Sourcing strategies and trends
Service provider positioning
Technology is evolving fast and there is an ever increasing number of new products and platforms available. There is a strong expectation for technology driven business transformation. Everything has to be digital. The cloud is maturing and offers fantastic new possibilities. Waterfall is dead, agile co-creation in joint teams with the business is in.
All of these dynamics have a strong impact on CIOs but they face a number of challenges - internal IT skills are not up to date, a more diverse technology provider landscape is emerging, there is scarcity of talent on the market and the traditional partners are not always the right choice. A one size fits all model does not apply.
In this context, we see a clear trend of CIOs adopting a multi-sourcing model for IT:
1. For the traditional services, consolidate to few strategic service providers to have scale and more responsibility with the provider (e.g. Application management). Less fragmentation, clear accountability and steering on output as opposed to staff augmentation.
2. Strengthening internal talent on business / functional skills and sometimes on new technologies for core domains. The adoption of agile requires more business proximity from IT, so new skills are being build internally.
3. Niche service providers for specific topics e.g. artificial Intelligence initiatives are picking up and we see this space
taken more by start-ups and niche companies rather than the traditional layers.
4. Emergence of new Saas/cloud providers is disrupting traditional infrastructure services.
We also see a clear difference in the sourcing strategy for traditional IT versus that for new technology and digital initiatives:
Sourcing for Traditional IT:
Stable operations and cost efficiency are key. We see a continuation of the trend of managed services with an offshore or nearshore delivery model - both for application and infrastructure services. There is concentration on a few selected providers.
Sourcing for new technology and digital initiatives:
Here we see a trend to move away from managed services towards co-sourcing and ‘co-creation with the business’. Several companies have adopted agile as their main way of working - particularly financial services and telecommunications where IT is considered core. The other industries are still at experimental stage with “innovation studios” or “co-creation hubs” where business, IT and external partners work together in a start-up mindset. Sourcing for such initiatives is multi-sourced. While there is place for a primary service provider, there is focus on internal skills building and niche providers.
differs by sector
When we analyze the data across the 70 companies and government organizations, we see some clear trends and differences in the sourcing strategy depending upon the sector (e.g. Financial services vs Industry).
The S-Square Sourcing Model Framework depicted below allows easy analysis of the aggregated data points.
The Horizontal axis depicts the depth of supplier relationship. This may range from multiple agencies for IT staff, a few selected providers with strong client/provider relationship, to strategic partnering.
The vertical axis depicts the extent of outsourcing. This may range from insourcing, mixed teams, to managed service / outsourcing.
Based on its position on the two axes, a contract would belong to one of the following 4 categories: Insourcing, Staff Augmentation, Co-sourcing (includes strategic partnering) and Managed Service (includes multi-tower outsourcing).
Insourcing is when a company retains internal control and the external staff contracted on individual basis is less than 30% of the total. When external staff contracted on an individual basis is greater than 30% of the total, we consider it as staff augmentation.
Co-sourcing on the other hand, has mixed internal and external teams, but instead of contracting individual staff from multiple agencies, the client has consolidated to a few selected providers. Strategic partnering brings co-sourcing to the next level with one or more partners (see next article).
We have taken the following distribution for the sectors: Financial services and Telecommunications, Industrial, Public and Mid-market. Mid-market represents companies with less than 1.5 bn Euros in turnover.
The following table shows the distribution of sourcing strategies by sector across applications and infrastructure services.
Managed services represents 55% of the contracts across the entire population. Insourcing or staff augmentation are still the chosen strategy for 34% of the scope. Co-sourcing represents 10% of the overall scope. However, there are large variations depending upon the sector.
Financials services and Telecommunications
IT is core business for the banks, insurance companies and telcos. This means that they tend to keep strong internal control and participation. In many cases they have adopted agile (even company-wide). They have moved away from staff augmentation with several providers / contractors towards co-sourcing and strategic partnering
(representing almost 30% of the total contracts). This is done with 2 or 3 strategic service providers, while still keeping sufficient internal skills.
ING Bank is a good example of distributed agile and strategic partnering with a few service providers. This is further discussed in our case study on Page 16.
Industry and Public services
We club together manufacturing, consumer goods, retail, pharmaceuticals and utilities within ‘Industry’. These sectors are often consolidated on a few chosen platforms like SAP and Salesforce. These are seen as less ‘core’ compared to applications within Financial Services and Telco. This has led to a widespread adoption of managed services in this sector with 73% companies having outsourced their application management, data center or workplace management. Public seems to follow a similar distribution.
For new technologies and digital initiatives however, they do work in an agile way in mixed teams. They typically engage with a strong project-based service provider or a niche company. 23% of the contracts in Industry and 38% of the contracts in Public Services follow insourcing or staff augmentation.
