New Market Pressures Will Drive Next-Generation IT Services Outsourcing


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October 9, 2008
New Market Pressures Will Drive
Next-Generation IT Services
by Paul Roehrig, Ph.D.
for Sourcing & Vendor Management Professionals

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New Market Pressures Will Drive Next-Generation IT Services Outsourcing

  1. 1. October 9, 2008 New Market Pressures Will Drive Next-Generation IT Services Outsourcing by Paul Roehrig, Ph.D. for Sourcing & Vendor Management Professionals Making Leaders Successful Every Day
  2. 2. For Sourcing & Vendor Management Professionals October 9, 2008 New Market Pressures Will Drive Next-Generation IT Services Outsourcing IT Management Dilettantes are Squandering Enterprise Resources by Paul Roehrig, Ph.D. with andrew Parker and antonin Shanahan ExEcuT I V E S u M Ma Ry Against a background of economic crisis, war, price shocks, natural disasters, and political upheaval, making decisions about IT services for global enterprises is getting more complicated. Regardless of whether you think the daily news points to the Apocalypse or simply a rough patch of road, today’s turbulent business environment can all but paralyze enterprise planning. IT faces this impact as much as any other business function, but the reality is that commerce must continue. IT service delivery is a foundational capability essential to our modern world, and technology-driven efficiency improvements are vital to business success. Unfortunately, many firms source and manage IT services badly, basing decisions on invalid assumptions that ignore changes and challenges in the market. Smart execs use IT services not merely to manage technology “plumbing” but also to profoundly affect business performance. Sourcing groups must support business decision-makers in aligning the IT management archetype to the outsourcing deal, identifying providers that will thrive in the new outsourcing business context, and welding IT goals to core business outcomes. Tabl E O F cO N TE NTS N OT E S & RE S O u RcE S 2 Today’s Tough Business Climate Will Force This report is based on a synthesis of findings Firms To Face Up To IT Realities from multiple Forrester research initiatives The current Outsourcing business context — and advisory sessions with business and IT Please Fasten your Seat belts professionals who are currently facing difficult decisions in today’s economic uncertainty. Healthy Provider Management — are you a lion Tamer Or an Orchestra conductor? Related Research Documents Market Realities create an Old World Versus “Global IT Outsourcers and Top-Tier Telcos New World Service Provider landscape Partner For converged Service Delivery” The Focus On bits and bytes loses Ground To a May 16, 2008 Focus On commercial Value “HP acquires EDS To Focus On Enterprise IT REcOMMENDaTIONS Services” 12 Exploit Service Opportunities To Boost Your May 13, 2008 Business “The Three archetypes Of IT Vendors” april 25, 2008 © 2008, Forrester Research, Inc. All rights reserved. Forrester, Forrester Wave, RoleView, Technographics, TechRadar, and Total Economic Impact are trademarks of Forrester Research, Inc. All other trademarks are the property of their respective companies. Forrester clients may make one attributed copy or slide of each figure contained herein. Additional reproduction is strictly prohibited. For additional reproduction rights and usage information, go to Information is based on best available resources. Opinions reflect judgment at the time and are subject to change. To purchase reprints of this document, please email
  3. 3. 2 New Market Pressures Will Drive Next-Generation IT Services Outsourcing For Sourcing & Vendor Management Professionals TODaY’S TOUgh BUSInESS ClImaTE WIll FORCE FIRmS TO FaCE UP TO IT REalITIES Publicity — even hype — about the evolution of IT services and outsourcing may seem, at first glance, to be mostly manufactured by those who stand to gain — with service providers and industry analysts the prime candidates. But IT services offer not merely a new way to manage technology “plumbing.” Instead, they promise new ways to profoundly affect how services clients run their businesses. Since the late 1990s, technology-enabled work has been woven into the fabric of global commerce. In trying to adapt, far too many firms have become IT dilettantes, with huge amounts of capital and hordes of people dedicated to IT work that fails to drive equity generation, mission achievement, or brand differentiation. Staying in the low-value IT transaction business without good reason is perhaps the biggest waste of time and resources since the invention of solitaire.1 Of course, not all enterprises keep IT services in-house. Most large firms out-task all of the time, handing off lower-value nondifferentiating work to external agency staff; many firms outsource — entirely giving over responsibility for delivering a business process or its IT underpinnings to an external entity. IT services decision-makers make daily choices about how many IT processes (if any) should be handed over to service providers. But as the outsourcing business matures, and the broader market exhibits higher levels of variability, these decisions are becoming more difficult and risky. The