With digital transformation all but mandatory across industries today, that innovation imperative is impacting every part of IT, including its outsourcing engagements. However, many CIOs are struggling to integrate third-party IT services deals into their long-term business strategies. Indeed, a recent Everest Group survey found that 61 percent of enterprises pursuing digital transformation were dissatisfied with their service providers.
This may be because there is a disconnect between traditional outsourcing approaches and exponential change. “While outsourcing in the past has had a laser focus on efficiency and costs, digital transformation is trying to deliver something different or new for the business as a whole to help them better compete,” says John DiCarlo, managing director for business transformation and outsourcing advisory firm Pace Harmon. Seemingly every IT service provider has rebranded itself as a digital transformation partner, but “little has changed in their approaches and offerings,” says Phil Fersht, founder of outsourcing consultancy and research firm HfS Research.
Something has to give if customers want to see results — and IT service providers have the potential to be a valuable resource. “Outsourcing is not going away and can be a key enabler of digital transformation if outsourcers are willing to evolve and have flex in their contracts to accommodate new services,” DiCarlo says. Customers, too, must begin adjusting their outsourcing approaches if they want to move beyond cost and efficiency improvements to truly transform their businesses with the help of key IT partners.
Outsourcing customers are already increasingly investing in transformation-enabling IT services. “Digital has become the underpinning of all outsourcing relationships — irrespective of scope, scale, or complexity,” says Rajib Datta, lead partner for ISG Digital Strategy & Solutions. ISG’s outsourcing market indices show that the value of as-a-service deals, for example, have grown every quarter since 2015. More than a quarter of revenues for the top 20 outsourcing providers are generated by digital services, according to Jimit Arora, partner in Everest Group’s IT Services practice, with those markets growing as the traditional services market is shrinking.
If IT leaders want to achieve the full value of these digital investments, however, they need to rethink their approach to outsourcing and consider the ways in which providers can help them as well as the ways they can detract from digital transformation efforts.
The value of outsourcing to transformation
While looking to an IT service provider for complete digital transformation would be folly, there are many ways outsourcers can help. For one, they can work with customers to implement improvements that pave the way for increased innovation, such as cloud migration, DevOps adoption, or freeing up dollars from legacy systems. “There are a lot of enabling capabilities that businesses can explore to move in that direction,” says DiCarlo. “Outsourcing providers can help with this.”
As more best practices emerge, it’s more likely that an IT service provider will be able to provide digital skills and experience at a scale that the typical customer lacks. “As has always been the case, [customers] are able to take advantage of the scale and skills of the service provider and, importantly, able to leverage the investment in digital capabilities and solutions of the service provider,” says Randy Wiele, managing director at KPMG’s Shared Services and Outsourcing Advisory practice. That can enable outsourcing clients to transform faster. “With speed becoming the new currency in IT, an outsourcing relationship delivers talent at scale, which delivers speed of execution,” says Arora.
What’s more, outsourcing providers can bring to bear their experiences working across clients and industries. “This ability to learn from other people’s successes and failures is invaluable and cannot be replicated in an insourced environment,” Arora says. They also have access to enabling tools and processes; an outsourcing provider can theoretically set up an innovation lab for a customer more easily than the customer could on its own.
When IT providers stand in the way
At the same time, there are a number of ways in which traditional outsourcing engagements can thwart digital transformation. “A [existing outsourcing] contract that is too rigid and doesn’t provide the option for flexibility could impede digital transformation,” says DiCarlo. Heavily customized engagements also make shifting into transformation-enabling mode more difficult. “We encourage customers to use the standard service offered by the service provider so that digital is more easily applied,” Wiele says.
Digital transformation also demands the shift to a more agile IT operating environment of rapid design, iterative improvements, and frequent deployments. Some IT outsourcing providers may struggle to integrate into their customer’s agile environment — or vice versa. “Today’s outsourcing market is about enterprise agility,” says Arora, “but old habits are hard to break.”
For providers, the traditional deals can be more profitable than the digital deals, Arora adds, deterring them from investing in transformation-focused engagements. “If a provider is slowing down a client to either protect revenues or margins, that is a big red flag, says Arora. “Also, if a provider is not making the right investments in new talent, new technology, new methodologies and processes, they will slow the client down.”
Best practices for transformation-enabling engagements
IT leaders who want to pursue transformation-enabling agreements can take a number of steps to overcome the hurdles that exist with traditional outsourcing deals and take advantage of new capabilities that are emerging.
Evaluate business needs
Start by evaluating what the overarching business imperatives are, highlight those that are technology-enabled, and determine gaps between the existing IT architecture and that future state. “The answers to these questions may cause a technology organization to rethink its future platform strategy and flexibility, investment strategy, and technology-enablement strategies,” says Datta.
Eliminate traditional IT barriers and boundaries
“Digital transformation should be treated with a holistic outside-in perspective, not in silos as is still common in many IT environments,” DiCarlo says.
Consider the types of IT services engagements required going forward
“Not every outsourcing relationship needs to be strategic – but rather, they need to be fit for purpose,” says Datta. The IT services market is broadening to include a more diverse set of provider options, says Ollie O’Donoghue, research director for IT services at HfS Research. Customers should look beyond the size of outsourcers and rather determine what roles providers will need to fill. Some may be legacy aggregators, others may add staffing capacity, others may be orchestrators or niche technology specialists, and some may be true business transformation partners.
“Recognizing that different types of providers and different roles need to be evaluated, priced, contracted and governed differently is key,” Arora says. “Where things break is when a client wants to manage a new contract or a new provider using mechanisms that are suited for legacy.”
If there’s one thing that the enterprise push for digital has done to change the sourcing landscape, it’s pushing clients to look beyond the usual suspects to find the talent and capabilities they need. This is building a richer and more diverse provider ecosystem. Digital is so complex, that no single provider has the answer to all the questions — enterprises are more aware of this, and are looking to smaller and cooler providers to bring into their sourcing strategy.
Do your due diligence on digital partners’ capabilities
“Proof of delivery has become a mandatory element to selection,” says Fersht. “If a provider doesn’t have the credentials, experience, and battle scars of hard-fought digital initiatives already, they’ll struggle to come to the table with any credibility as clients develop a healthy cynicism.” Look for client references and demonstrable results, advises DiCarlo.
Source for adaptability
“An IT outsourcing relationship with contract flexibility is key to helping enable digital transformation,” DiCarlo says. “[Also] cross-functional teams that can collaborate and deliver new services, products, and capabilities more rapidly are essential.”
Consider new sourcing models
Everest Group is seeing an increase in the number of deals that integrate operations, applications, and infrastructure in one way or another and some increasing deal sizes. “Bucking the trend from the last 3 years, deal sizes are inching upwards as clients get more comfortable with the idea of digital services,” says Arora.
In the long run, outsourcing service providers will be developing solutions that will enable digital transformation with the hope that outsourcing can be used to create new digital solutions — or even to buy prepackaged digital solutions, says Wiele. In the meantime, however, the onus is on IT leaders to integrate their portfolio of outsourcing deals into their digital transformation plans.