IBM Center for Applied Insights                                                             Pushing the limits of         ...
IBM Center for Applied InsightsThe majority of growth-seekers want to reduce costs too. But                        As inno...
IBM Center for Applied Insights•	   Do they have proprietary insights or experiences that can            This new sourcing...
About the authorsChristopher Townsend is the IBM Global Technology ServicesGeneral Manager for the Distribution Sector. He...
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Pushing the Limits of Outsourcing - Innovators Reinvent the Services Relationship


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The traditional outsourcing model–architected primarily to reduce costs–is too narrow to accommodate the expanding expectations of business innovators. These companies are looking for providers with expertise, scale and insights to help them deliver strategic business outcomes, not just save money. And this shift in mindset–from outsourcing non-core functions to partnering for critical capabilities–is fundamentally changing the business and IT services industry.

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Pushing the Limits of Outsourcing - Innovators Reinvent the Services Relationship

  1. 1. IBM Center for Applied Insights Pushing the limits of outsourcing Innovators reinvent the services relationship For decades, cost savings was the dominant driver behind outsourcing. Highlights: But sourcing motivations have changed. More than half of all CEOs now partner extensively with external providers to drive innovation.1 The traditional outsourcing model – Among outperforming organizations, that percentage is even higher architected primarily to reduce costs – is too narrow to accommodate the expanding (59 percent). Similarly, two-thirds of growth-focused CIOs are expectations of business innovators. These partnering extensively to change the mix of skills, expertise and companies are looking for providers with capabilities within their organizations.2 expertise, scale and insights to help them deliver strategic business outcomes, not just save money. And this shift in mindset – In business today, most products and services are designed, developed from outsourcing non-core functions to and delivered by an integrated – often global – network of collaborators. partnering for critical capabilities – is As author and columnist Thomas Friedman put it, CEOs “rarely talk fundamentally changing the business and IT services industry. about ‘outsourcing’ these days. Their world is now so integrated that there is no ‘out’ and no ‘in’ anymore.” 3 Recently, we asked 97 C-suite executives about their aspirations for outsourcing relationships – both in terms of scope and what they aim to accomplish.4 Seven out of ten told us they plan to outsource for strategic reasons like driving growth and innovation. Based on their chief motivation, these organizations were categorized as: • Cost-cutters – 27 percent outsource their IT infrastructure to reduce operations costs • Growth-seekers – 37 percent outsource IT infrastructure, application management or business processes to achieve operational efficiencies and revenue growth • Innovators – 36 percent outsource multiple parts of the business to enable transformation and innovation What we found most interesting was the progression of objectives across these three groups. When asked about a wide range of potential sourcing benefits, the only objective the majority of cost-cutters deemed very important was reducing operational costs and achieving balance sheet improvement. Simply put, cost-cutters want just one primary outcome from their outsourcing relationships: cost savings.
  2. 2. IBM Center for Applied InsightsThe majority of growth-seekers want to reduce costs too. But As innovators continue to expand the nature and scope ofthey also want faster time to market for new products and sourcing relationships, we expect other segments will shiftservices, and increased efficiency and effectiveness across the their approaches as well. For instance, our findings suggestentire value chain. that cost-cutters are beginning to recognize the importance of broadening their sourcing focus beyond back-office opera-Innovators expect all of the above – and more. In addition to tions into the front office, and enlisting partners’ help incost reduction, speed-to-market, and value chain efficiency, transforming operations through better data integration andthe majority of innovators want providers to help them: analytics. Tapping partners’ scale and leaning on them for a more proactive, holistic approach to managing security and• Drive front-office effectiveness (not just back-office) risk are also next on their priority list.• Better anticipate and respond to disruptive technological changes or market forces Similarly, growth-seekers are interested in leveraging their• Proactively manage risk, compliance and security via providers’ global reach– as well as their expertise in proactively technologies like predictive analytics managing security, risk and compliance. Next up on inno-• Share risks and rewards based on business outcomes vators’ priority list is engaging partners who can help them deepen customer insights to improve customer experiences.Their outsourcing objectives are broad and ambitious. Butthey’re also indicative of a different type of relationship – one Emergence of a new sourcing modelin which the service provider is far more integral to achieving With strategic partnering becoming increasingly prevalent,desired business results. In fact, innovators are three times it’s important to consider the impact sourcing relationshipsmore likely to empower service providers with the flexibility can have – not only on business outcomes, but also on ato adapt technology infrastructure, applications and business company’s core business model and corporate culture. Ifprocesses as needed to deliver strategic business outcomes. innovation and transformation are critical components of your business strategy, how can prospective partners contribute?Expanding expectations Increase efficiency and Proactively Share risks and effectiveness Better anticipate manage security, rewards based Reduce cost of across value Achieve faster Drive front-office and respond to risk and on business operations chain time to market effectiveness disruptive forces compliance outcomes Cost-cutters Streamline Growth-seekers Improve Innovators TransformFigure 1. As a group, innovators have broader, more strategic objectives in mind for their sourcing relationships. 2