Small to medium sized companies have not yet evolved towards managed services and predominantly tend to follow an insourcing or staff augmentation model (59% of the overall contracts). This is mostly due to limitations of scale, but also internal culture. In these companies, we find only selective managed services contracts on the most commodity pieces of work (e.g. network).
We also observe a different vendor landscape for the mid-market segment. The large global service providers who dominate the enterprise market, do not usually serve the mid-market. The mid-market is mostly served by the tier 2 players (e.g. Delaware, Cegeka and Fujitsu) or tier 3 players like (e.g. Cronos and Real Dolmen).
Our research shows that the agile way of working is rapidly winning ground. 31 out of the 70 organizations that we surveyed apply Agile in some form or other. agile is characterized by multi-disciplinary teams, close collaboration between business and IT, scope that is not fixed and dynamic sprints. So the question for CIOs is:
Is the outsourcing / offshoring model still appropriate or is it back to insourcing?
How can I still collaborate with my main service provider?
We had several discussions with clients and service providers on this topic. Here are the key learnings and S-Square’s point of view on IT sourcing for Agile.
How to source for agile
Proximity to the business and IT driven transformation make insourcing appropriate. Consequently, we see several organizations rightfully strengthening internal skills.
However, since flexible access to ever-changing technology skills remains a challenge – we believe full insourcing is not an option. There remain advantages of working with the large service providers – who have themselves adopted agile, have developed deep skills at scale and strong assets by industry that are not easy to match. They also have access to a larger skill pool.
An organization’s sourcing strategy needs to fits its culture and needs. Based on assessment of the agile sourcing model at the organizations we interviewed, we have come up with a framework that shows the main options available to an organization.
Sourcing model 1
Insourcing with staff augmentation
The organization takes full control internally and builds strong internal skills. It utilizes external staffing to fill in the skills gap – handpicking individuals to have a best of breed team. The external staff usually comes from many different companies or sometimes from a few selected partners, but is always a collection of individuals. While this model affords strong internal control, the drawback is that due to hiring individuals the responsibility for results remains fully internal.
Sourcing model 2
If you want to leverage the scale and result-orientation of your traditional service provider, we suggest to adopt a co-sourcing model. These are mixed teams of internal and preferred provider staff. Having sufficient scale, the service provider can take co-responsibility for the deliverables and outcomes. You track and measure performance through different SLA/KPI e.g. Velocity and Net Promotor Score. With the right scale, the service provider can follow “distributed agile”, leveraging off-shore or near-shore capabilities. This brings cost-efficiency and helps to tap into larger skill pools.
We see the co-sourcing model being applied more and more for agile. It is especially appropriate for organizations that have complex, highly integrated application landscapes and/or for digital innovation initiatives. In both cases internal staff are important and a full outsourced service is less appropriate.
As companies transition to agile, we see a clear learning curve on part of both clients and suppliers. With clients, we often see a tendency to continue to work in staff augmentation mode despite the possibility to have more results orientation and ownership from the service provider. Also, co-sourcing requires suppliers to work in a more collaborative manner with shared responsibilities. We see several traditional suppliers (used to working in managed services) struggle to adapt to the new approach. Experience suggests that the learning curve lasts more than a year.
Sourcing option 3
Strategic partnership represents the next level of maturity and relationship compared to a co-sourcing model. It is characterised by the service provider working across several functional domains; deep C-level relationships; investment from both parties;
shared responsibility for success; and a common way of measurement, working and training across client and service provider. It is typically done by companies that have a longstanding relationship with a service provider.
We see this model at large organizations with a lot of experience in sourcing e.g. in financial services and telecommunications, where companies have consolidated to a few strategic partners.
The ING case study of distributed agile and strategic partnering is a very good example of that (see next chapter).
Sourcing model 4
Mixed teams, close collaboration with the business and scope not fixed upfront makes managed service less relevant for Agile. However we do see instances of managed services, particularly for non-core applications. The change and run components can be outsourced to a third party as a managed service, while still working agile.
Most of the companies following agile are evolving towards some form of co-sourcing, rather than insourcing or a full managed service.
and distributed agile
The banking industry is facing disruption like never before. Small and nimble competition is appearing on the market with smart products at amazing speed. Digital is key and speed is of the essence. The management of ING Bank decided that to stay ahead of competition it needed to go agile – across the entire organization. And in doing so, they have become one of the first few traditional businesses to have adopted agile inspired by the Spotify model. At the same time, ING decided to consolidate its IT sourcing from a fragmentation of external parties towards a strategic co-sourcing relationship with three global service providers.
We invited Rocky Woestenborghs who is Head of IT Advisory Products at ING Belgium and Netherlands and was at the forefront of this program, to share his experience with us. Rocky leads a team of 700 highly skilled engineers across 3 countries. Supporting him was Alok Chaurasia, Cognizant’s Client Partner for ING during this journey. This web meeting was organized by S-Square and CIONET.