Current Outsourcing Business Context — Please Fasten Your Seat Belts Generally, outsourcing business growth is counter-cyclical to the overall economy, so service providers tend to grow well in down economies. In early 2008, Forrester asserted that burgeoning economic pressures would contract overall IT spend and that IT services budgets — and share of overall spend — would increase with firms’ attempts to improve technology while attacking costs. Our latest data show that this is in fact happening. The dramatic fallout from the current (and expanding) global banking crisis is acting as a force multiplier to other market drivers — including the growing IT skills gap and the maturation of the outsourcing industry — that are shaping how IT will be run over the coming years.2 The result is a business context that will tax even the most experienced IT decision-makers. · IT spending decision-makers hit the brakes. In the US, for example, Forrester predicts there will still be modest growth in overall IT goods and services spending in 2008, but about 46% of global enterprise decision-makers have indicated that they have reduced IT budgets as a result of current economic pressures. Spending on external services seems to be a prime target relative to other major line items, and this is driving service providers to deliver even more efficiencies (see Figure 1).3 · The outsourcing business continues to grow. Today’s global economic pressures are already forcing firms to drive cost-cutting even harder, and many firms are turning to applications and October 9, 2008 © 2008, Forrester Research, Inc. Reproduction Prohibited
  4. 4. New Market Pressures Will Drive Next-Generation IT Services Outsourcing 3 For Sourcing & Vendor Management Professionals infrastructure outsourcing to reduce overall IT spend. Even though growth of overall IT budgets is contracting, many clients are also investing money in projects that help reduce spend and increase IT efficiency. Put simply, clients are spending money to save money, and this means business growth for service providers (see Figure 2). There is, of course, a darker scenario where the banking crisis, oil and food scarcity, and currency fluctuations depress the overall market so much that the volume of business failures inflicts severe pain on the IT service provider community. Figure 1 Global Economy Drives lower Enterprise IT Spending “How will the slowdown in the global economy affect your overall IT spending for the next 12 months?” No Yes We have already cut back our IT budget. 54% 46% We have put projects and new initiatives though 75% 25% a more thorough ROI. We have put discretionary spending on hold. 78% 22% We have cut back on services spend. 79% 21% We have cut back on our hardware expenditures. 85% 15% We have cut back on our software expenditures. 86% 14% Base: 258 Global 2000 enterprises (20,000 or more employees) Source: Enterprise IT Services Survey, North America And Europe, Q2 2008 46850 Source: Forrester Research, Inc. © 2008, Forrester Research, Inc. Reproduction Prohibited October 9, 2008
  5. 5. 4 New Market Pressures Will Drive Next-Generation IT Services Outsourcing For Sourcing & Vendor Management Professionals Figure 2 uS Economy Downturn Is Driving Increased Enterprise Outsourcing “How will the slowdown in the US economy impact your IT services spending for the next 12 months?” Very unlikely action Somewhat unlikely action Somewhat likely action Very likely action We are negotiating lower rates 10% 17% 40% 33% with suppliers. We have cut back our use of contractors. 15% 28% 37% 21% We are increasing our use of offshore. 22% 29% 33% 16% We are increasing our use of 21% 35% 34% 9% applications outsourcing. We are increasing our use of 24% 36% 31% 8% infrastructure outsourcing. We are just taking a wait-and-see attitude. 34% 29% 26% 11% We are expanding our use of contractors. 30% 40% 24% 7% Base: 258 Global 2000 enterprises (20,000 or more employees) (percentages may not total 100 because of rounding) Source: Enterprise IT Services Survey, North America And Europe, Q2 2008 46850 Source: Forrester Research, Inc. healthy Provider management — are You a lion Tamer Or an Orchestra Conductor? Although satisfaction with outsourcing tends to be relatively strong across the market, there are still many firms that have the remnants of small and large IT outsourcing projects that blew up on the launch pad. In spite of these often public failures, the realities of today’s cost pressures and performance demands are accelerating IT outsourcing activity even as some firms slow down their use of external providers for project work. In parallel, a new set of business conditions increases demands on IT managers. The financial context of outsourcing deals is becoming more complex and risky, and this puts an added pressure on IT decision-makers who now have to demonstrate a higher level of general business management skill, particularly in managing internal expectations and working with an ecosystem of service providers. Employers expect them to demonstrate robust management acumen where in the past they rewarded only hard-core technology skills. It is these business and management issues that are most often the root causes of major deal troubles, resulting in an unnecessary allocation of time and money as clients and providers struggle to improve unhealthy services deals.4 The reality of outsourcing today is that most enterprise clients must manage a complex ecosystem of internal and external service providers. This puts an additional burden on clients as well October 9, 2008 © 2008, Forrester Research, Inc. Reproduction Prohibited
