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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.
IBM Center for Applied Insights




The majority of growth-seekers want to reduce costs too. But                        As innovators continue to expand the nature and scope of
they also want faster time to market for new products and                           sourcing relationships, we expect other segments will shift
services, and increased efficiency and effectiveness across the                     their approaches as well. For instance, our findings suggest
entire 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 in
cost reduction, speed-to-market, and value chain efficiency,                        transforming operations through better data integration and
the 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. But
they’re also indicative of a different type of relationship – one                   Emergence of a new sourcing model
in 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 relationships
more likely to empower service providers with the flexibility                       can have – not only on business outcomes, but also on a
to adapt technology infrastructure, applications and business                       company’s core business model and corporate culture. If
processes 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
                                                                                                                                                         Transform



Figure 1. As a group, innovators have broader, more strategic objectives in mind for their sourcing relationships.




                                                                             2
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 terms
This kind of criteria has significant implications for the entire         of social, political and economic risks. When organizations
ecosystem 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 minds
Evaluation becomes much more difficult. For instance, how                 of customers and the general public. In an increasingly
do you value greater agility, faster time-to-market or a more             transparent world, businesses are judged by every facet
innovative 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 accordingly
work with them. Prioritizing both efficiency and innovation               The sourcing of services is a decision with long-term
requires new governance models. Granular, task-oriented                   significance. More than half of the companies we surveyed
service 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 organization
and their providers to effect change, especially at the enter-            Before entering this kind of long-term relationship, it’s
prise level. Compromises to accommodate the organization’s                worth considering the adage: You are who you associate
preferences can limit the partner’s ability to leverage standard-         with. Organizations need strategic providers that reflect the
ization and scale. Companies will need to strike a balance                qualities and capabilities they aspire to have – the strengths
that provides partners with both the ability and the incentive            that can lead to better business outcomes.
to attain desired business results. And to create room for
achieving these broad, strategic objectives, the scope of the
sourcing agreement may need to extend beyond individual
processes 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.
                                    ibm.com/smarter/cai/value
                                                                      3
About the authors
Christopher Townsend is the IBM Global Technology Services
General Manager for the Distribution Sector. He leads a team
that helps clients achieve their business goals through modern
sourcing strategies – his focus is on developing and deploying
outsourcing solutions relevant for today’s business leaders.       © Copyright IBM Corporation 2012

In prior roles, Chris held similar responsibilities within the     IBM Corporation
Nordic countries and globally across the Consumer Products         New Orchard Road
                                                                   Armonk, NY 10504
industry, and he led the IBM acquisition and integration of
two large services companies. In addition, Chris was respons-      Produced in the United States of America
                                                                   October 2012
ible for transforming the IBM reverse logistics supply chain
across the Americas, improving its efficiency, flexibility and     IBM, the IBM logo and ibm.com are trademarks of International Business
                                                                   Machines Corp., registered in many jurisdictions worldwide. Other
scalability through the implementation of new software and
                                                                   product and service names might be trademarks of IBM or other
outsourcing of re-manufacturing. Chris can be reached at           companies. A current list of IBM trademarks is available on the Web at
cbt@us.ibm.com.                                                    “Copyright and trademark information” at ibm.com/legal/copytrade.shtml.

                                                                   This document is current as of the initial date of publication and may
Connie Blauwkamp is a principal consultant within the IBM          be changed by IBM at any time. Not all offerings are available in every
Market 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 PROVIDED
science 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 ANY
technology start-ups and not-for-profit organizations. Since       WARRANTY OR CONDITION OF NON-INFRINGEMENT. IBM
joining 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. In
2004, Connie’s team received the Gerstner Award for Client         Notes and sources
Excellence 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 conniebl@us.ibm.com.            ibm.com/ceostudy. 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, http://www.ibm.com/
provides 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 with
clients on business communications and organizational              3
                                                                    Friedman, Thomas L., “Made in the World,” The New York Times,
                                                                   January 28, 2012, http://www.nytimes.com/2012/01/29/opinion/sunday/
change management and led cross-functional global IT and
                                                                   friedman-made-in-the-world.html?_r=1
business teams to deliver infrastructure and enterprise-wide
systems. 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 revenues
threats. Caitlin can be reached at caitlin.halferty@us.ibm.com.    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

