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IT outsourcing year 2015: major changes ahead

2015 was the year that IT outsourcing companies welcomed standardization, outcome-based contracts grew, while RFPs dimmed its pace.

2015-12-29 09:54:55

Customers embrace standardization

Companies did, in fact, become less interested in customer solutions and the intensive infrastructure required to support them, writes CIO magazine.. "They largely see standardization as a way to drive productivity, efficiency and maintainability of solutions," says Marc Tanowitz, managing director of outsourcing consultancy Pace Harmon.

"Service providers have clearly moved away from asset based deals, which is forcing buyers to increasingly invest in optimizing their IT infrastructure to meet the needs of their stakeholders. What's more, cloud providers began to offer more protections and options in their standard agreements, explains Rebecca Eisner, partner in the Chicago office of law firm Mayer Brown. "Companies embraced standard offerings in 2015 in large measure because providers began to embrace the needs of big company customers. This is particularly apparent for core functions for which cloud terms have historically been ill-suited."

Renegotiation reigns

Companies didn't just renegotiate at the end of their outsourcing deals, they started re-examining them mid-term, says Dan Masur, partner in Mayer Brown's Washington, D.C. office. "The renegotiations have been driven in part by re-solutioning to bring in new technologies, retrofitting to add digital technologies, restructuring to adopt outcome or output based pricing, reconciling the contract to changing realities, and re-sourcing components of the services to specialized providers."

This behavior, however, was more stop-gap than strategy, says Bill Huber, managing director with outsourcing consultancy Alsbridge. "The market has shifted dramatically, and re-competes have demonstrated the potential to unlock significantly greater value at this juncture than can usually be achieved by a straight renegotiation, whether or not the renegotiation includes re-scoping."

The deal-per-customer ratio continued to climb. "Clients are becoming increasing comfortable with best of breed suppliers and multi-provider environments," says Tanowitz of Pace Harmon. "Driven by popularity of the cloud, standardization allows clients to ‘plug in' or ‘unplug' providers easily, and many companies have moved away from deals with a heavy asset investment by the provider."

However, points out Information Services Group (ISG) partner Steven Hall, "many enterprises are still challenged with governing in a services-based environment and have yet to modernize their governance organizations. We continued to see rapid adoption of SaaS solutions;

workloads/applications moving to public cloud environments; and the implementation of bi-modal IT models, which all require advanced governance capabilities seen in product lifecycle management."

The cloud comes down to earth

Finally. "In 2015, cloud computing reached the end of the beginning," said Paul Roy, partner in the business and technology sourcing practice of Mayer Brown. "Cloud computing has become and is now a routine part of outsourcing conversations and solutions." Public, private and hybrid solutions were all on the table. "At this point, enterprises' forward looking investments almost always include cloud infrastructure for the apps they are supporting," says Pace Harmon's Tanowitz.

The sourcing decision becomes data-driven

"2015 saw the continued rise of Technology Business Management and TBM software providers," says ISG's Hall. "IT organizations are starving for actionable intelligence, based on their data, to help them make sound investment decisions." Tanowitz argues that sourcing has always been data driven: "data and analytics are essential to ensure sourcing decisions are grounded in a solid business case and also to ensure that the procurement process remains objective and audit-proof. We expect this to continue to be the case, even for emerging technologies and new and innovative services."

Outcomes become the name of the game

If only. "Outcome-based sourcing continues to face headwinds," explains Huber of Alsbridge. "Progress is being made, but the fact is that outcomes are difficult to define in a way that fits traditional contract structures, and they take time to get right. This is going to take more work by smart, creative deal-shapers before outcome-based sourcing can truly replace traditional input-based models as the predominant sourcing model." So far, the best we can offer is that some deals have shifted from input-based tooutput-based, says Brad Peterson, partner in Mayer Brown's Chicago office. "Pricing on outcomes like cash collections looks like a true answer but—like most true answers—takes great diligence and skill to achieve and remains relatively rare," he explains. "However, the move to output-based pricing is an important move away from the typical pricing based on inputs and a step closer to a true business outcomes measure."

The business takes over
Business leaders did play a bigger role in procuring IT services—particularly cloud services—than in the past. However, "IT remains vital for the integration of service provider solutions and for effective security," says Eisner. "The business has certainly taken over the digital agenda in many organizations and SaaS solutions, such as HR technology, are being made outside of IT," says ISG's Hall. "But, many CIOs have stepped up this year to own the digital agenda for their enterprise."
And odds are IT may become even more integral to future sourcing decisions. "Cybersecurity and interoperability trump unfettered business-centrism as the Internet of Things adds another layer of complexity and vulnerability," says Huber Alsbridge.

The RFP fades
"The RFP continues to be an essential piece of the competitive procurement process, particularly for complex products and services," says Tanowitz of Pace Harmon. "However, we are seeing more collaborative approaches to RFPs, such as co-developing statements of work and creating more solution-oriented approaches to RFPs that lend more flexibility to the process and allow suppliers to offer innovative solutions."

While the RFP remained entrenched, it did not go unquestioned. "The RFP has not gone away, but the old templates have grown stale, and sourcing processes, including RFPs, need to become more adaptive," says Alsbridge's Huber. The tried-and-true approach never worked well for emerging technologies, says Peterson of Mayer Brown. "There, RFIs, RFSs and Proof of Concept projects work better. However, the RFP has remained a trusty tool for traditional outsourcing deals where it remains important to communicate requirements and obtain comparable information from potential service providers."

Dawn of the cloud robots

"We've certainly seen an uptick in conversations about robotics process automation (RPA), but the reality is that cloud robots are still little more than Excel macros at this point," says Tanowitz. "Providers discuss cloud robots frequently and the benefits can be meaningful in terms of productivity gains, but we haven't seen clients take advantage of the technology in a meaningful way." Automation is advancing, says Brian Bodor, partner in the global sourcing practice of Pillsbury, "but we have yet to see the ‘rise of the machines.' We expect to continue to watch this trend in 2016 and beyond."
Where robotics and automation have taken hold is not cloud computing, but business process outsourcing, says Roy of Mayer Brown.

Supplier risk takes center stage

Outsourcing customers did not get serious about supplier risk overall, but they did get hyper-focused on cybersecurity. As a result, clients paid more attention to service location in signing deals, says Eisner of Mayer Brown. "We generally see supplier risk conversations ebb and flow with current events," explains Pace Harmon's Tanowitz. "Rather than preparing for supplier risk based on geographic instability or events, we're seeing enterprises preparing more holistically for disaster response and recovery, including assessing cybersecurity risks and the protection of customer data that may be in the hands of their supplier.


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