HOW DOES IT WORK?
In parallel to the decision of going agile, ING decided to restructure its IT Sourcing model. Staff augmentation with many providers evolved into strategic co-sourcing with three strategic partners: Cognizant, HCL and TCS. ING considers the external staff as “an extension of our IT organization”. It is not outsourcing or managed services, but a strategic co-sourcing model. The internal and external staff work as “one integrated team working within the ING operating model”. Currently, the IT team is 50% internal and 50% external. In a natural way, scope and platforms get assigned amongst the three providers.
The joint teams operate in the ING way of working: one method of working, one integrated way of measuring performance and one way of managing people. All internal and external staff get classified and grow within the same Dreyfus skill classification model.
This model creates transparency but also requires more from the service provider. ING expects all external resources to be at least at Competent (Level 3). This is different from the standard pyramid approach in a traditional model and requires the service provider to organize differently.
When working with the external partners, ING wanted access to talent and skills and the insights / assets of global service providers. But at the same time it wanted cost efficiency by leveraging offshore. ING applies the distributed agile model. Currently, onshore - offshore ratio with the strategic partners is 50/50 with the offshore services delivered from India. The intent is to further grow the offshore ratio. ING and its partners want an empowered offshore capability – they have offshore agile coaches and the next step is offshore proxy product owners. A considerable travel budget was reserved to establish the working relationship with the offshore teams during the initial years. Each ING lead spent time in India working side by side with the offshore staff and like-wise having offshore staff working onsite on a rotation basis.
Alok gave his perspective on how to make such an offshore collaboration successful from a service provider point of view: besides the technology infrastructure and governance (daily stand up calls) – what is more important is high level of trust, transparency and strong relationships at the individual and team level. Communicate and share the business goals, make sure that the service provider teams at offshore get the big picture and that ING staff works hand in hand with offshore teams. That has resulted in a high level of ownership with offshore teams that makes a positive difference - more outspoken, more pro-active, more engaged.
Rocky highlighted the energy and focus that has been put in to achieve this level of relationship: always stress the common purpose, strong governance and communication and strong focus on people management. Each strategic partner has an internal ING “sponsor” (to mediate and to create opportunities). There is executive level governance and long term commitment from ING towards the three strategic partners - both on the existing platforms and new evolutions.
ING is a very good example of bringing the relationship with the service provider to a strategic level. Consolidation towards strategic co-sourcing with selected partners that work under the client’s agile operating model is a clear trend within Financial Services or others using agile at scale. In other industries like consumer goods or industrial companies there is also a trend of supplier consolidation and strengthened collaboration, but its is more towards managed services rather than co-sourcing.
what's cooking in ai
That AI is the next big thing since the internet is now a common notion. In interviews done with Belgian CIOs by CIONET in early 2020, more than 80% responded with AI as the topic that interests them most. AI is also on top of marketing agenda from all large IT service providers.
As part of the Partnership Benchmark 2020, we wanted to go beyond the hype to find out what is really happening on the ground. AI is a wide term that encompasses many things. But what are the key areas where we see real projects? What competencies are well developed? Who are the key players on the Belgian market today?
AI has evolved beyond Analytics
A few years ago, most companies who claimed to be working with AI were limited to applying AI for Analytics. They used AI to better decipher patterns and trends within data and make smarter predictions. However, the biggest disruption in AI comes from recent advances made in two particular areas of Machine Learning – Machine Vision and Natural Language Processing. These have the power to transform how we work and even how we live. And these are the areas where we see the most interesting projects taking shape today.
Also, giants like Google, Microsoft and Facebook have developed open source machine learning libraries and platforms that are made available to anyone to build AI based applications, giving a big boost to companies active in this field.
AI startups are leading the way
While all large IT service providers are active in this space and are developing their AI capabilities, our study indicates that it is the small AI focused startups who have the most advanced capabilities and projects. In Belgium, companies like ML6, Radix and Faktion have realized projects at large companies and government organizations. Each of them have between 30-70 machine learning engineers and are growing quickly.
Some project realizations
in production VDAB uses AI to improve the results of job matching for their candidates reducing the time required to fill in introduction questionnaires from 45 to 10 minutes for each candidate. Brussels Airport uses AI to improve passenger experience through Chatbots and accurate prediction for luggage pick up times.
GSK uses AI to speed up vaccine development by using machine vision capabilities. Using machine vision, GSK is able to ascertain how quickly certain living bacteria are able to reproduce on a petri dish in a much faster and more accurate manner.
