5 types of outsourcing providers — and how to get the most from them

As corporate technology leaders pursue their digital transformation strategies, many are looking to IT service providers as potential partners in those change efforts. However, a one-size-fits-all approach to outsourcing providers is not likely to serve CIOs well in meeting innovation goals. In fact, bigger doesn’t necessarily mean better in the digital change era.

“Traditionally, size was a good proxy for capability, especially when technology was viewed fundamentally as an enabler of efficiency,” says Jimit Arora, partner in Everest Group’s IT Services practice. “Companies had rules about not wanting to work with companies below a certain size or scale threshold citing governance or risk capabilities.” However, as rapidly advancing technology capabilities have emerged as key enablers of business differentiation and growth, CIOs are finding that they instead need different types of IT services providers to meet all of their needs.

When it comes to the most cutting-edge tools, smaller startups or niche providers may have more of the capabilities required. IT leaders may also need a partner to handle legacy application maintenance and production support in order to devote more of the in-house IT organization to transformation efforts, for example. Or they may want to look to third parties to manage their outsourced environment or to spearhead their transformation efforts.

Now is an opportune time for IT leaders to reassess their IT service provider mix. By looking at outsourcers not based simply on scale but on the specific role they will play, IT leaders can assemble the right mix of capabilities to best enable their organization’s technology and business strategies.

Following are five types of roles IT service providers play today — along with examples of outsourcers who fall into each category, what value they provide, and how to optimize engagements with each type of outsourcer. (Note: some providers offer capabilities in multiple areas.)

1. The service integrators

Examples: Cognizant, CapGemini, Wipro

What they do: As the need to use multiple outsourcers has grown, so too has the complexity of managing the outsourced environment. A number of large IT providers have built capabilities in multi-sourcing orchestration over the past decade, providing oversight, governance and management for complex sourcing environments.

When to use them: A service integrator may be valuable to an IT organization that does not have the ability to orchestrate their own portfolio of providers. These companies are able “to manage a variety of suppliers and address the underlying risk at an individual supplier or portfolio level,” says Arora. IT leaders may contract with these companies to integrate multiple staffing augmentation firms or automation providers, curate a startup ecosystem, or simply reduce the overall management overhead and complexity of their multi-sourced portfolio.

Unique rules of engagement: When evaluating service integrators, says Arora, a history of successfully managing similar-size engagements is key. CIOs should also make sure there are no actual or perceived conflicts of interest between the integrator and the integrated; if other providers view the orchestrator as a competitor, it won’t work. Service integrators are typically compensated based on business outcomes or metrics that serve as a proxy for end-to-end IT capabilities. These engagements tend to be more successful when the provider has some skin in the game, Arora says.

2. The staffing augmenters

Examples: TEK Systems, Randstad, Pontoon

What they do: The staff augmentation role is not new; it’s a traditional IT service approach that enables IT leaders to increase and decrease staff size based on needs without taking on additional liabilities that come with hiring more full-time staff.

When to use them: IT leaders can use these on-site contract workers to meet either short- or long-term requirements. As visa-related concerns have limited the ability of offshore or global IT services providers to ramp up resource in onshore locations quickly, CIOs may look to the staff augmenters instead.

Unique rules of engagement:  Staff augmenters are paid for on a full-time-equivalent or headcount basis. They can either be managed by an IT organization’s internal staff or, in some cases, a service integrator (see above). “These types of providers should be evaluated based on the speed with which the company can deliver resources, their geographic coverage, and [any special] capabilities that the providers are investing in to keep talent up to date.”

3. The legacy aggregators

Examples: Tata Consultancy Services, IBM, HCL Systems

What they do: While businesses are looking to the CIO’s organization for innovation and  transformation, IT still needs to keep the proverbial lights on. In fact, as digitization increases so does the expectation for reliability and stability of IT systems.

When to use them: IT leaders will look to legacy aggregators to handle support for established systems — for example, maintenance and production support for end-of-life applications.

Unique rules of engagement: Standardized processes and methodologies, investment in automation tools, and scale are important considerations that will translate into lower costs, says Arora. Buyers should also be amenable to the high degree of offshoring that keeps prices competitive. In addition, “clients should try to structure these as output-based or managed services contracts with committed productivity improvements,” says Arora. They should also understand that legacy aggregators have little incentive to innovate.

4. The specialists

Examples: Globant Systems, Luxoft, LTI

What they do: This may be the fastest growing category of IT service provider. These niche providers range from midsize providers to growing startups with one thing in common — they have skill sets and intellectual property in a specific area that can be valuable to the IT organization.

When to use them: CIOs will seek out technology specialists to provide capabilities in very narrow or emergent areas — blockchain, data science, or user experience, for example — or for their established domain expertise.

Unique rules of engagement: Evaluating the technical or functional domain is critical to separate the real specialists from those marketing themselves as such, says Arora. The pricing model can be either variable (headcount-based) or fixed (project-based). One particular challenge CIOs are coming up against is the acquisition of specialist firms by larger providers. “Clients should ensure that their contracts are able to sort through these change control events,” Arora says. “However, even if a specialist gets acquired by a legacy player, the client should continue to treat the specialist through a separate purchasing vehicle versus trying to fold them into an earlier construct.”

5. The transformers

Examples: Accenture, Deloitte, IBM

What they do: Providers in this role specialize in consulting on and managing large change efforts or initiatives rather than discrete projects or tasks.

When to use them: The transformational provider is as likely to be hired by the business as by IT. “Clients are essentially leveraging transformation partners when they have high need for business consulting or organizational change management and are looking for a partner to drive the overall transformation journey,” Arora says.

Unique rules of engagement: CIOs will need to do their due diligence to confirm the provider’s expertise when it comes to industry knowledge, change management, and client engagement. They should also understand that transformation does not come cheap. “The pricing for these typically follows a combination of consulting-type professional fees constructs with a significant portion of the fee linked to business outcomes,” says Arora. Although some transformers may also provider other services — legacy aggregation or service integration — these engagements should be managed separately from the others. “This is a premium skill and trying to use the same global rate card for transformation [run-the-business] initiatives is a recipe for disaster.”