Tearing Up the Traditional Outsourcing Contract
By Vinod Chandran
Companies today find themselves in an almost untenable position. Business cycles are much shorter, making long-range planning a thing of the past. Changes in technology and consumer expectations are driving companies to adapt, innovate and transform at an unprecedented pace. Simultaneously, the global economy continues to languish, so there is little easy money to fund necessary innovations.
Outsourcing may not at first blush seem to solve this conundrum, and certainly the current IT outsourcing model has little to offer in this regard. That’s why we will see CIOs completely rethinking their relationships with suppliers, starting with the contract.
The recession was a wake-up call for the industry. A lot of outsourcing contracts signed before 2006 did not allow for the dramatically changing revenue profile that many Fortune 1000 companies experienced during the 2008 downturn. Nor did those agreements anticipate other critical developments: shorter business cycles; the evolving business models spawned by the rise and confluence of social media, mobile and cloud computing, and business analytics; and the consumerization of IT, as employees dumped company BlackBerrys in favor of their own iPhones. Trapped in rigid and traditional sourcing arrangements, CIOs have become increasingly frustrated by their inability—and the unwillingness of incumbent IT providers—to respond swiftly to these important changes.
Consequently, CIOs will increasingly demand sourcing contracts that allow for flexibility and agility. In addition to provisions for contingencies and variable conditions, the contracts will require greater transparency and alignment between the service provider and the customer. The five- or ten-year fixed, “black-box” contract will become an artifact of the past. Contract language will shift from “no” to “now” as CIOs reject inflexible providers and monolithic contracts in favor of partners willing and able to respond to new situations on the fly.
Next-generation contracts will eschew fixed-cost arrangements and instead provide for utility style, pay-per-use services, allowing companies to scale up or down almost on demand. Service agreements will move away from an exclusive focus on Service Level Agreements (SLAs) to a requirement that providers deliver business value, innovation and a high-quality customer experience. More and more CIOs will expect their partners to help them not only control expenses but also invest the realized savings in the creation of new capabilities.
The changing nature of the outsourcing contract has structural implications for CIOs and their internal organizations. Under SLA-only agreements, outsourcing governance focused almost exclusively on whether delivered services were operating smoothly. The new agreements will require a deeper, more collaborative relationship between CIOs and their service providers, as well as between IT and the rest of the business. But collaboration doesn’t just happen, and many IT functions aren’t equipped to capitalize on it. As a result, enterprises will restructure their IT organizations to better encompass this shift from managing SLAs to enabling service providers to drive innovation and value creation. We are already witnessing customers investing in innovation councils that bring together the business, the IT organization and the service provider to drive a business-focused innovation agenda.
Ultimately, CIOs will have to re-envision not only their outsourcing relationships and the contracts that govern them but also their own role. We’ll see CIOs focusing less on the nitty-gritty of IT operations and more on the core business issues of satisfying customers and generating revenue. As technology becomes increasingly ingrained in every aspect of business operations, CIOs will be the catalysts of this shift. They’ll orchestrate the many moving parts of new collaborative relationships. In this role, the CIO will need a dependable partner who can rapidly execute plans that will drive business change.
About the Author
Vinod Chandran is senior vice president and head of North America Infrastructure Management at HCL Technologies.