The "digitalization" of the enterprise & why traditional sourcing fails

A few weeks ago Gartner published a research report titled, "Taming the Digital Dragon: The 2014 CIO Agenda". Effectively the report says that CIOs have spent the last decade focused on how to keep the lights running with more and more efficiency, but now need to start focusing on building innovative digital products and services (as well as keeping the lights running as efficiently as possible). Gartner calls this duality a bimodal future and points out to a few key things CIOs need to do to succeed, including:

  • increased migration to the public cloud.
  • changes to legacy technology and sourcing relationships.
  • implementation of agile methodologies and beyond (e.g., creation of multidisciplinary teams and alternative sourcing models).

It was interesting to note that the words "sourcing" and "talent" appeared a total of 6 times in under a 1,000 words. So why is sourcing so important, and why are current sourcing models not well equipped to handle the "digitalization" process?

Why is sourcing important? 

What the Gartner article does not get into (as it probably assumes its readers are already aware of this), is how IT services are delivered today. It's been over a decade since IT was delivered by IT. Through the "noughties" IT services have largely been sourced through external vendors, and companies spend a lot of money on this. Below is a break down global IT spend across various key categories:

Credit: Gartner

Credit: Gartner

Approaching $1T globally, IT services spend by companies represents the second largest spend item by most enterprise IT organizations. In addition to this, when you consider that telecom spend is also services spend, and that both software and hardware spend is increasingly becoming services spend (via. PaaS, SaaS, and IaaS), you very quickly realize that the modern IT organization's #1 focus is generally vendor sourcing and management.

How does the current sourcing model work?

Let's assume you are an enterprise that is looking for a vendor to come in and perform a $10M network refresh, how do you go about sourcing the appropriate vendor to handle this? A well managed procurement process would look something like this:

RFP Process Flow.png

The above process represents an ideal scenario where the IT organization has the skills in-house to develop the RFP and manage the vendor selection process. In many cases this turns out not to be the case, and a process similar to that depicted above needs to be undertaken to source a vendor to manage the vendor selection process for the network refresh. This could easily take two months by itself, and extend out the above vendor selection process into a six month long process.

What is the "digitalization" of IT?

Gartner sees IT entering its third era - the era of "digitaliztion". The first era was marked by automation of hitherto manual processes, and the second era was marked by the industrialization of IT. This is roughly similar to our depiction (shown below) of the eras of personal productivity (the PC era) and organizational productivity (the client-server era).

What Gartner refers to as the era of "digitialization", we refer to as the era of "collaborative engagement". Additionally, as we pointed out in another post, this era is significantly different from the previous two eras (both of which focused on driving internal efficiencies) in a few key ways, the most important of which is its focus on building consumer facing, revenue generating products and services. The most successful IT (or digital) organizations in this era will not be the ones that successfully deploy Microsoft office on 200,000 PCs worldwide, or implement SAP R/3 across 5 business units, but the ones that help their companies quickly and cost-effectively test new ideas and iteratively build high quality products and services.

Why does the current sourcing model fail?

It is this success criteria that is the Achilles' heel of the sourcing model in play across IT organizations today. To be successful in this new era of "digitalization" IT has to deliver in a fast, cost-effective, and high-quality manner. The current sourcing model fails on all three of these fronts. Why is that?

  • Speed: It cannot take 4-6 months to select a vendor. While that might work for a network refresh that happens once every 5-10 years, it doesn't work when speed to market can be the differentiator between you and your competition.
  • Cost:  The average consumer facing mobile app costs less than a $250K to develop. A six-month vendor sourcing process, involving an external consulting firm to help with vendor selection, can cost multiples of that by itself. Again, this may be OK when selecting a vendor to execute a $100M ERP transformation, but doesn't work when building out a $100K mobile application.
  • Quality: The vendors that build the best consumer facing products and services are quite different, and significantly more numerous, than the vendors that can successfully implement a CRM system. There only a handful of world-class vendors that can effectively execute $100M+ projects, and they well known to most IT organizations. There are lot more high-quality vendors that can deliver a $100K project, but they are not as easy to identify in the extremely fragmented ecosystem that exists at this price point.

What can companies do about it? 

While there are no easy answers to this question, a good starting point to begin thinking about "digitialization" is to determine whether to build internally - which requires having the right team with the right set of skills for this new era - or whether to outsource software development. Below is a framework that we presented in a previous post on this subject that is worth revisiting:

Outsourcing Model.png

While this might seem a bit simplistic a first, there are a two things that require some deep thinking. The more obvious of the two is whether the digital product that you are building is a core or non-core product. Lets take the example of airline building its primary app - yes the app is an important part of the overall customer experience that the airline offers, but its not the core product that the airline offers, it is a supporting product. On the other hand if NCR were to build a competing product (they are planning to do just that in partnership with PayPal) to Square Wallet, it would very much be a core product of the company.

The less obvious point to consider in the framework above, is whether or not you are a tech company - again, we wrote a piece on this subject quite recently. This would have been a non-point even a decade ago, when tech companies were primarily software, hardware, and IT services companies. However, isn't this what the "digitalization" of business is all about? Where what were traditionally non-tech companies (Nike for example), are today being considered tech companies? The primary driver behind this is "digitalization" as Gartner puts it, or "collaborative engagement" with the user (customer, employee etc.) that we describe.

The framework above is simply a starting point, albeit a very useful one. Once you have determined what kind of company you are (or the kind of company you want to be when you're all grown up) and the kind of product you are building, you can work on the sourcing strategy that you should adopt. If you are tech company building your core product, then having the right internal team is of paramount importance. In the current competitive environment we find ourselves in, this is not simply about going out and offering creatives and engineers the highest salary possible - if anything the soft incentives are as important, if not more important to the individuals that possess these skills. This particularly holds true for millennials. However, in this uber competitive market for top talent, even if you check of all the boxes, you might still be unable hire or retain the best talent, in which case you might have little choice but to outsource even core product development.

What further complicates the era of "digitalization" is that ideas for "digitalization" can originate from anywhere in an organization. Often the best ideas originate not from management, but from rank and file employees that are digital natives. Mechanisms needs to exist to drive the best of these ideas from concept to execution to market in a manner that maintains a healthy balance between speed, cost, and quality.  How can organizations achieve this? Lets take a quick look:

Speed: Companies can leverage ideation platforms to identify and build support around their best ideas, sourcing platforms to quickly find and source the best teams to build products that bring these ideas to life, and project management and collaboration platforms to track execution and delivery.

Cost: Leveraging SaaS platforms vs. hiring expensive consultants to prioritize ideation and to manage procurement will help reduce sourcing costs in itself. Additionally, working with independent, agile product development teams vs. large, general purpose consulting firms will help further reduce cost by minimizing management overhead and maximizing speed to market.

Quality:  Hiring the right team to do the job can win half the battle in terms of delivering a quality product. To win the other half, organizations should emulate how startups build digital products. Startups don't get everything right from the get-go, however they do get to market quickly, fail-fast, and iterate off those failures to build a better product. 

In Closing:

While this era of "digtitalization" is really very different from the eras that have passed, it is arguably much more exciting than the pervious two eras. If the last two eras were about developing the infrastructure layer of the digital age (PC's, networking, client-server computing, and the early stages of cloud computing), this era will be about building out the application layer that will power the digital age. IT organizations will have to adapt to delivering quality (vs. cost), adopting new sourcing models, and perhaps even look at evolving into a new operating model