a multi-sourcing model emerges
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:
For the traditional services, consolidate to few strategic service providers to have scale and more responsibility with the provider (e.g. Applications management). Less fragmentation, clear accountability and steering on output as opposed to staff augmentation.
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 built internally.
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.
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.
sourcing strategy 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).
The table below shows the distribution of sourcing strategies by sector across applications and infrastructure services. 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.
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 in the next section.
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 services 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).