Gartner Outsourcing & Strategic Partnerships Summit

Analyst Q&A

Analyst Q&A with Linda Cohen, Gartner Research VP Distinguished Analyst and Conference Chair

We recently sat down with Linda Cohen, Conference Chair for Gartner Outsourcing & Vendor Management Summit, to discuss key trends and developments impacting Sourcing Executives and Directors and their organizations, right now. Here's what she had to say.

Q: How has last year's crisis impacted outsourcing today?

During the past year, organizations have been under pressure to do more for for less, and that's definitely impacted their sourcing strategies and activities. The result: a heightened emphasis on cost containment with more and more organizations adopting all forms of outsourcing – including global delivery models, cloud-services offerings, and other alternative delivery options. But guess what's happened? A lot of problematic deals have resulted from this extreme emphasis on cost. Why? Because a purely tactical focus too often obscures strategic objectives.

Q: What's the most important takeaway from 2009?

Organizations have to realize that last year's cost-dominating decision making needs to embrace a more holistic view of what it means to be cost competitive – especially as we move from crisis to recovery. That's why – right now – you should be evaluating how cost of services impacts quality, value, relationship viability, scalability and sustainability of business value – and not just the bottom line.

Q: What are your recommendations as we move forward?

Although cloud services, new alternative delivery models – and yes, even the economy – have changed the face of outsourcing, we still need to improve the basics and diligently apply best practices. The multisourced environment – in which so many of us now operate – makes that even more imperative. From the very start, you need to make sourcing decisions based on a solid business case and a sound sourcing strategy, not just cost containment. Don't be afraid to avoid hasty, tactical sourcing decisions that will inevitably cause you long-term pain. It's the best way to mitigate risk.

Q: But if someone has a deal already in play, what should they do?

Those who have succumbed to cost-only-focused outsourcing in the past need to correct course by renegotiating their deals to ensure full value from existing outsourcing relationships. And if you're approaching new deals, be careful that you don't confuse the lowest-cost bid with the right deal. Being cost competitive is all well and good, especially when it drives efficiency and standardization that benefit you, the organization. However, competitive bidding can be unrealistic for the provider (How long can they deliver at that price?) and ultimately, prove risky to both you and them.

When you're structuring outsourcing contracts, be sure to build in the kind of flexibility that allows you to move from cost control to enhancement and innovation. Economic shifts are bound to happen during the life of a multiyear outsourcing deal. You'll need to respond quickly and nimbly.

Q: What should you be aware of when it comes to cloud sourcing?

It's pretty clear now that cloud services models will change what has been for decades a stable delivery approach – with in-house management of services, highly customized architectures and solutions, and outsourcing and offshoring as the most important approaches. Over time, most aspects of corporate IT will be transformed by new delivery models and cloud-based approaches. Please, don't get me wrong. In-house managed IT systems and traditional outsourcing deals will continue to play a significant role for a long time. But, right now, it's vital to determine what roles, responsibilities, structures and processes will be needed as these new models are incorporated into new IT operating models and sourcing strategies. Bottom-line: Cloud-services hype has started to dissipate, and the serious work of validating cloud offerings has begun in earnest.

Q: What about Global Sourcing?

Because of the global economic downturn, more and more organizations turned to offshore locations as a proven method to reduce cost. What's more, those who were already experienced at it expanded their reach even further. So what we're seeing in 2010 is a demand landscape that is far more challenging. Buyers are demanding multi-country options, a broader range of globally delivered services and a shift toward alternative delivery models, outcome based relationships and not just bodies. Case in point: Indian-centric providers are now showing up as cloud providers. In fact, large offshore players are increasing their focus on cloud service and alternative delivery models to help customers migrate into these new, low-cost services.

Q: How have the pressures of cost-containment impacted vendor management?

We're coming out of a period when many organizations underinvested in the management of their outsourcing service providers. And the problems it has caused are still with us. On the other hand, many organizations realize the importance of vendor management. Yet when they build a business case, they don't account for a disciplined approach to managing outsourcers. Instead they spread vendor management around their organization like confetti. Or they rely on the contract as the tool for managing vendors. If you're on that path, I say, "Stop, right now." This is what you need to do instead:

• Formalize the activities and responsibilities for vendor management in your sourcing strategy.
• Map out the responsibilities for key functions, such as contract management, performance management, financial management, relationship management, risk profiling and risk management.
• Figure out which vendors are the truly strategic ones and focus your attention and higher value resources on them.

Analyst Q&A with Ben Pring, Gartner Research VP and Frank Ridder, Gartner Research Director

We recently sat down with Benjamin Pring and Frank Ridder to discuss key trends surrounding alternative delivery models and cloud sourcing. Here's what they had to say.

Q: What's happening in the outsourcing marketplace right now when it comes to IT services?

FR: There are many positive signs that organizations are looking to IT and IT services to enable growth. Although the term "cautiously optimistic" is still widespread, the potential for IT and outsourcing to help organizations make the critical turn to growth is greater than ever.