  6. 6. New Market Pressures Will Drive Next-Generation IT Services Outsourcing 5 For Sourcing & Vendor Management Professionals as providers that have to work within — or even manage — multiprovider ecosystems, with higher risk of failure and complex interdependencies.5 Clients can run sourcing deals that meet internal expectations by aligning contracts and governance structures across the ecosystem, with predefined principles set out in a sourcing strategy that has been validated in advance with all of the stakeholders (see Figure 3).6 “Know thyself ” was supposed to have been carved into the stone at the Greek Oracle at Delphi. Although the sages likely had more existential considerations in mind, this is good advice for IT services clients too. Forrester has found that many clients struggle when assumptions and expectations for an outsourcing deal do not match how the engagement is contracted and managed. In practice, three alternative levels of engagement between client and service provider define the broad options for approaching an outsourcing relationship:7 · Solid Utility deals help keep the lights on. For low-risk services requirements — often some form of staff augmentation — clients can use more of a “vendor management” paradigm to focus primarily on inputs (e.g., the right people show up at the right time) and contract compliance more than service outputs. These “out-tasking” deals are perfect for situations where responsibility for all IT services is retained by the client firm, but managers seeking consistently defined service levels, continuous improvement driven by the provider, and innovation should craft a different kind of relationship. · Trusted Supplier deals give clients service-based contracts. Service-based contracts have become the de facto standard for many IT outsourcing contracts (particularly in the infrastructure space). These contracts have a higher level of shared risk between providers and clients, but they also include benefits for clients such as higher levels of operational transparency and continuous improvement over the term of the contract (often baked into lower prices over time). Managing these interactions is more complex for the client because the focus should be on overall deal “health” driven by good deal governance or “provider management.” · Partner Player deals share business technology risks. Few business platitudes are as common as “We want to be your partner,” but some IT services deals are beginning to build in true shared business risk. Some deals now include a much more risky business interaction that goes far beyond traditional contract procurement. This highly complex dance requires management from all participants to exhibit subtlety, creativity, and skillful ecosystem management to balance shared risk and reward. A good example is the Hewlett-Packard interaction with British Telecom, where each sells services to the other, but they have also created a joint go-to-market offering. © 2008, Forrester Research, Inc. Reproduction Prohibited October 9, 2008
  7. 7. 6 New Market Pressures Will Drive Next-Generation IT Services Outsourcing For Sourcing & Vendor Management Professionals Figure 3 adopt The Optimal Management Paradigm With your Services Ecosystem My IT service provider is most like a . . . Solid Utility Trusted Supplier Partner Player Relationship My provider is a replaceable My provider is a trusted My provider is a partner, not commodity like a brand of supplier like my personal unlike my business-spouse. If toothpaste. physician. either of us fail, we both fail. Stickiness Easily replaceable. More difficult to replace. Extremely difficult to replace Some loyalty based mostly due to cost and complex on risk of changing, but business interactions. ultimately can be changed for better value. Mission of IT “Keep the lights on (and do “Do the project right” and Depends on the deal (“Get the it cheaper).” “Meet the SLAs.” package there overnight,” “Create new products,” or “Grow market share”). Risk/reward Little shared risk. Limited Moderate shared risk. Risk Business risk is embedded in business impact for failure or of failure mostly confined to the IT risk. If IT stops, the changing providers. IT, but with limited business business stops and the brand is risk. affected. Contract type Generally staff augmentation Service-level agreement Shared business with joint where you pay for labor and contract where you pay for output; often includes new not output. output; can include projects go-to-market offerings; ties IT with significant business to business outcomes like implications. throughput or financial. Sample • Reduction of costs • Process quality • Time-to-market success • Cost/transaction • User satisfaction • Net new revenues metrics • Uptime/response time • User productivity • Customer retention • Balanced scorecard • Product quality Common • Inflexible pricing • Billable element is usually • Billable element varies widely pricing • Billable element is usually service-level outputs with by contract measures an FTE penalties for misses. • Money-back guarantees • Fixed price • Key performance measures • Risk/reward or value-based for IT operations contracts • Evolutionary service targets • Revenue/gain sharing • Customer satisfaction as a • Open book pricing bonus/payment criterion So I manage Lion tamer Grammar school teacher Orchestra conductor most like a . . . . . . And that Relatively simple to manage; More complex to manage; Highly complex management means focus is mostly on inputs focus is on deal “health” interaction; requires subtlety, (e.g., people show up) and driven by good deal creativity, and skillful provider contract compliance more governance; emphasis is on ecosystem management to than outputs; requires good IT outputs like service SLAs balance shared risk and reward. operations control. and key project status. 46850 Source: Forrester Research, Inc. October 9, 2008 © 2008, Forrester Research, Inc. Reproduction Prohibited
  8. 8. New Market Pressures Will Drive Next-Generation IT Services Outsourcing 7 For Sourcing & Vendor Management Professionals market Realities Create an Old World Versus new World Service Provider landscape Making a tough self-assessment of what the firm really wants from IT service providers is one step in helping ensure long-term sourcing success. The next aspect of managing through complex market shifts is to properly align to providers that fit those business and technical requirements and are well-positioned for long-term survival as business requirements change. IT services clients have always wrestled with how to manage their outsourcing deals, but navigating through the changing provider landscape presents new challenges today. Several major market shifts effectively divide the service provider landscape as “Old World” legacy firms face increasing challenges by “New World” firms as likely to be headquartered in India as Armonk, N.Y., or Cupertino, Calif. But this is not merely about the founding date or India-based firms versus North American and European- based firms. This is about how these firms deliver services and create value. The next generation of outsourcing providers delivering significant value to clients will have to thrive in the disorder of these new market shifts. · The old notion of “offshoring” should be retired. Global service delivery is about options for clients that balance requirements and cost, not just pure wage arbitrage.8 Now that the service delivery “center of gravity” can be almost anywhere, clients of mature outsourcing firms can have delivery from onsite, nearby, or a remote location, regardless of where the provider is headquartered. In this new business reality “offshoring” no longer equals “India,” so it’s now time for the notion of “offshoring” or an “offshore provider” to be replaced by “global service delivery.” Forward-thinking clients (many of whom are already managing an ecosystem of global service providers) recognize this, and Forrester data shows that use of remote infrastructure management (RIM) — most often implemented by legacy multinational service providers — is set to expand (see Figure 4). · Telcom and IT service provider tie-ups will exploit convergence to take market share. Convergence between IT and telecom service delivery opens up ample opportunity for competition — or collaboration — between firms on either side of the fence. Alliances spring up to exploit the collaboration option and deliver client value as a preformed IT ecosystem. Examples include IBM’s diverse network deals with AT&T; Hewlett-Packard’s relationship with BT; and Dutch telco KPN’s acquisition of IT service provider Getronics. In addition, some telecom firms like India’s Bharti Airtel are expanding service offerings into the broader IT services space. Some IT services clients still choose to manage separate telecom and IT providers, but options are growing for clients that want to take advantage of convergence, particularly in network-related services (see Figure 5).9 · Service providers continue the path of consolidation and partnering. Continuing M&A activity among service providers only adds to the gastric distress of many IT services clients. Although HP’s recent acquisition of EDS was the largest IT services acquisition ever, M&A and alliance building abounds in the IT services and telecom services domains. Other recent © 2008, Forrester Research, Inc. Reproduction Prohibited October 9, 2008
  9. 9. 8 New Market Pressures Will Drive Next-Generation IT Services Outsourcing For Sourcing & Vendor Management Professionals examples include the divestment of multiple components of Getronics (CompuCom acquired the North American delivery capability), and Caritor’s acquisition of Keane.10 Major deals get most of the press, but the story doesn’t end there. In H1 2008, Forrester tracked 270 activities that fell into one of the following four main categories: M&A; partnership activities; new solutions and services; and changes in go-to-market and delivery strategies (see Figure 6).11 · Clients seek providers that can deliver tomorrow’s business requirements. It’s tough enough to figure out what is required today, much less five years into the future. This truism underlies much of the buyer dissatisfaction