How to build IT innovation, flexibility into your IT outsourcing deals

Learn how to draw IT innovation from your IT outsourcing vendors and structure your contracts to cover new technology models like cloud and SaaS.

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Enterprise CIOs seeking IT innovation from their IT outsourcing providers must be prepared to give a bit, too.

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Specifically, CIOs must be willing to share their problems with IT vendors, get comfortable with emerging, innovative technologies like cloud computing and Software as a Service (SaaS), and structure their IT outsourcing contracts in a way that rewards vendors for their IT innovation efforts.

This advice, stemming from Forrester Research Inc.'s recent Services & Sourcing Forum in Chicago, is especially pertinent in the current economy, in which many CIOs are looking to innovate IT and restructure long-term outsourcing deals with an eye toward both cost savings and future growth.

Speakers advised that CIOs beware of locking themselves into long-term IT outsourcing contracts that do not provide the wiggle room to take advantage of new, more efficient and less expensive technologies -- particularly if they want vendors working on their behalf to stir up more IT innovation.

But doing so isn't easy. A Forrester survey of 710 enterprise IT decision makers in the second quarter of 2009 found that 38% complained of a lack of IT innovation or continuous service-level improvements by their IT vendors.

According to Sudin Apte, a senior analyst at Cambridge, Mass.-based Forrester, as IT sourcing professionals struggle to cut costs in a down economy, they are also determined to extract the maximum value possible from their service providers. However, many are unsure how to justify change requests and demand flexibility in their contracts.

Share your organization's problems with your IT outsourcing provider

Conference speakers said while IT shops sometimes expect their service providers to go the extra mile and solve their problems for them, vendors aren't mind readers. An organization that wants to draw IT innovation from its providers must be willing to undergo a transformation of its own, pushing the business to take bigger risks and transform its approach to IT outsourcing, said Dev Mukherjee, senior vice president and president of toys and seasonal items at Sears Holdings Corp. This includes getting over any mental roadblocks that prevent IT from openly discussing problems with an IT vendor -- or even several IT vendors at once.

The language
of IT innovation
Dev Mukherjee, senior vice president and president of toys and seasonal items at Sears Holdings Corp., said IT must speak in business terms if it hopes to innovate. Here, he translates buzzwords into "business messages."

"Cloud" → "No capital required." "SaaS" → "We have an app for that."
"BI" → "Info your way." "Outsourcing" → "Your flexible friend."

"I would rather have an innovative organization than just a risk management IT organization," Mukherjee said, adding, "I appreciate how much work it takes to get the lights on, but you're not getting credit for it."

Mukherjee advises making a list of the five biggest problems in not only IT, but also your entire organization. Then, go to your vendor management team members and ask them to address these problems with IT sourcing partners. It's important to ask your service providers not only what they can do for you, but what you should stop doing, he said.

To achieve IT innovation, you will have to recast the IT dialogue so the business side can understand it. "Talk the language the business wants you to talk," Mukherjee said. (See sidebar for buzzwords to avoid.)

Eric Cohan, director of IT procurement at Dell Inc., agreed, saying it's important to speak openly with your vendors about your organization's IT problems. In other words, "take the mystique out," he said.

Structure your outsourcing contract with an IT innovation margin for cloud, SaaS

It's unrealistic to expect service providers to provide IT innovation on your organization's behalf for free, so be prepared to structure your IT outsourcing contracts to pay for this progress, speakers and attendees said.

NASA, for example, is revamping its IT sourcing strategy spanning 100 contracts and 10 NASA locations. As part of the process, IT has implemented fixed-price contracts for stable, utility-based services and implemented a cost-incentive model for larger, transformative work that rewards maximum vendor flexibility, said Jonathan Pettus, director of NASA Marshall Space Flight Center's Office of the CIO.

NASA is also including emerging delivery models such as cloud in the requests for proposals it sends out for services for its five IT towers -- desktop services, enterprise applications, Web services, network services and data center services.

"It's given vendors the opportunity to share other innovations they'd propose," Pettus said.

Stephanie Moore, chief marketing officer at UST Global Inc., an outsourcing services firm, said one of the key challenges customers face is fear of being "hoodwinked" when paying for innovative services like cloud or SaaS.

If we push [vendors] to
the edge,
we'll sacrifice innovation.

Miguel Medina
manager of global procurementMattel Inc.
Paying for managed or outcome-based services is difficult, Moore said, as it's hard to know what qualifies as a good deal, how to validate what you've spent and what metrics to use in validating and payment. Thus, she stressed the importance of trust in a managed service relationship.

Still, opinions among attendees differed on the best payment model for extracting IT innovation from providers.

Courtney McCoy, manager of worldwide preferred vendors at Cummins Inc., a 37,000-employee company that designs, manufactures, distributes and services engines and related technologies, said he believes a lack of innovation can cost a company in the long run.

At the moment, McCoy is looking to improve IT innovation while also procuring a good price by moving to a fixed-bid model for some IT services.

"Now we can say [to the vendor],'You're in here, be creative and bring something to the table,'" he said.

But Miguel Medina, manager of global procurement at Mattel Inc., a toy company with 25,000 employees worldwide, said he believes focusing on a set price could lead to problems.

"If you're concentrating on cost, there's only a small amount of margin," he said. "They're not going to come back with the dashboards that are going to allow you to sell to your business."

IT often faces a problem when the CFO or others on the business side want to see more savings. However, "if we push [vendors] to the edge, we'll sacrifice innovation," he said. "The CFO is saying, 'I don't need innovation. I need [to cut] cost.' But I think that premise is flawed."

In managing relationships, it's important to understand costs on both sides, look toward future gains and reward vendors appropriately for those gains, Medina said.

"If you improve, that's the whole point," he said.

Let us know what you think about the story; email Rachel Lebeaux, Associate Editor, or follow her on Twitter @rlebeaux.

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