How your sourcing strategy can support the transformation to digital

Your sourcing strategy and the digital transformation

There was a time when the IT department determined the way forward on technology. But the playing field has changed and IT departments now need to take into account differences in pace, business dynamics and needs. Three key sourcing strategies point the way.

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Sourcing and the road to digital

The traditional IT organisation, with a clear distinction between business demand management and supply management, is fast disappearing. The time when the IT department determined the best way forward on technology, imposing its solutions upon the organisation and its business entities, is no more. The playing field is changing because:

  • Business stakeholders are increasingly tech-savvy and feel capable of making their own decisions on what technology solutions will fit and help them best;
  • Technology is becoming critical in terms of both business performance and competitive advantage, resulting in rapidly growing business requirements while diversification is also increasing.

Due to these business and digital strategy imperatives, we are seeing our clients restructuring and simplifying their operating models.

Legacy
While these needs are becoming increasingly apparent, many organisations still have to maintain a legacy IT environment. One that is critical to ensure business performance, but not sustainable and future-proof. This requires next-generation IT operating models that:

  • Enable digital innovation and easily adopt Agile ways of working. With a strong focus on change, outcome, speed and value. And with close and frequent interaction with the business;
  • Ensure the predictability and stability of the core IT domain. That requires performance according to agreed service levels such as availability and response times, in addition to more empathy-based indicators such as first class experience, low lost user productivity and high ease-of-use.

A one-size-fits-all approach is definitely not the way forward; this is where IT started, but this will also render it obsolete.

How sourcing can provide support
Almost all IT organisations are facing these developments. They are adjusting the way they work in terms of organisation & governance, skills & competencies of personnel and the definition of KPIs & performance management. The aspect we want to highlight here is how differentiated sourcing strategies and relationships with IT vendors can support IT organisations in their transformation to digitalisation. Depending on the level of industrialisation (i.e. whether there are established market best practices or no common best practices available) and the strategic value (i.e. whether IT gives no comparative value or is market differentiating) of the IT functionalities delivered and managed by the IT organisation, there are three sourcing strategy options:

1. Solution buying
This is for highly industrialised IT functionalities which are of limited strategic value to the organisation. The required functionality is sourced from an innovative solution provider which will also ensure the vertical integration of this solution within the client’s service (SaaS). The internal organisation remains responsible for service integration within the ecosystem, while the solution provider builds and tests the IT solution and brings this to the organisation based on a predefined release schedule. Although the client organisation has limited influence on the further development strategy of the solution bought, this option still requires close interaction and collaboration on innovation between the internal service integrator (SI) function and the solution provider.

2. Standardised supply
This is the best option for that part of the IT landscape which has grown over the years and become complex over time, but is not mission critical. Our starting point is that organisations should select (an) external service integrator(s) (SI) to be given the objectives of:

a) Maintaining and stabilising the environment;
b) Rationalising and simplifying the landscape where possible to reduce operating costs.

The capabilities of external service providers should be leveraged as the most cost-efficient manner of maintaining these environments. There is a lot of potential here to offshore specific activities that, bundled, may benefit from lower costs and higher quality. Effective demand management regarding the SI is required. The SI is responsible for integrating and testing the services within the landscape except for, of course, the user acceptance testing (UAT). The SI and the company’s remaining IT organisation work closely together to achieve specific goals on technology transformation and innovation in line with and connected to the architecture roadmaps.

3. Co-sourcing development
In those cases where the IT functionality and environments are vital for the success of the organisation, the optimal sourcing strategy is generally to cooperate and co-source; of course, in addition to acquiring in-house capabilities, with partners to ensure and drive business responsiveness, agility and speed. We see these strategies mainly being applied in the area of the digital frontend e.g. online services , IT and suppliers are working closely together in scrum teams to ‘make’ solutions that have a short time-to-market. There are examples where client organisations and service providers have established joint ventures to ensure their joint commitment and shared targets. Specific project characteristics here are small-scale, iterative, semi-formal, co-creation, strong collaboration and outcome-based. Because of the interactive way of working and intensity of the process, the work between the partners involved is primarily performed onsite with very little offshoring. Testing is generally executed by the client itself.

In closing
It is abundantly clear the digital game is now on. Our clients are definitely progressing with their digitalisation journeys towards 2020 and beyond. This is affecting our clients’ strategies, structures and sourcing relations in a transformational way. That’s why the topic is currently dominating the C-level business agendas. And that’s exactly as it should be.

We believe that organisations should make distinct choices in the sourcing strategies they apply in order to leverage the capabilities of their service providers effectively. For those IT environments critical for the future, suppliers in the client’s ecosystem should demonstrate their digital capabilities in terms of people, processes and technology, and co-drive tech-innovation within the client’s ecosystem, so that all parties can reap the benefits of digitalisation.

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