider. Solicit bids from more than one service provider as a form of valuable education.

4. Determine if your organization can afford the lost time of a failed relationship. The lack of competitive tension in the initial engagement can mean that the service provider is less pliable. As a result, you might find that you have to start all over again, and this may cause you to put your organization through the pain of yet another transition and further delays in achieving your operational and business case objectives.

5. Take the time to gather information needed for an intelligent conversation with the service provider. Even when the need for commitment and results is urgent, the devil is in the details, and time spent discussing the principles and foundation of the agreement will save time in the negotiations phase. Except where the leverage is high, it can be difficult to secure the most favorable contractual terms, price and service levels when the service provider does not feel a competitive threat. These are complex contracts, and clarity is essential.

To discuss the benefits of a competitive transacting process further, contact Melany Williams.