with outsourcing, and it’s the charge that IT outsourcing decision-makers continue to face. Most enterprise clients quite reasonably seek lower costs, end user productivity support, and improved business processes quality in the style of “keep the lights on” Solid Utilities and “meet the SLA” Trusted Suppliers. But decision-makers are also now looking to IT as a significant enabler of business innovation, new market offerings, customer retention, and core business process re-engineering (see Figure 7). Figure 4 RIM use Is Set To Expand across The Market “What is the status of your company’s use of remote infrastructure monitoring, management, and administration services this year?” Already using a third party 18% Will not use a third party for this service 34% Considering using a third party for this service 30% 48% of respondents are either considering or will outsource Will outsource to a third party in the next 12 months using RIM services over the 18% next 12 months Base: 947 North American and European technology decision-makers from firms with at least 1,000 employees Source: Enterprise IT Services Survey, North America And Europe, Q2 2008 46850 Source: Forrester Research, Inc. October 9, 2008 © 2008, Forrester Research, Inc. Reproduction Prohibited
  10. 10. New Market Pressures Will Drive Next-Generation IT Services Outsourcing 9 For Sourcing & Vendor Management Professionals Figure 5 The Network Is critical Infrastructure That Enables business Process Applications OS and middleware Servers, IT infrastructure storage, and PCs WAN LAN Network VoIP 46850 Source: Forrester Research, Inc. Figure 6 The activities Of IT Service and Outsourcing Providers In H1 2008 Go-to-market/strategy delivery changes 87 Partnerships 84 New solutions and services 75 M&A 24 Base: 270 activities tracked among 23 IT services and outsourcing providers 46850 Source: Forrester Research, Inc. © 2008, Forrester Research, Inc. Reproduction Prohibited October 9, 2008
  11. 11. 10 New Market Pressures Will Drive Next-Generation IT Services Outsourcing For Sourcing & Vendor Management Professionals Figure 7 Many Enterprise clients Now Rely On IT To Drive core business change ”How well does your IT organization currently support each of the following goals?” Not at all Low support High support To a great extent Don’t know Lowering the company’s overall operating costs 7% 14% 44% 34% Improving end user workforce productivity 5% 21% 51% 24% Improving quality of products and/or processes 5% 22% 46% 28% Acquiring and retaining customers 18% 25% 27% 29% 1% Re-engineering core business processes 10% 34% 42% 14% Driving innovative new market offerings or business practices 16% 37% 33% 14% 1% Base: 683 very large (5,000 to 19,999 employees) and Global 2000 enterprises (20,000 or more employees) (percentages may not total 100 because of rounding) Source: Enterprise IT Services Survey, North America And Europe, Q2 2008 46850 Source: Forrester Research, Inc. The Focus On Bits and Bytes loses ground To a Focus On Commercial Value For clients managing providers as Partner Players, IT service management is becoming more focused on business outcomes in addition to basic operations. This trend is part of a broader market shift that Forrester has characterized as the move from IT (information technology) to BT (business technology) — pervasive technology use that boosts business results and in which the business becomes deeply embedded in technology.12 But capturing the value associated with this shift requires leaders to wrestle with tough decisions about what their companies really do and how technology enables that core business. The result is a rethinking of the structure of the modern corporation. What, specifically, has to be done in-house anymore? At a minimum, most leading Western companies are turning toward a new model of innovation, one that employs global partner networks.13 Outsourcing within this market shift presents several tremendous opportunities and challenges: · Managers want to link IT services to business outcomes. IT service leaders are now being compelled to justify performance and to build stronger links to the end-business. Operational metrics will remain the principal control mechanisms for outsourcing services deals, but some smart managers now require providers to meet service levels not only for operations but also for business outcomes. (see Figure 8). Wipro, for example, manages IT infrastructure for an India- October 9, 2008 © 2008, Forrester Research, Inc. Reproduction Prohibited
