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This is Not Your Father's Outsourcing Deal

By Steve Hall, partner

First-generation outsourcing deals, the former behemoths of the industry, are going the way of the dinosaurs. Today, very few enterprises are sourcing their entire IT environment to a single service provider. Instead, most enterprises have adopted a multi-sourcing model in which they seek best-of-breed providers to support specific components of their IT organization. While first-generation deals typically included a transfer of assets to the service provider, organizations today are shifting more and more to a hybrid-cloud environment, one that leverages a blend of on-premises data centers and private and public clouds. These changes have dramatically impacted contract terms and duration. The average duration of outsourcing deals has shrunk from seven years to three. 

Second-generation deals also have largely run their course. For the past half-dozen or so years, enterprises have sought and reaped the benefits of labor arbitrage, offshore delivery and Remote Infrastructure Management (RIM) solutions. But renegotiating these kinds of deals today typically results in more of the same. Most outsourcing contracts have been renegotiated multiple times with little more than lower rates or increased productivity as the best possible outcome.

Today’s deals—third-generation deals—reflect a whole new way of thinking. And, if done right, these deals will redefine outsourcing as a shared vision between the client and the service provider in which both share in the risk and reward of continuous innovation. To make the most of third-generation outsourcing deals, enterprises must, above all, anticipate the new realities of business and accomplish these Top 5 goals:

  1. Pave the way to the cloud. Enterprises will likely move 50-70 percent of their enterprise applications to the public cloud over the next three to five years. To support this transformation, outsourcing deals will need to incent cost variability and rapid movement to the cloud.
  1. Automate where possible. Automation of IT services will eliminate 20-40 percent of the contracted-for labor in the traditional outsourcing arrangement. Future deals should demand significant levels of automation and analytics in core IT and application maintenance functions.

  2. Define and prioritize agility. As the agile enterprise becomes the dominant operating model, enterprises need to make sure any deal they sign has a definite plan to nurture and sustain agile development, flexible demand and DevOps to accelerate the development of new digital products. The speed to innovation should be one of the top priorities of a third-generation deal.  

  3. Recast the role of IT. Today’s IT organization must consider the ways it can weave “a digital fabric” by taking advantage of emerging technologies and as-a-service solutions to serve the enterprise’s customers, employees, partners and providers. Assessing the entire digital value chain through third-generation outsourcing will unlock potential across the enterprise and position IT to become a revenue-generating engine and a value-added partner to the business. This new role for IT includes outsourcing deals that incorporate the latest solutions for product engineering, cloud deployment and digital insights gained from integrated analytics.

  4. Create connections that matter. Connectivity will be the name of the game. Billions of things are already connected around the world using Internet-of-Things capabilities and platforms. Just as the modern vehicle is an entertainment platform, a navigation platform, a revenue-generating platform (through Uber and Lyft) and a platform that is connected to other cars and traffic systems, next-generation outsourcing deals will make the value of connectivity real for the business.

ISG helps enterprises craft outsourcing deals that enable a whole new generation of benefits. Contact me to discuss further.

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