Why NZ CIOs should consider directly managing their vendor ecosystem

Hitching your IT transformation programme to a vendor’s roadmap makes a lot of sense for CIOs who’ve been burned by expensive in-house bespoke projects that leave behind a slew of legacy issues. But while sound in theory, the reality can prove disappointing when the vendor fails to deliver on its promises or don’t address specialty areas they deem too small to invest in.

Relying on a single third-party service provider—whether an outsourcer, systems integrator, or major vendor—to deliver multiservice expertise as essentially a general contractor “does not seem to be delivering desired results for client firms,” says Ilan Oshri, the University of Auckland’s director of the Centre of Digital Enterprise, based on research done with Boston Consulting Group. Having IT take on that general-contractor role may be a better approach, especially in New Zealand, where IT is less likely to hire a third-party lead service provider anyhow.

The research was informed by a CIO Executive Council and IDC 2016 Strategic Partner Index study which showed the 71% of IT leaders spend up to half their total budget on external technology vendors and service providers, but only 10% were “highly satisfied” with even their most strategic vendors. (Such vendors prefer the term “strategic partner”.)

Vendor ecosystem: definition, pros, and cons

It prompted the researchers to look more closely into what they term “vendor ecosystems”, how these might work more effectively, and what the challenges are. A vendor ecosystem differs in one significant way from other models of relying on a network of vendors: IT acts as the integrator or general contractor, instead of an outsourcer, systems integrator, or major vendor providing that discovery, management, and integration function.

According to Oshri, a vendor ecosystem contains a mix of small and large companies led by IT that lets CIOs tap into the skills of both the specialists and the generalists. “What makes a collection of vendors an ecosystem is the joint effort expected from a number of vendors, some large and some small, some multiservice and some specialist, to work together in order to solve a business challenge a client firm faces,” he says.

There are several pros to the vendor ecosystem approach:

• With IT in the lead role, CIOs may get more innovation specific to their needs than from an established network of vendors aligning to a major vendor’s roadmap or agenda, Oshri says.
• Likewise, the solution developed may be more specific to that IT organisation’s needs.
• The provider pool can also be more flexible than available in a major vendor’s established portfolio.
• New Zealand is dominated by small and medium companies, which often are not the targets for large third-party service providers. But even a small organisation can fit together different tech solutions, as evidenced by Te Māngai Pāho’s ecosystem approach, recently profiled in CIO New Zealand.

But working with a vendor ecosystem comes with its own set of challenges, notably around governance. “Such an innovation model is challenging for both client firms and vendors as it creates new engagement rules for the parties for collaboration. For the client firm, there are new challenges in the form of understanding what capabilities are critical for the governance of an ecosystem as well as which capabilities reside in the market and how to tap into these capabilities,” Oshri says.

There is also the issue of finding ways to incentivise vendors which might be expected to accept a lower portion of the company’s IT investment, “thus potentially depressing their enthusiasm to cooperate,” Oshri says.

New Zealand CIOs ripe for the vendor-ecosystem approach

The research team spoke with more than a dozen client firms and two suppliers across retail, finance, manufacturing, mining, health, and logistics in Australia, Europe, and the US, and Oshri says their findings have plenty of relevance for New Zealand CIOs, who he says have been slow to set up vendor ecosystems for digital innovations.

“Generally speaking, New Zealand enterprise is among the least spenders on IT services through third-party service providers, and more specifically New Zealand enterprise tends to encourage in-house innovations while relying to a much lesser degree on ideas and capabilities outside the firm, such as vendors,” Oshri says.

“However, some sectors in New Zealand, such as financial services, face global competition that requires them to get to market rather rapidly, something that is much harder to achieve if these firms rely only on their internal capabilities,” he says.

The research group did see a move towards favouring vendor ecosystems in the companies they spoke to, with a key driver being direct access to specialist vendors. “As solutions get more complex and cutting-edge, firms are choosing to go direct to specialised vendors, rather than multiservice vendors. This allows them to better leverage the capabilities of the market and develop solutions that suit their specific needs,” Oshri says.

It can be difficult to find specialist vendors, and the researchers found that some businesses had recruited an external party to scout the market for specific expertise.

Meanwhile, how to create the most effective governance structure is still to be determined, with many of those interviewed by the researchers debating how to incentivise and penalise, as well as monitor vendors’ collective performance. “As ecosystems of vendors often bring together numerous vendors to deliver a single solution, firms seem to lack the ability to apply joint performance indicators that reflect on the joint effort and incentivise vendor to collaborate,” Oshri says.

It’s an area ripe for development, and while CIOs in New Zealand may be lagging in developing their own vendor ecosystems, their counterparts offshore also have a long way to go. “Our research so far suggests that CIOs are not well prepared or well equipped to cope the complexity of managing vendor ecosystems. There seems to be lack of understanding of the concept at C-suite level as well as deficiency in terms of metrics to measure joint performance as well as in terms of incentives to promote joint effort,” Oshri says.