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Corporate IT: Don’t Let Your Sourcing Hurt Innovation

A new class of IT service providers offers some great corporate opportunities but many organizations don’t have the sourcing policies to take advantage.

The big enterprise IT service providers that corporate technology professionals deal with daily have been joined by a host of start-ups, cloud providers, consumer technology companies, and marketing agencies with technology ambitions.

While many of these new companies will merge, go under, or be acquired by the large providers, the variety of choice in areas such as partnership, analytics, mobility, integration, and digital marketing is only going to rise.

This generates opportunities for companies that are flexible enough to take advantage, but many will find their hands are tied by their sourcing policies.

The CIO at a large multinational recently told that they only work with a small group of enterprise partners so, if a small provider develops an interesting new IT capability, they “wait until one of our enterprise partners copies the innovation, or buys the vendor.”

They give competitors who work with the original provider a head start of months or years, and in a world where 75% of digital marketing capabilities go from pilot to mainstream in less than six months, it is hard to see this as a sustainable strategy.

Two Sourcing Goals

Today, many IT teams have two goals when managing sourcing partners:

1. Reduce sourcing cost and complexity: Companies consolidate their technology purchasing with a small number of enterprise partners to gain scale benefits, reduce management overhead and technical complexity, and (at least in theory) allow the chosen few to develop a better knowledge of the client.

Cost and complexity are further constrained by thorough evaluation processes and performance metrics and by insisting on detailed, standardized contracts.

2. Manage sourcing risk: Companies minimize risk or transfer it to the vendor by bringing in their legal and audit teams, introducing yet more assessments, and requiring additional contractual language.

These goals are important; no firm wants to return to the days of ad hoc, subscale IT purchasing, or vendors who perform so badly that they jeopardize their clients’ businesses.

But the main side-effect of managing cost and risk so rigorously is that vendor selection and management become slow and onerous for all.

How to Exploit Innovative Ideas Rapidly

To exploit innovative ideas rapidly, progressive companies have made their IT sourcing policies more flexible in three areas.

1. Lower the bar for small-scale experiments: Fail fast, fail cheap is the watchword for innovation in IT, but it is hard to fail fast if it takes months to get approval to work with a new vendor that offers an innovative capability.

Some companies define an alternative, lightweight process for evaluating vendors when the aim is a proof of concept or pilot project rather than large-scale deployment.

2. Make allowances for start-ups: Sometimes a small or nascent vendor comes up with a capability that would make a real difference to company performance and isn’t available from anyone else.

In these circumstances, one senior IT leader recently told us that although they insist that the vendor signs the same risk indemnification clauses as their other providers, they know that the vendor doesn’t have the resources to fulfil their obligations if the worst happens.

Rather than introduce flexibility tacitly, it would be better to strip down the requirements and introduce other mitigation steps instead. This approach may also be useful when working with large providers of consumer technologies who are reluctant to make allowances for enterprise buyers.

Another issue that arises with emerging providers is their commercial naivety. In extreme cases, they may even need to be coached on how to negotiate with and support a large corporate customer.

3. Treat cloud providers differently: Evaluating cloud providers creates a dilemma. On one hand, the security, performance and ongoing viability of the provider is more important than when buying traditional on-premise software, and as the provider probably relies on other providers for hosting, their security, performance, and viability must also be assessed.

On the other hand, a thorough evaluation is hard if the provider has been chosen by a business leader who may not even consider it an “IT vendor.” One approach to addressing this dilemma is to establish separate cloud assessment criteria and involve business leaders in overseeing the evaluation.

One company that does this finds that business leaders are more likely to engage with the process if they have a stake in running it, and if it isn’t perceived as governance by IT.