  12. 12. New Market Pressures Will Drive Next-Generation IT Services Outsourcing 11 For Sourcing & Vendor Management Professionals based mobile telco. The billing and service levels link to customer-service business metrics like billing timeliness — a business key performance indicator enabled by service availability. More clients want their Partner Player service provider ecosystems to help clearly articulate the IT value proposition by linking real business outcomes to technology services. · Bold outsourcing decisions help firms become lean — and successful. Fully exploiting outsourcing investments demands going beyond a pure cost-focused “Solid Utility” approach; “Trusted Supplier” and “Partner Player” outsourcing helps companies focus on building brand and shareholder equity. Although this requires tough decisions about what is core and not core to your firm, aggressively jettisoning non-core business processes can allow outsourcing more room to create value. Nike, for example, has bolstered its success by maintaining direct ownership of brand and key customer interactions — but little else.14 It went beyond the question “What should we outsource?” to instead ask, “What should we not outsource?” For non-core IT functions it becomes a necessity to assess the risk and ROI of outsourcing. · Outsourcing enables the promise of “re-engineering the corporation.” In 1993 Hammer and Champy wrote Reengineering the Corporation: A Manifesto for Business Revolution.15 Many executives read the book — and even tried to implement the guidance — but real-world application proved challenging, leaving execs wondering just how to make it all work. The healthy growth of outsourcing recently gives firms the tools to act on the advice about corporate re-engineering as providers become more efficient at taking over non-core business processes with meaningful metrics and rigor. It’s still not easy, but the outsourcing business continues to mature, and 56% of decision-makers at very large firms already rely on IT to support process re-engineering and build more process control and ROI into their IT environments.16 © 2008, Forrester Research, Inc. Reproduction Prohibited October 9, 2008
  13. 13. 12 New Market Pressures Will Drive Next-Generation IT Services Outsourcing For Sourcing & Vendor Management Professionals Figure 8 links To business Performance are a Priority For Enterprise IT leaders “Which of the following initiatives are likely to be one of your IT organization’s major business- or corporate-related themes for 2008?” “Improving the measurement of IT’s impact on business performance.” Don’t know 1% Not on our agenda Critical priority 11% 17% Low priority 32% High priority 40% Base: 937 firms with 5,000 or more employees Source: Enterprise And SMB IT Budgets And Spending Survey, North America, Europe, And Asia Pacific, Q4 2007 46850 Source: Forrester Research, Inc. R E c O M M E N D aT I O N S ExPlOIT SERVICE OPPORTUnITIES TO BOOST YOUR BUSInESS From strategy, to provider ecosystems, to how deals are managed, the IT services outsourcing market is changing faster now than ever. This rapid churn can be good for clients that have a sound understanding of new services market realities, or it can be a rocky road for those who don’t step wisely. IT sourcing decision-makers should aim to use IT services as a way to better enable the core business. · Build and manage a deal that aligns with your IT and business environment. consider what deal archetype would make the most sense given your context and business requirements. are you looking for a utility provider or a shared-risk partnership? Given the long-term nature of many deals, the original expectations (and business context) will change over time, resulting in a disconnect between sourcing deal expectations and reality. IT services clients should take a hard look at how they really want the provider to behave October 9, 2008 © 2008, Forrester Research, Inc. Reproduction Prohibited
  14. 14. New Market Pressures Will Drive Next-Generation IT Services Outsourcing 13 For Sourcing & Vendor Management Professionals and how the deal is structured and managed. This means finding a provider that’s aligning for the future of IT services and then structuring a healthy contract — with forward-looking provisions for service levels, business metrics, pricing, and service — to maintain alignment over time. · Build relationships knowing that the landscape will continue to shift. The wave of IT service provider consolidation is not over. There are still several major firms and dozens of midsize IT providers that will be ripe for takeover over the next 18 to 24 months. This is not necessarily bad for clients because IT services firms making acquisitions frequently want one of the biggest assets held by other providers — the client base. There may be changes in how the deal is managed, but acquiring firms almost always want to maintain service continuity for the client installed-base. Even so, sourcing teams should plan on the basis that the provider topography will continue to change with mergers, acquisitions, and divestitures. · Structure contracts for future provider changes. contracts require structures to provide a level of protection when the service provider changes control or becomes financially at risk. change of control clauses should be structured to grant clients rights to terminate on their own timeline and protect against expenses associated with moving the work from the incumbent to another provider. contracts should also include provisions for significant revisions or termination with evidence of financial trouble (for example, if the bond credit rating assigned by Moody’s or S&P falls below a stated minimum). · Embrace the global delivery model. The harsh reality is that the trend toward the use of global delivery cannot be reversed without severe impact on the overall economy. The economic impetus driving outsourcing is that cost models are changing in virtually every industry, and the wage arbitrage lever can be a powerful tool to free up savings for many