I don’t know about your company’s situation; but having looked at literally hundreds of outsourcing contracts, I see that they all have something in common. The original intent was a one-time shift to transform and improve an operational aspect. Unfortunately, IT outsourcing contracts sort of poured concrete around the outsourced processes. Thus, the quest for operational excellence through outsourcing IT has the effect of stopping companies from changing. That’s a non-starter in the digital world.
When companies begin to rotate from legacy environments into digital technologies and digital business models, it’s not long before they realize they must fundamentally rethink their assumptions around the old ways of doing things. In those old assumptions, outsourcing IT infrastructure, development and maintenance and other IT functions made sense. The assumption was those functions were not core competencies, so the company should outsource to get efficiencies of scale and price points through leveraging the outsourcer’s core expertise. That assumption was usually right; the company transformed from Point A to Point B and achieved a one-time shift in improving operations.
Here’s the problem for your company’s business in the digital age: a one-time shift isn’t good enough because transformation to improve performance is an ongoing journey. Your company can’t afford to be cemented in to old contracts that restrain movement. And when it comes to creating and delivering new value, it’s no longer sufficient or wise to leave that control to the mastery of another company.
Why not? Because IT is the “backbone” for the digital business model in how your company creates and delivers value. So, IT must now become a core competency. This is not to say that companies should stop outsourcing IT functions. Rather, I’m saying that existing contracts that give the outsourcing provider the control over how the service is delivered won’t allow your company to make the necessary changes for the digital world. Consider these three factors, for instance:
- You’ll need to align backbone costs with the overall thinking for where your company is headed in the transformation
- You’ll need ownership and control of skill shifts
- You’ll need to be flexible as the transformation journey evolves and not get locked in to any technologies or any providers of service capabilities.
In digital, what was once context – the IT “pipes” – is now core and needs to be controlled in house. Your company needs this foundation so it can drive future disruptive services.
Three key components
Three components are the primary focus in changing your business model to bring IT services back in house and develop core competencies.
1. Architecting how to manage the business
When you shift from managing a third-party service provider to the concept of service ownership, you’ll need to determine what that shift looks like and how to ensure it has staying power and impact. In almost all successful digital transformations, this involves shifting the IT structure from a functional orientation to an end-to-end service orientation. As you automate and software-define your business, service starts to take priority over function. Most companies reorganize into cross-functional teams rather than functional teams, ensuring a high degree of integration across services.
I can’t overstate how important this orientation shift is. Focusing on functions doesn’t drive value impact. When your company takes ownership responsibility and controls the service, you can focus on what really matters in driving value.
2. Third-party contracts
Before contract renewal time arrives, invest in uncovering market information and current trends around use of third-party service providers. Determine pressure points and negotiation strategies.
If you plan to renew the contract but change ownership and flexibility aspects, make sure you understand the relationship dynamics that the change will drive. Also make sure you understand conditions that need to be in place in the relationship so your company will have a chance to operate successfully in a digital world.
3. The challenge of a business model change
Part of the challenge of a business model change is the dramatic change required to rethink the existing organization and align it with the new digital realities. Your company will need to systematically review old precepts and assumptions, many of which you didn’t realize you had in place. IT isn’t the only area of the business that needs to change. You’ll need to align all operating aspects and services end to end with the new model. It may involve changes to policies, processes, talent models, budgeting, hierarchy, governing and more.
A word of caution: Companies that have gone through this transformation effort that didn’t adjust their organization to align with the new business model failed to gain the benefits of the new operating model and often faced pushback from their organizations as they struggled to reconcile the two operating models. Traditional change management techniques such as assigning internal process owners with responsibilities for driving change fell dramatically short of their goal; they made little progress because the organization wasn’t aligned with the overall thinking around where the company was headed.