BP: As economies and businesses reposition for growth, competitiveness enabled by IT and sourcing strategies will be a necessity. Last year, more organizations became interested in and actually used new delivery models. In fact, remote infrastructure management (RIM), infrastructure utility, SaaS, business process utility (BPU) and cloud computing emerged as the most important new delivery models.

Q: What about the "price is the bottom line" mentality?

BP: The good news is that times are changing. And organizations are just now starting to shift from cost-driven decision making to a more holistic view of what it means to be cost-competitive. By cost-competitive, I mean evaluating how cost of services impacts quality, value, relationship viability, scalability and sustainability of business value. So if you're looking to adopt new alternative delivery models or new cloud-based services, be clear about how they can help you achieve cost objectives while suitably supporting business needs

Q: What should we expect moving forward?

BP: Cloud computing hype isn't what it was a year ago. It's starting to fade. And now is the time to get serious. Does it make sense for you? Service announcements from major players will intensify, (especially the infrastructure and application areas) as well as from startups, (especially in the application and process area). There will also be announcements from unexpected providers. At the same time, issues from security to performance will pose reality checks for the business application of cloud computing.

FR: I'd like to add my two cents about cloud. It's becoming clearer that cloud computing models are changing what has been for decades a stable delivery approach, with in-house management of services, highly customized architectures and solutions, and outsourcing and offshoring as the most important approaches.

Q: What does that mean for corporate IT?

FR: In the long-term, most aspects of corporate IT will be transformed by new delivery models, including cloud-based approaches. Realistically, in-house managed IT systems and traditional outsourcing deals will continue to play a significant role. However, it's time to start planning for the future. The imperative for corporate IT is to determine what roles, responsibilities, structures and processes will be needed as these new models are incorporated into new IT operations models and client sourcing strategies. Keep in mind that the transformation will be gradual. Customized process and applications, as well as in-house managed infrastructures, will be with us for a very long time. But it's abundantly clear that the trend toward one-to-many industrialized services will define leading-edge IT services.

Q: But what about right now? What should prospective buyers of cloud sourcing consider?

FR: Buyers should understand the demands of their end users before they decide to leverage cloud services over traditional services. If the organization is not ready to leverage a high standard, or applications, through an Internet browser, then the change might be big and the business case not that successful. Organizations that need full customizable solutions, or that don't require a great deal of flexibility, might not be the best candidates for cloud services today.

BP: And I'd like to add a few thoughts about cloud sourcing providers. New providers aren't necessarily a known quantity. And they typically come from the consumer side, like Amazon and Google. They still need to prove that they can work successfully with large enterprise organizations. They just don't have the experience in managing and responding to the dynamics of large organizations (e.g., the ever-changing demand pattern). The result: less mature contracts, relationship and support models.

FR: That's right. So even though there are advantages like high contract flexibility and "speed to solution," you need to know the answers to questions like these:

• How can I integrate cloud solutions into the rest of my IT?
• Can I sign a standard contract, and if so, what are the risks?
• Can I live with a low-degree of customization?
• Will the security cloud providers offer match my policies and needs?
• Will the solution meet the regulatory demands of my industry?

Analyst Q&A with Christopher Ambrose (CA), Gartner Research VP and Helen Huntley (HH), Gartner Research VP

We recently sat down with Christopher Ambrose and Helen Huntley to discuss key trends surrounding vendor management. Here's what they had to say.

Q: Why is vendor management so important?

HH: We know for a fact that organizations are relying on more suppliers than ever before. If you have more suppliers and vendors supporting your ecosystem, and if you don't manage them correctly, then your business is at risk. Yet, too many organizations continue to underinvest in the management of their outsourcing service providers. When it comes to building a business case, they don't account for a disciplined approach and instead spread vendor management responsibilities and activities around their organization.

Q: So vendor management is more than just dealing with contracts?

HH: Absolutely. Organizations that spend months building and negotiating contracts, especially those that contain significant performance metrics, often rely on the contract as the tool for managing the vendors. They think it's going to self-operate. But to maintain proper control and get the value you're expecting, you still have to have skin in the game. Oversight is critical.

Q: In a nutshell, what does vendor management entail?

CA: We like to boil it down to these four areas: contracts, performance, the relationship and risk. From organization to organization, vendor management programs will certainly vary. After all, everyone is operating at a different level of maturity. But as a discipline, vendor management should have these activities at its core: managing the commercial terms and conditions of the contracts, keeping vendors aligned with the organization's business goals, managing and optimizing costs, and assessing and mitigating risks when using vendors.

Q: But not all vendors are alike.

CA: That's right. Too often, the focus of vendor management has been on standard metrics and management processes across all vendors. Many organizations are now categorizing their strategic vendors, separating those considered critical to their business from those delivering more commoditized products and services. Strategic vendors require different levels of vendor management attention than vendors supplying tactical support.

HH: When you segment vendor relationships you can more easily prioritize vendor management fundamentals. For instance, you'll quickly assess your organization's dependence on the supplier and whether or not that vendor is easily replaced. You'll know how much money your enterprise has invested in the vendor's products, and identify the risks of walking away. Once you have the answers to those questions, you'll know where to spend more time and effort.

Q: What about cloud computing and its impact on vendor management?