firms, organizations, and agencies. certainly not everything can be outsourced or delivered remotely, but sourcing groups should challenge their own assumptions about traditional definitions of IT “offshoring” and identify what really can and can’t be delivered from lower- cost delivery locations. · Consider bundling lines of service along the IT supply chain. The more successful service providers of the near future will be able to aggregate multiple lines of service, including infrastructure work, applications outsourcing, business process outsourcing (bPO), systems integration (SI) project work, and consulting. clients already wrestle with how to allocate work across a constellation of service providers, particularly now as major providers are offering “products” such as telecom services and managed security services in addition to infrastructure and applications work. Service convergence can be good news for buyers willing to craft a sourcing strategy that aggregates demand with a smaller number of providers linked together with a strong delivery process foundation. · Use the current economic turmoil as fuel for an IT-to-BT transformation. Regardless of current weaknesses in the broader economic market, smart decision-makers will aggressively © 2008, Forrester Research, Inc. Reproduction Prohibited October 9, 2008
  15. 15. 14 New Market Pressures Will Drive Next-Generation IT Services Outsourcing For Sourcing & Vendor Management Professionals leverage technology as a business accelerator rather than as a sunk commodity cost. The evolution from IT to bT should not go on hold during any near-term market corrections (or even a recession). buyers who are building, restructuring, or managing outsourcing deals should focus on improving service and contract visibility (potentially building business services management tools and processes into the deal). Sla architectures should include baseline operational metrics but should also include business-oriented outcomes.17 EnDnOTES 1 How much is being “wasted”? In hard dollars, we know that the US infrastructure outsourcing market is about $44 billion per year (EMEA is about $33 billion). And we know that only about 20% (roughly) of businesses currently outsource infrastructure components. So the potential US infrastructure outsourcing market can be sized at about $220 billion per year. If we make a conservative estimate that about 60% of infrastructure work is suitable for outsourcing, that suggests an addressable market of about $132 billion per year. Taking an extremely conservative rule-of-thumb for outsourcing savings of 15% — based on TPI large-deal data — then the potential latent asset that US businesses are sitting on by not outsourcing more infrastructure services is about $19.8 billion per year. Source: Patrik Jonsson, “Is that a spreadsheet on your screen — or solitaire?” USA Today, March 18, 2005 ( business/2005-03-18-nc-solitaire-legislation_x.htm). 2 Even a quick scan of the financial headlines can trigger the conclusion that tougher economic times have arrived. Many IT sourcing decision-makers will find themselves under still more pressure to deliver near- term cost savings while simultaneously improving support for the business. See the March 3, 2008, “Stay Focused On Your Strategic Outsourcing Objectives — Even As Economic Pressures Mount” report. 3 Global purchases of IT goods and services — which equal IT vendors’ revenues — will equal $1.7 trillion in 2008, growing by 6% after a 12% increase in 2007. A declining US dollar boosted 2007 growth rates and will do so in 2008 as well; measured in euros, global IT purchases growth will be 4%. A US economy in or near recession will be the main cause of slower 2008 growth, pulling down growth in IT purchases both in the US and with major trading partners in Europe and the Americas. Total global spending on technology goods, services, and staff, the global IT operating budget from a CIO perspective, will reach $2.4 trillion in 2008, an 8% increase from 2007. See the February 11, 2008, “Global IT 2008 Market Outlook” report. 4 Forrester’s data shows that outsourcing clients are generally satisfied except in two major areas — the outsourcers’ ability to manage change and implement innovation in the client environment. See the August 3, 2006, “Sourcing Fails To Deliver On Promises Of Innovation And Managed Change” report. 5 As more companies adopt a multiple-provider outsourcing strategy, executives are struggling to install governance processes that are cost-effective, ensure delivery quality, and provide responsible oversight of multiple complex contracts. Most practitioners agree that current outsourcing deals fail to achieve expectations primarily because of deficiencies in account governance — and multiple providers add complexity and risk for benefits that may be more perceived than real. See the August 22, 2006, “Reality, Risks, And Best Practices For Managing Multiple Service Providers” report. October 9, 2008 © 2008, Forrester Research, Inc. Reproduction Prohibited
