Power of Many

2007-11-14 17:23:39 Source: http://www.accenture.com

Maximizing the Multi-Source IT Operating Model for High Performance.
Multi-vendor information technology outsourcing—establishing strategic relationships with different vendors for specific types of work—is gaining favor among financial services organizations. In fact, it is fast becoming the norm. The main driver behind the multi-sourcing movement is the same that has driven the selection of "best-of-breed" software instead of a large enterprise software solution, namely, that a collection of vendors handling only areas in which they are expert will generate better IT and operating efficiency and stronger revenue growth than a single vendor responsible for everything.

Important Issues for CIOs
Yet while financial services companies have found the multi-vendor outsourcing model offers a compelling value proposition, multi-sourcing also raises two significant sets of issues that CIOs must be aware of, and ready to deal with, if they plan to generate maximum business benefits from it.

The first set of issues involves ensuring that the company has the right operating model for the IT function to begin with. Many IT organizations are built with a transactional, "deal-by-deal" mindset to outsourcing characterized by a tactical, reactive stance driven by metrics and focused on solving identifiable problems. This mindset is at odds with more strategic outsourcing projects that often yield results that are intangible, complex and harder to measure. When strategic partners are selected, measured and managed the same way as tactical partners, innovation can be stifled and the value promised can erode.

The second set of issues relates to how outsourcing arrangements are created and managed, which has its roots in the basic experience and skill sets of the retained IT organization and its core processes. Experience shows that the wrong type of deal can have serious repercussions for the relationships over the long term—whether it is due to a lack of balance between onshore and offshore service provision or a focus on the total cost of the deals rather than on the value generated.

Another concern is how the company sources the service provision. In multi-sourcing, it's critical that the organization does not rely too heavily on its traditional commodity sourcing approaches, which can prevent it from gaining the larger benefits offered by more strategic relationships or devising incentives to encourage vendors to deliver innovative solutions.

Finally, CIOs pursuing multi-sourcing must recognize the complexity and risks in managing multiple vendors delivering highly specialized services. They should be particularly aware of whether their retained IT organization has the skills and capabilities necessary to oversee the day-to-day operation of the relationships; whether the IT processes supporting vendor management and governance across contractual boundaries are robust and effective; and whether responsibilities are clearly defined across the relationships with a single point of accountability for results.

Changing Approach to Outsourcing
To ensure these issues do not torpedo a multi-sourcing initiative, companies should adopt a new approach that can enable them to unlock the full potential of these relationships. At the core of this approach are three key actions: define what the business needs from IT and how IT's actions support its objectives; create a new IT operating model in which outsourcing is a core element; and make changes to the retained IT organization (people and processes) to ensure that the company can execute the new IT operating model and fully capitalize on the depth and breadth of the capabilities offered by the chosen vendors. It seems too obvious to say that for an IT organization to be effective, it has to meet the needs of the business. Yet time and again we've seen cases in which IT gets detached and ends up optimizing its own processes at the expense of supporting the business. For a multi-sourcing arrangement to deliver maximum benefits, the company must first ensure that IT fully understands what the business wants to accomplish and what type of technology support it needs to succeed.

A New IT Operating Model
With the business drivers for IT explicitly understood, a company can create a new IT operating model that recognizes outsourcing strategy as a core element and applies basic strategic sourcing techniques to it. Purchasing IT outsourcing services is really no different from buying other goods and services. All scenarios involve pricing, scoping, negotiating, contract development and vendor management to one degree or another. Therefore, a company can treat procurement and management of providers in much the same way it treats other supplier relationships. It begins by categorizing IT spending in terms of business impact and complexity, sorting activities ranging from commodity to strategic.

When evaluating the strategic importance of each activity, the company should take into account factors such as value to customers and importance to customer satisfaction, as well as percentage of the company's expenditures. The company can then implement a process that defines the potential group of suppliers for each category, enabling effective negotiation and allowing the group to be benchmarked and managed.

At each step, the process should be informed by proven procurement strategies. For example, the purchase of commodity-type services should focus on aggressive price negotiation and maximization of buying power, including the development of alliances among purchasers. Conversely, when buying more strategic services, a focus on developing mutual advantage and long-term partnerships is more advantageous. In a strategic relationship, buyers should strive to share productivity gains, facilitate simultaneous engineering and establish joint ventures with suppliers. These measures will help establish and maintain long-term, collaborative relationships that ultimately can drive higher performance from their strategic outsourcers and commodity services at the lowest possible cost.