IT Sourcing: Do Not Underestimate the Impact on Your Operating Model
The world of technology delivery is increasing in complexity by the minute. Providers, tech platforms, global talent, hybrid workplaces, partners and start-ups all have to form a well-coordinated delivery ecosystem. Enterprise IT organizations need to sense and respond to business stimuli, support multiple business units at the same time, demonstrate commercial value, align fluidly to business products and value streams, innovate through partner ecosystems, manage talent globally and demonstrate financial accountability on technology spend. The pressure on the enterprise technology organization has never been greater.
The complexity of the IT service provider ecosystem is only growing for many tech-dependent organizations. The impact of sourcing on the operating model must not be underestimated.
How to Get the Greatest Value from Sourcing
The situation at many enterprises today can be best described as a combination of internal and external talent working on heritage and modern technologies to deliver bespoke and market-ready solutions. And the situation is constantly shifting with pressures both seen and unexpected. A modern technology organization requires an adaptable operating model to meet demand and thrive during continuous change.
Every sourcing event triggers the necessity to revisit the operating model and its basis. ISG has been helping clients manage both the change associated with sourcing and the required adjustments to their operating models.
Changes to the Sourcing Mix that Drive Operating Model Updates
When designing the optimal operating model, it is crucial to take the organizational prerequisites into account in the early stages of a transaction. Questions to be answered are plentiful: Which parts of the organization are affected? Should employees be transferred to a potential partner – if yes, which employees would be in scope of a transaction? How to manage a provider effectively? What activities/roles should remain inhouse? How should the provider be integrated into the company’s ecosystem? What kind of delivery model to expect from the provider?
A proven operating model framework will help define the service scope, the sourcing objectives and principles and the contract architecture so a company can identify the required retained skills and capabilities it needs to steer the new contract.
It will also help an organization describe and analyze the interfaces between the provider and the retained organization to clearly define how the services will be delivered, governed and managed.
The ISG operating model framework helps enterprises define the retained organization, including its ways of working (by adjusting or simplifying processes and delivery models), its organizational structure with required skills and capabilities, the new tools it will use to manage relationships and the governance models it needs for contracting with selected partners. These changes will be supported by a strong change management approach.
How to Avoid Common Operating Model Pitfalls in Sourcing
Implementing a sourcing strategy and operating model together is no easy task. This must be executed properly to achieve optimum benefits without expensive rework.
Many companies tend to run sourcing transformations without correctly defining their sourcing strategy and scope and instead address only the requirements of outsourced or retained functions. This usually results in a mix of fragmented/siloed environments that require much larger and costlier organizational transformations to course correct at a later stage. Starting with a sourcing strategy will ensure that both retained and outsourced organizations establish right-sized teams, are equipped with the right capabilities to deliver high-quality work from different locations (e.g., on-shore, near-shore, off-shore, or a combination) and meet local and global data protection requirements.
A sourcing strategy also helps companies rapidly establish business continuity, secure enterprise buy-in (as to who will do what) with clearly defined lines of authority, speed up decision-making, secure the right resources and eliminate duplicate work without impacting the cost base.
Another common pitfall for enterprises is when they retain capabilities or roles that are not the core strengths of the retained organization. Based on the sourcing strategy, certain benefits should be achieved (e.g. capability improvement, cost savings) by handing over such capabilities/roles to an outsourced provider. However, as soon as it comes to structuring the retained organization, certain aspects related to organizational structure and internal politics can inhibit the organization from reaching its desired benefits. The sourcing strategy should be adhered to through all phases of the sourcing relationship.
In many cases, companies hesitate to let go of responsibilities to the provider. This is especially true in first-generation sourcing (and mostly with outsourcing). This will result in friction in the operating model and inefficient processes. Managers and employees must come to terms with letting go of their “doer” roles and allowing suppliers to manage parts of their organizations/functions – even if they take some time to get used to. An effective organizational change management (OCM) framework, including a communication strategy and plan, is usually deployed alongside a sourcing strategy to alleviate this risk.
How ISG Can Help You Design the Right Operating Model
For many companies, designing an operating model proves to be a challenge. In the context of substantial IT outsourcing to third-party providers with joint IT delivery, the complexity can increase exponentially if a joint operating model is not set up.
ISG advises on 60% of the global advised IT sourcing market and helps clients avoid the pitfalls that typically occur in sourcing transactions. We use a three-pronged approach:
- Developing a sourcing strategy: We determine the business and technology objectives alongside both the current technology estate and roadmap strategy and then compare them to current operational structures, skills, and capabilities and to market leaders. With our comprehensive assessment framework, we look at maturity and adoption levels across multiple categories and at multiple levels of precision to establish a baseline and to compare against market best practice levels. Based on the outcomes, we will determine with the leadership team whether sourcing is a solution and, if sourcing is the decision, there is a need to design a high-level sourcing strategy that outlines key decision points including scope and structure. Then we leverage our industry-leading benchmark capabilities and market data to initiate a sourcing process for provider selection.
- Designing the target operating model for the retained organization: Informed by your specific objectives and leveraging successful structural topologies and patterns from relevant market comparators, we work collaboratively with you to define the design principles for the sourcing that will result in the target operating model. The design principles will also be translated into requirements that serve the potential provider with guardrails to improve their strategic fit in the selection process. The operating model will allow for constant adaptation to a dynamic, scalable, changing sourcing landscape and allow for innovation within a stable, secure environment. We address from high-level to detailed operational components, including:
- Business/technology alignment using a business-oriented approach
- Joint organizational structure, including teams, roles, responsibilities, critical skills, location and labor strategies
- Ways of working that enable connected business value streams, including joint delivery and modern delivery approaches
- Governance and performance frameworks that recognize the need for guardrails while minimizing friction in velocity
- Potential cultural differences and people-side implications.
- Managing the transition and transformation: During and after the selection of the provider(s), we bring our proven methodologies to realize the collective vision of the target state while helping your people establish an adaptive organization with the expectation of continuous change. ISG supports enterprises during the partner selection process and the transition to its selected partners. But even when a provider takes over responsibility, it’s just the start of a transformation journey. New technologies, services and business requirements need to be constantly monitored and adapted, and the operating model also needs to evolve accordingly. ISG supports clients in addressing the critical questions of transformation: Does the organization’s architecture facilitate critical connections between legacy and modern technologies? Are there different delivery models, tools, and ways of working that are relevant to my essential business value streams and how do I best integrate the provider in accelerating this? How do I manage the integrated partner ecosystem to seamlessly bring the expertise and delivery capabilities I need? How do I manage and govern with fact-based decision-making and outcome-based, agile-oriented financial, investment and performance models?
ISG offers its clients a holistic approach across the board, connecting a sourcing initiative with the required operating model adjustments right from the beginning. We not only support enterprises as they define the best possible contract, but we also help ensure they have the right organization in place to get the most value out of the sourcing initiative. As the leading IT sourcing advisory, we leverage our unique experience and expertise to manage complex provider integrations and create effective operating models. Contact our experts to find out more.
About the authors
Dennis Bork
