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Agile is being rapidly adopted as the lean alternative for the waterfall systems development methodology. It stands for multi-disciplinary teams, very close collaboration with the business, and short delivery cycles. We often hear CIO’s saying “outsourcing is not the solution here, we need tight multi-disciplinary collaboration, business proximity, and functional and technical skills are again “core” to us”.

So the question is: with Agile, is it back to insourcing, or can we still have managed services and strategic collaboration with the large SI providers? And how? In this article, we explore the Agile model from a sourcing options point of view.

Introduction to Agile

Agile methodology is a lean way of working to deliver valuable solutions to the business. The Manifesto for Agile Software Development is generally agreed to be based on twelve principles:

  1. Our highest priority Is to satisfy customer through early and continuous delivery

  2. Welcome changing requirements even late in development.

  3. Deliver working software frequently (weekly or monthly)

  4. Business people and developers work together daily

  5. Build projects around motivated individuals. Provide them the environment and support they need and trust them to get the job done

  6. The most efficient way to convey information to your development team is face to face conversation

  7. Working software Is a primary measure of success

  8. Agile process promotes sustainable development. Sponsors, developers and users should maintain a constant pace

  9. Continuous attention to technical excellence and good design boosts agility

  10. Simplicity—The art of maximizing the amount of unnecessary work not done is essential

  11. The best requirements, architecture, and design emerge from self-organizing teams

  12. At regular intervals, the team reflects on how to become more effective and tweak behavior accordingly

What is also relevant for the sourcing aspect: in agile, teams are more stable, and work flows through the stable team at constant pace. This is different than in waterfall, where teams get formed and ramped up and down significantly, based on project (stages).

How to source for agile

So sourcing in agile means sourcing teams, not projects.

The need for proximity to the business, face to face interaction, long term stability of teams, IT more core to the business than before, and shorter delivery cycles, make in-sourcing a very suitable strategy.

On the other hand the large SI service providers have adopted agile and have developed deep skills at scale and strong assets by industry that are not easy to match. Leveraging one or a couple of large providers and committing them to success still remains a valid and viable option. This can range from “managed capacity with SLA” up to a mature partnership with significant skin in the game from the service provider.

Both in-sourcing and working with external partners are valid options. Your choice should depend on your company culture, your maturity and availability of relevant skills in the market.

The different sourcing collaboration models form a continuum, ranging from full in-sourcing up to external sourcing with varying degrees of accountability:

  • Agile – In sourcing

In-sourcing, optionally with some external staff augmentation

  • Agile – Managed team capacity

Mixed teams internals/externals, but with preferred providers on SLA based contracts

  • Agile – Strategic partnership

Mixed teams internals/externals, in a long term deep strategic relationship with the service provider, sharing in the pains/gains for achieving success.

Sourcing option #1 – in-sourced augmented with external staff

You take full control internally and build internal skills across all competencies. You grow and train talent and skills across all aspects: business/functional, technical, development, operations, scrum masters, etc.

To leverage the external world, you can use staff augmentation: complementing internal staff with external skills where needed. You go for best-of-breed on the externals: you handpick each profile and will have a team of best-in-class people. You source from the large providers, but also from niche companies that can offer niche skills, and freelancers.

With staff augmentation you don’t get the very best out of the large, global providers, as with them you buy overall quality and result, rather than always the best individual CV’s. But there are mid-size and some large providers that do offer this model as their core.

Sourcing option #2 - Managed team capacity

Many organizations also under agile continue to source externally. External sourcing gives you the best access to ever evolving skills and that at the moment you need it, and access to assets and experience across all technologies and all domains.

If you choose for external sourcing, then it makes sense to consolidate to a fewer number of service providers, so you have scale, you have senior contacts, you have leverage /power because of the volume and senior contacts, the company knows your culture, the people know your business and know your IT systems, etc.

“Managed team capacity” with one or a couple selected service provider(s) gives you a model where you commit the provider(s) on success also in agile.

  • What you “buy” is “skilled people that form a highly effective team”. As said, in agile you cannot buy “fixed scope for a fixed price”

  • You measure success of the team through a SLA/KPI framework typical to agile:

  • SLA/KPI related to agile team performance: NPS (Net Promotor Score), velocity (amount of work done in a sprint), % run vs change, % automation, etc.