  16. 16. New Market Pressures Will Drive Next-Generation IT Services Outsourcing 15 For Sourcing & Vendor Management Professionals 6 The bottom line for clients is where and how you deliver value to their businesses — and they will want you to communicate this to them in terms that they understand. That means that clients need to know if you’re IT-centric, solution-centric, or business-centric in the value you offer. See the September 5, 2008, “The Three Archetypes Of IT Vendors” report and see the March 22, 2006, “The Three Archetypes Of IT” report. 7 In the past, companies have failed to consider all of the factors that affect their outsourcing strategy. As a result, many find that outsourcing doesn’t deliver the benefits they seek. Forrester has found that companies don’t get all of their expected outcomes and want to improve their outsourcing results. IT departments are opting for fewer end-to-end outsourcing deals, growing infrastructure outsourcing, and increasing preference for selective outsourcing. See the September 21, 2007, “Three Pragmatic Steps To An Outsourcing Strategy” report. 8 The adoption of and investment in a low-cost global delivery model (GDM) has accelerated, and we’ve arrived at the “hub and spoke” stage, where multinational corporations (MNCs) like Accenture, Capgemini, CSC, and IBM use India as the main center for remote delivery. See the November 7, 2007, “The State Of Development Of The IT Services Global Delivery Model” report. 9 In both the telecommunications provider and IT services marketplaces, competition has taken drastic turns in recent years. On the one hand, certain capabilities that had been important sources of revenue and competitive differentiators are now commodities. On the other, both types of providers see great revenue potential in specialization — allowing each partner to focus on what it does best. In this manner, both help their respective clients address some of the great emerging technical challenges that they are confronting early in the 21st century. See the May 16, 2008, “Global IT Outsourcers And Top-Tier Telcos Partner For Converged Service Delivery” report. 10 While Forrester has seen major acquisitions recently by the large multinationals — such as Capgemini purchasing Kanbay and EDS taking over MphasiS — many are still struggling to adapt to the new IT services paradigm. Likewise, large India-based service providers have been making smaller, albeit strategic, acquisitions to build out their own global delivery models and strengthen their US and EMEA-based consulting capability and business alignment. See the February 9, 2007, “Caritor Acquires Keane: A New Marriage Of Local Client Service With Offshore Delivery” report and see the May 13, 2008, “HP Acquires EDS To Focus On Enterprise IT Services” report. 11 The IT services and outsourcing market is in the midst of a fundamental transformation that will eventually lead to a new IT ecosystem framed by new constituencies of buyers and suppliers, all supported by new, standardized global processes for the development and delivery of technology. See the July 14, 2008, “Market Momentum: IT Services And Outsourcing Market, H1 2008” report. 12 Forrester conducted an IT excellence survey and found that CIOs are doing a great job of managing IT operations and aligning investment budgets and portfolios with business organizations and strategies. Although it seems to be changing, many CIOs are still doing less to drive business results, manage IT operations’ relationship with the business, or help drive technology-based business innovation. See the July 24, 2007, “CIOs: Avoid IT Marginalization On The Path To BT” report. © 2008, Forrester Research, Inc. Reproduction Prohibited October 9, 2008
  17. 17. 16 New Market Pressures Will Drive Next-Generation IT Services Outsourcing For Sourcing & Vendor Management Professionals 13 Source: Pete Engardio and Bruce Einhorn, “Outsourcing Innovation,” BusinessWeek, March 21, 2005 (http:// 14 Source: Adam Turner, “Outsourcing? Just do it,” The Sydney Morning Herald, February 15, 2005 (http:// 15 Source: Michael Hammer and James Champy, Reengineering the Corporation: A Manifesto for Business Revolution, Harper Business, 1993. 16 Technology is also increasingly useful in helping re-engineer real-world processes. The April 25, 2007 Forrester Wave™ on enterprise architecture (EA) tools demonstrates that the real benefit of these tools is not in the modeling itself but in the modeling that supports real EA objectives — such as knowledge sharing, collaboration on standards, and providing aggregated dashboards that help decision-makers choose from different scenarios. See the August 21, 2007, “Business Modeling For CxOs” report. 17 Anyone reading the economic headlines might easily conclude that a rough ride is underway for many US businesses. Predictions range from shrill proclamations of impending doom for Western civilization due to the credit crunch and deficit, to naive assurances of calming near-term stability. The reality is much more complex of course, and the anticipated severity of financial challenges differs hugely around the world and by business. Many IT outsourcing decision-makers will soon find themselves under even more pressure to deliver near-term cost savings while simultaneously improving support for the business. See the March 3, 2008, “Stay Focused On Your Strategic Outsourcing Objectives — Even As Economic Pressures Mount” report. October 9, 2008 © 2008, Forrester Research, Inc. Reproduction Prohibited
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