CA: As the popularity of cloud-based IT services and solutions grows, vendor management will become more complex. Why? Because business units will assume a greater role in buying decisions. So the key here is to ensure that strong vendor management controls are in place to help business units manage sourcing and vendor relationships consistently.

Q: How do you get started with vendor management?

HH: It comes down to these three steps:

• Formalize the activities and responsibilities for vendor management in your sourcing strategy.
• Map out the responsibilities for key vendor management functions, such as contract, performance, financial, relationship and risk management.
• Determine which vendors are truly strategic and which are not, then focus more attention and higher-value resources on those suppliers.

Vendor Management Framework is an excellent tool to improve the value your suppliers deliver to your enterprise. With it, you can map out each of the critical steps I've mentioned and identify those activities needed to manage vendors more effectively.

Analyst Q&A with Cathy Tornbohm (CT), Gartner Research VP and Robert Brown (RB), Gartner Research VP

We recently sat down with Robert Brown and Cathy Tornbohm to discuss key trends surrounding Business Process Outsourcing (BPO). Here�s what they had to say.

Q: How has the economy affected BPO adoption?

RB: Worldwide, the market conditions for BPO from 2009 to 2010 was one of extended contracting cycles, which meant that the number of new deals signed through the end of 2009 was slower than anticipated.

As a result, we now expect the BPO market to rebound to 6.6% annual growth in 2010. Deals that were "put on ice" in 2009's recessionary environment are now being signed, and net-new deals are coming to fruition. Expect these opportunities to increase in tempo and volume through 2010. (But keep in mind that any major economic disruption will impact BPO cost assumptions.)

Q: What�s been motivating buyers of BPO services?

RB: Buyers have been looking for "quick wins" in tactical BPO areas that can quickly improve their cost basis throughout the recession. This short-term strategy, however, may cause enterprise disruption in the long term, especially if organizations outsource rapidly, without mitigating risk. Other businesses will find that they have already cut processes severely, and they will begin to utilize BPO to build long-term plans for competitiveness. For companies that are looking to monetize their assets, BPO will be a quick way to do so.

Q: What about global delivery conditions for BPO?

RB: The larger economic picture is tied to global delivery conditions for BPO in a couple of important ways. In the medium term, we expect greater "heat" on compliance (internal and regulatory, such as in the banking industry), especially with the credit turmoil and financial mess that the global economy has witnessed.

The current frenzy to cut costs could lead to a cascading offshore effect, in which BPO buyers and suppliers look to ever-farther frontiers of the globe to extract maximum benefit of labor arbitrage.

Q: What's the difference between BPO and Business Process Utilities? And what's the impact of cloud computing?

CT: The difference between "traditional" business process outsourcing (BPO) and Business Process Utilities (BPU) is that BPU providers design, own and deliver the process and the platform, and the process is, therefore, highly shared and standardized across the client base.

BPU could be seen as "business process outsourcing as a service" or "business process outsourcing on demand." As alternative delivery architecture for BPO services, BPU adoption continues to rise among buyers globally. It is being purchased both from "niche" specialist BPU vendors as well as from established BPO ones. What�s more, vendors have started to aggressively offer cloud-sourced process offerings in conjunction with established one-to-one BPO service contracts.

In many respects, BPU mirrors the trends in the software as a service (SaaS) marketplace, although it is not as advanced and as developed as SaaS. The difference between SaaS and BPU is that with BPU, the buyer is receiving not only an application (as a service), but a process offered as a managed service, too.

Q: How do service-level agreements come into play with BPU?

CT: A key determinant of BPU services will be its service level agreements. SLAs for BPU involve business outcomes like process turnaround times, levels of accuracy, or client satisfaction. (Whereas those of SaaS typically feature technically-focused SLAs like platform availability/uptime and security).

While most BPU services are enabled by SaaS-like cloud platforms that automate process transactions through advances in one-to-many software technologies, some do offer scalable managed services delivered by humans as well.

Q: What about vendor management? Is it much different when it comes to BPO?

RB: The management of business process outsourcing (BPO) delivery has much in common with IT Outsourcing. But there are differences that must be accounted for in the operation of the retained team. CIOs, Sourcing Managers and Business Process Executives must understand the key challenges and apply best practices in BPO Vendor management to ensure outsourcing success. We recommend the following:

• Establish or adapt your sourcing management focus for the specific needs of business process outsourcing, but do not create a fundamentally different governance or sourcing management approach.
• In business process deals, good relationship management is as important as good contract management. You�ll want to invest the time and effort to keep trust and control balanced in your BPO initiatives.
• The defining difference between ITO and BPO is the broader range of constituents involved in a business process engagement. Some of whom will have little knowledge of outsourcing. Involve all interested and affected parties from an early stage, and throughout the deal, to ensure that expectations are set and satisfaction levels maintained.

Q: Is there any other any other advice you have for prospective buyers of BPO services?

CT: Here are some simple guidelines to follow:

• Challenge your providers to articulate the value of proposed innovations in terms of business benefits and tangible bottom-line effects.
• Develop a formal innovation plan process and ensure that the plan is part of the outsourcing contract.
• Be sure to collaborate with your service providers.