  • SLA/KPI on provider on-boarding resources: success rate in timeline finding and onboarding of new resources, right proficiency levels of the resources, long term stability of key resources in the team, etc.

  • You “pay” a fixed price for a skilled set of people (rate card based) with fees at risk related to achieving the SLA/KPI. A variant to fees at risk is pain/gain sharing. So not only there is a risk, but there is a gain if the provider and the team overperform, which gives more incentive to the provider and the teams.

This model requires that you work with one or few service providers only (not with many). E.g. you have defined that for all work in sales & marketing you work with provider ABS, and provider XYZ is secondary for that domain. The provider in a given agile team will source various roles, across different levels of responsibility. In this way the provider has a real impact on the performance of the mixed team, and therefore the provider can accept the SLA/KPI on the performance of the team.

Sourcing option #3 - Strategic partnership

Companies that are mature in sourcing and that have a longstanding relationship with a service provider, can evolve to a “strategic partnership”. It is a co-operation that highly “engages” the service provider (taking ownership for success at his client) and is typical for longer term co-operations where trust has built. It comes with senior people (leadership) of the provider that are engaged at the client (e.g. strong relationship of provider senior staff with senior business stakeholders). It comes with significant volume of provider staff being present at this client (scale), across different levels, leadership, managerial, functional, technical.

If above characteristics of partnership are present, then below co-operation models can apply:

  • The characteristics from the previous model apply, e.g. fees at risk based on SLA/KPI that measure the success of the team and of the provider in timely onboarding of qualified people.

  • The strategic angle can be “a co-sourcing model, mixed teams that operate the clients’ one global methodology for agile” (this model has been implemented by some large Financial Services companies that operate large IT delivery shops). All resources, internal and external, are trained on the clients’ one global methodology for agile. All resources are evaluated/ranked on a common resource proficiency model (P1, P2, …) and it is clear for each individual what proficiency level he/she is. In co-sourcing the provider will be present at the client in senior positions (co-managing) and across all levels in the teams. Commercially it is simple: rate card per role/skill and per proficiency level. But commitment-wise, the provider takes a lot of accountability.

  • The strategic angle can also be on “committing to successful outcome of the program”. The partnership agrees on a certain vision/objective that needs to be achieved (e.g. “enabling an omni-channel business model through newly build SaaS CRM application”). Client and provider leadership will help navigate to get to that vision. All levels of the partner are engaged to achieve the outcome (e.g. business liaison by senior people of the provider). The provider can have a financial pain/gain linked to achieving the objective.

  • Larger organizations often apply SAFe (Scaled Agile Framework). Under SAFe you operate many different small define/build/test teams, but there is also over-arching teams such as the product management team, the release management team and the program/portfolio management teams, to ensure the program and architecture views. In successful strategic partnerships we see the external provider having presence in all these teams. The providers have impact across all layers and in this way can take co-accountability for the overall result of the program.

  • Above advanced co-operation models (strategic co-sourcing, committing on achieving the objective, ...) are not easy to contract with hard facts and figures. But that is typical to strategic partnering: it requires high levels of co-operation and maturity. A combination of trust and strong, top-to-top governance achieves more than hard contract management


Agile methodology makes CIO’s think about their in- versus outsourcing of IT delivery. There are elements that make in-sourcing more relevant and there other elements that make external sourcing more relevant. The sourcing model that companies should adopt depends on their culture/maturity and will be somewhere on a continuum between in-sourcing and strategic partnering with many gradations in between. In any case also in agile there are many ways to have the external partner commit to the success of the program.

At S-square we have developed sourcing models and a contract-template typical for agile and we help clients in the definition and implementation of their sourcing model and contracts.


S-square is an IT sourcing advisory firm that enables clients and IT providers to achieve joint success. S-square stands for “Sourcing Success”.

Its offers services that span the entire sourcing life-cycle: starting from strategic sourcing advisory, target operating model, business case; managing the end to end selection process; conducting 360-degree performance checks on running contracts; and finally coaching and training in sourcing best practices.

Our team of senior experts with extensive personal experience across global IT services delivery, organization & sourcing solution shaping, commercials and contract negotiation will be your ally in getting to your personal Sourcing Success.

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