  3. 3. IBM Center for Applied Insights• Do they have proprietary insights or experiences that can This new sourcing model could also cause companies to provide headlights into future technological or market shifts? re-evaluate the number of service providers they choose to• What competitive advantages could you gain from access engage and the delivery model they use. When objectives are to – or, even better, collaboration with – their R&D function? more strategic and touch more of the organization, services• How can their expertise, assets, reach and network of fragmentation can become quite costly and complex. Sourcing partners help you develop new business models or expand by process may seem optimal since it allows the firm to hire into new markets? “best of breed” for a particular activity. But by perpetuating• Do they have specialized capabilities that help deepen silos, it can actually sub-optimize the overall cost-to-value your understanding of customers and provide differentiated ratio, hinder agility and complicate the organizational change experiences? management necessary to achieve a wider range of business• Will working with this provider over the next five years outcomes. As a result, companies may want to reduce the total positively impact your organizational culture, making it number of providers to allow select strategic partners the more innovative and agile? opportunity to orchestrate greater transformation.• How well do their strengths align with your particular business objectives? The choices companies make about providers– both how many and who to engage – also have implications in termsThis kind of criteria has significant implications for the entire of social, political and economic risks. When organizationsecosystem involved in the selection process – from sourcing and providers are deeply intertwined, their performance,decision makers to third-party advisors to service providers. decisions and actions are linked, especially in the mindsEvaluation becomes much more difficult. For instance, how of customers and the general public. In an increasinglydo you value greater agility, faster time-to-market or a more transparent world, businesses are judged by every facetinnovative culture – especially over the long term? of their global supply chains.In addition to altering how service providers are selected, Where’s your business headed?this new approach to sourcing also changes how firms Partner accordinglywork with them. Prioritizing both efficiency and innovation The sourcing of services is a decision with long-termrequires new governance models. Granular, task-oriented significance. More than half of the companies we surveyedservice agreements that dictate how – rather than what – tasks have been outsourcing for five years or longer.need to be performed hamper the ability of the organizationand their providers to effect change, especially at the enter- Before entering this kind of long-term relationship, it’sprise level. Compromises to accommodate the organization’s worth considering the adage: You are who you associatepreferences can limit the partner’s ability to leverage standard- with. Organizations need strategic providers that reflect theization and scale. Companies will need to strike a balance qualities and capabilities they aspire to have – the strengthsthat provides partners with both the ability and the incentive that can lead to better business attain desired business results. And to create room forachieving these broad, strategic objectives, the scope of thesourcing agreement may need to extend beyond individualprocesses or departments. About the IBM The IBM Center for Applied Insights introduces new ways Center for of thinking, working and leading. Through evidence-based research, the Center arms leaders with pragmatic guidance Applied Insights and the case for change. 3
  4. 4. About the authorsChristopher Townsend is the IBM Global Technology ServicesGeneral Manager for the Distribution Sector. He leads a teamthat helps clients achieve their business goals through modernsourcing strategies – his focus is on developing and deployingoutsourcing solutions relevant for today’s business leaders. © Copyright IBM Corporation 2012In prior roles, Chris held similar responsibilities within the IBM CorporationNordic countries and globally across the Consumer Products New Orchard Road Armonk, NY 10504industry, and he led the IBM acquisition and integration oftwo large services companies. In addition, Chris was respons- Produced in the United States of America October 2012ible for transforming the IBM reverse logistics supply chainacross the Americas, improving its efficiency, flexibility and IBM, the IBM logo and are trademarks of International Business Machines Corp., registered in many jurisdictions worldwide. Otherscalability through the implementation of new software and product and service names might be trademarks of IBM or otheroutsourcing of re-manufacturing. Chris can be reached at companies. A current list of IBM trademarks is available on the Web “Copyright and trademark information” at This document is current as of the initial date of publication and mayConnie Blauwkamp is a principal consultant within the IBM be changed by IBM at any time. Not all offerings are available in everyMarket Development and Insights organization, working with country in which IBM operates.industry and brand marketing teams to apply marketing THE INFORMATION IN THIS DOCUMENT IS PROVIDEDscience to strategic industry imperatives. Connie’s marketing “AS IS” WITHOUT ANY WARRANTY, EXPRESS OR IMPLIED, INCLUDING WITHOUT ANY WARRANTIES OF MERCHANT-experience includes work with multinational corporations, ABILITY, FITNESS FOR A PARTICULAR PURPOSE AND ANYtechnology start-ups and not-for-profit organizations. Since WARRANTY OR CONDITION OF NON-INFRINGEMENT. IBMjoining IBM, she has held a number of brand strategy, market products are warranted according to the terms and conditions of the agreements under which they are provided.and offering management, and marketing consultant roles. In2004, Connie’s team received the Gerstner Award for Client Notes and sourcesExcellence for the successful launch of the IBM BladeCenter 1 “Leading Through Connections: Insights from the Global Chief Executive Officer Study,” IBM Institute for Business Value, May 2012, http://www.platform. Connie can be reached at This research is based on in-depth interviews of more than 1,700 CEOs from around the world.Caitlin Halferty is a managing consultant with the IBM Center 2 “The Essential CIO: Insights from the Global Chief Information Officer Study,”for Applied Insights. In this role, she focuses on research that IBM Institute for Business Value, May 2011, insight into emerging business and technology ciostudy. More than 3,000 CIOs from 71 countries were interviewed for this study.trends. Prior to joining the Center, Caitlin consulted withclients on business communications and organizational 3 Friedman, Thomas L., “Made in the World,” The New York Times, January 28, 2012, management and led cross-functional global IT and friedman-made-in-the-world.html?_r=1business teams to deliver infrastructure and enterprise-widesystems. She also served on IBM’s Global Pandemic Task 4 Respondents were all C-level executives (17 percent CEOs/Presidents; 16 percent COOs, 8 percent CFOs, 4 percent CMOs, 49 percent CIOs/Force to help optimize IBM’s ability to respond to pandemic CTOs and 6 percent other C-level leaders) of companies with revenuesthreats. Caitlin can be reached at greater than US$100 million. Two-thirds are from North America and the remainder from Europe, Australia and the BRIC nations. This survey was conducted in double-blind fashion: the identities of the respondents were not shared with IBM, and the respondents were not aware that IBM sponsored the research. Please Recycle SOE12346-USEN-01