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Pushing the Limits of Outsourcing - Innovators Reinvent the Services Relationship

  • 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. IBM Center for Applied Insights The majority of growth-seekers want to reduce costs too. But As innovators continue to expand the nature and scope of they also want faster time to market for new products and sourcing relationships, we expect other segments will shift services, and increased efficiency and effectiveness across the their approaches as well. For instance, our findings suggest entire 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 in cost reduction, speed-to-market, and value chain efficiency, transforming operations through better data integration and the 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. But they’re also indicative of a different type of relationship – one Emergence of a new sourcing model in 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 relationships more likely to empower service providers with the flexibility can have – not only on business outcomes, but also on a to adapt technology infrastructure, applications and business company’s core business model and corporate culture. If processes 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 Transform Figure 1. As a group, innovators have broader, more strategic objectives in mind for their sourcing relationships. 2
  • 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 terms This kind of criteria has significant implications for the entire of social, political and economic risks. When organizations ecosystem 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 minds Evaluation becomes much more difficult. For instance, how of customers and the general public. In an increasingly do you value greater agility, faster time-to-market or a more transparent world, businesses are judged by every facet innovative 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 accordingly work with them. Prioritizing both efficiency and innovation The sourcing of services is a decision with long-term requires new governance models. Granular, task-oriented significance. More than half of the companies we surveyed service 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 organization and their providers to effect change, especially at the enter- Before entering this kind of long-term relationship, it’s prise level. Compromises to accommodate the organization’s worth considering the adage: You are who you associate preferences can limit the partner’s ability to leverage standard- with. Organizations need strategic providers that reflect the ization and scale. Companies will need to strike a balance qualities and capabilities they aspire to have – the strengths that provides partners with both the ability and the incentive that can lead to better business outcomes. to attain desired business results. And to create room for achieving these broad, strategic objectives, the scope of the sourcing agreement may need to extend beyond individual processes 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. ibm.com/smarter/cai/value 3
  • 4. About the authors Christopher Townsend is the IBM Global Technology Services General Manager for the Distribution Sector. He leads a team that helps clients achieve their business goals through modern sourcing strategies – his focus is on developing and deploying outsourcing solutions relevant for today’s business leaders. © Copyright IBM Corporation 2012 In prior roles, Chris held similar responsibilities within the IBM Corporation Nordic countries and globally across the Consumer Products New Orchard Road Armonk, NY 10504 industry, and he led the IBM acquisition and integration of two large services companies. In addition, Chris was respons- Produced in the United States of America October 2012 ible for transforming the IBM reverse logistics supply chain across the Americas, improving its efficiency, flexibility and IBM, the IBM logo and ibm.com are trademarks of International Business Machines Corp., registered in many jurisdictions worldwide. Other scalability through the implementation of new software and product and service names might be trademarks of IBM or other outsourcing of re-manufacturing. Chris can be reached at companies. A current list of IBM trademarks is available on the Web at cbt@us.ibm.com. “Copyright and trademark information” at ibm.com/legal/copytrade.shtml. This document is current as of the initial date of publication and may Connie Blauwkamp is a principal consultant within the IBM be changed by IBM at any time. Not all offerings are available in every Market 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 PROVIDED science 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 ANY technology start-ups and not-for-profit organizations. Since WARRANTY OR CONDITION OF NON-INFRINGEMENT. IBM joining 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. In 2004, Connie’s team received the Gerstner Award for Client Notes and sources Excellence 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 conniebl@us.ibm.com. ibm.com/ceostudy. 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, http://www.ibm.com/ provides 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 with clients on business communications and organizational 3 Friedman, Thomas L., “Made in the World,” The New York Times, January 28, 2012, http://www.nytimes.com/2012/01/29/opinion/sunday/ change management and led cross-functional global IT and friedman-made-in-the-world.html?_r=1 business teams to deliver infrastructure and enterprise-wide systems. 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 revenues threats. Caitlin can be reached at caitlin.halferty@us.ibm.com. 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