The Evolution of Sourcing
The business-outcome focus of today’s CIOs creates new sourcing options and savings.
The role of IT has grown remarkably over the last few decades, wholly reinventing what businesses do, and how they do it. That transformation continues today at an accelerated rate, thanks to technologies such as cloud computing, big data, social media and mobility and the trends they enable, including BYOD and as-a-service models.
Those changes have had a clear follow-on effect on all parts of the organization.The IT department, which once focused on the nuts and bolts of a company’s infrastructure, now has primary responsibility for turning company strategy into reality.
This paper examines the evolutionary path sourcing has followed as it reacts to changes in business needs and available technologies. It considers the new business models and options available in sourcing today and how these features can support the new business-outcome focus of today’s IT function.
MEETING THE CIO’S CHALLENGE
IT has always had to contend with the fast pace of change throughout the IT stack. Hardware has taken on more advanced and complex management options. Software architectures and products spring onto the scene, mature and fade — to be replaced by the next wave. Every aspect of IT continues to change in rapid cycles, a fact of life that frequently leads to a gap between an IT department’s in-house skill set and the resources it needs.
Supplementing staff with external resources was the first answer to the challenge: Sourcing 1.0. Viswanathan says the original sourcing model was simple: “Twenty years ago, the concept was, ‘Your mess for less.’ We used to take over a company’s application systems in their entirety and try to do them at a cheaper cost.”
John Martoglio, global applications, cross-sell and transformation lead, says it’s a model that caught on quickly because it addressed a specific and clear need. “It’s a very tactical model. Let’s find the right set of skills at the right cost point and bring them on board at some rate per hour, per month. Some contracts were established on a consumption basis, but more often you had a set amount of capacity and you’d either use it or lose it,” he says.
Sourcing 1.0 is still frequently used by companies, but Martoglio says it does have some drawbacks: “In a Sourcing 1.0 model, all of the risk is on the customer, meeting development deadlines or keeping systems and applications running. The sourcing supplier is just providing resources, and if you budget 1,000 hours to complete a project and use 1,500, the customer picks up the tab.”
One of the most visible elements of sourcing’s first wave was the use of offshore resources. “That aspect of sourcing resulted in significant savings,” Viswanathan says. “We moved work to India and other low-wage countries and passed on the cost savings through labor arbitrage to the clients. This resulted in savings of as much as 40 percent.”
Sourcing 2.0 introduced a new level of commitment from providers — and new savings as well. This model also saw the introduction of more shared risk between customer and provider, a feature that addressed the key weakness of Sourcing 1.0. “The next phase of sourcing was more outcome-oriented and typically of a longer duration, because vendors needed more time to acquire the skills they needed,” Ramaswamy says. “They also felt they could assume more of the burden because they had gained experience from similar engagements with other clients, and brought some standard tools or processes to the assignment and applied them in a client-unique way.”
Martoglio says that sharing more of the risk also meant sharing the gain: “In a Sourcing 2.0 model, a provider such as CSC commits to a program on a fixed-price basis, and we guarantee improvements over time. We enter into risk-sharing, gain-sharing arrangements. If we are willing to be penalized, we also feel it is appropriate to share in the gain if we achieve agreed-upon objectives.”
Today, sourcing is changing again in response to the same trends and technologies that are affecting the wider business front. With IT at the core of every important business strategy, the company’s view of IT has changed.