The challenge remains progressing beyond the POC
While there are a number of examples of AI in production, we found that most initiatives end up getting stuck at the POC stage. This remains the key challenge within the AI domain. So much so, that a metric to judge successful AI providers is the % of their total projects which make it into Production. We discussed how to overcome this challenge with IT leaders and AI service providers:
1. Engage in the topic with the board/ C-Level. Align the initiative to the business strategy and make sure to get top down sponsorship. Do not treat this as an IT project or a standalone innovation showcase.
2. Think big and transformational. For the POC, chose an area that is core to your business and not something peripheral. A successful POC in a core business area has a better chance of adoption and making it into production.
Some Key Company Profiles
While there are a number of small companies active in this area, we highlight the two most important providers in this space. The other notable companies are: Faktion, Sagacify, Dataroots, Kantify and ReImagine.
Founded in 2013, ML6 started with a focus on Big Data / Analytics. As of end 2017, they decided to focus completely on Machine Learning and also changed their name from Datatonic to ML6. They have close to 70 people and probably the widest client portfolio in terms of the number of industries that they serve. They develop complete machine learning solutions and cover both Machine Vision and NLP. They like to do projects that are core to the business or technologically complex projects. ML6 work only with Google’s AI platform and are a preferred partner. Key clients include Belfius, TVH, Bekaert, Pfizer, Melexis, Fednot, ING and UZ Leuven.
Radix was founded in 2018 with a focus to help clients leverage AI in achieving their business objectives through AI. They have grown to 30 people and focus on both Machine Learning and Machine Vision. They offer complete machine learning solutions but are not limited to any one platform. Some of their marquee projects have received very positive coverage in the press – namely VDAB and GSK. Other clients include Brussels Airport, Atlas Copco and Mediahuis.
top 3 reasons inhibiting cloud transformation
1. Incumbent legacy applications are not cloud compatible
2. Security and regulatory concerns
3. Inability of the incumbent IT service provider to help drive the transformation
Cloud promised a new era of procuring and operating IT Services:
Flexibility and fast scaling
Service Catalogue based procurement
From Capex to Opex:
Pay per use and no capital outlay
Our survey indicates that every organization has made progress on the Cloud. However, we find different levels of cloud maturity:
Workplace and Productivity: The Cloud has become mainstream very quickly and has had a dramatic impact on collaboration, user productivity and experience. Most organizations have made good progress with cloud.
Datacentre: When it comes to mass adoption of the cloud and moving away from the datacentre, reality has fallen short of expectations.
We followed up our client survey with detailed discussions with experts from cloud providers like Azure and with the service integrators / cloud brokers. We examined the key challenges inhibiting the move from an on-premise datacentre towards the public cloud.
The key barrier remains
the incumbent legacy environment
Cloud only supports Linux and Microsoft OS. However, many companies’ mission critical and core applications are custom built applications running on non-Linux, non-Microsoft OS, underpinned by proprietary database technologies.
Custom built applications may often require to be recoded. Most of these applications were developed many years ago with few knowing how they were built and how they interact with each other. This results in higher risk and often a heavy investment.
We start to see some products emerging that offer solutions to overcome some of the operating system challenges - but they are in early phases of maturity.
Regulatory and Legal concerns
Many companies / organizations are bound to specific regulations and legal requirements. It is not always obvious how the move to the cloud will impact compliance to these regulations. One needs to consider how data is stored and ensure that the back up and archiving of data meets regulatory requirements. This is sometimes cited as a barrier to move to the cloud.
Inability of the incumbent service provider
to help drive the transition
Incumbent service providers are often not incentivized to help clients move to the cloud as it cannibalizes their existing business. Sometimes while the sales teams are well advanced on cloud propositions, the delivery teams are still rooted in the old way of thinking and working. The large skill gap remains a key hindrance in moving to the cloud.
The transformation from the datacentre to the cloud is not a short-term project, but a multi-year program around re-architecting the IT of the company and about developing new business solutions that leverage the vast potential of the cloud. It is imperative that a strong business case and commitment from senior business leadership is secured.
In order overcome the financial hurdle and build a sound business case for your cloud program, we recommend the following:
Look for new business opportunities – Digital impact on products and services or business operations can generate tremendous value. These can be the trigger to look at cloud native applications or to recode/rebuild legacy applications.
Take an application view rather than an infrastructure view towards cloud migration.
Consider life cycle events – Major functional enhancements or upgrades can be the justification for investment in an OS migration or recodification of legacy applications.
Moving to the cloud requires a structured program. We highlight some attention points:
Start with an application assessment – What business process does it support? How does it interact with other applications and what are the underlying operating system & database?
Take a SaaS-PaaS-IaaS approach - First check if you can replace the application by SaaS, then modernizing to PaaS (e.g. cloud databases), and as a last resort, fall back on IaaS.
Contract to achieve outcome - Integrate the effective transformation to the cloud into your service provider contract.
And finally the low hanging fruits - start with non-production environments and standalone applications that are not excessively interconnected.