3G A M M A I N S I G H TS

AGILE OUTSOURCING

Realising the value of IT outsourcing through a collaborative approach

Göran Kördel and Maria Ekberg

Agility and flexibility will be key success factors for future IT. Meeting the need for flexible delivery in an outsourced environment requires new thinking and innovative methods as traditional sourcing models are seen as too rigid and transaction oriented. This white paper explores the nature of agility and out-lines methods for each step in the outsourcing process to ensure a successful and agile IT delivery.

February 2014

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FLEXIBILITY IS BECOMING THE MOST IMPORTANT DRIVING FACTOR FOR OUTSOURCINGSourcing and outsourcing of IT are established tools to achieve different business objectives. Outsourcing is increasing, but in some areas such as service desk, some organisations also consider insourcing. To tackle the sweeping changes in IT and business, managers will be forced to re-evaluate their sourcing practices, according to Gartner. Two areas of change that organisations need to address are new technologies and delivery models. Cloud services are an example of both.1

Each year, 3gamma conducts an insight survey among CIOs and IT leaders with the purpose of gaining a better understanding of how companies successfully can source IT. 2 Results from the 2014 survey show that outsourc-ing of IT is growing in importance and will continue to increase (see figure 1: “Future of Outsourcing”).

47%

43%

10%

Future of outsourcing

Increase Same Decrease

Figure 1. How will your share of outsourcing develop in three years’ time? (Respondents=56)

The principal driver for outsourcing IT remains cost reduction. However, flexibility in various forms is becom-ing increasingly important. 34% of respondents in the survey consider flexibility to be the principal driver and many IT organisations feel trapped in fixed agreements (see figure 2: “Driving Factors”). The flexibility aspect considered most important is the ability to rapidly adjust volumes and costs. Other key aspects include the ability to change service content and levels, and being able to capture opportunities for innovation by readily apply-ing new technologies. This means that second and third generations of outsourcing will require a more agile delivery and an agile outsourcing. Research by Gartner also confirms that organisations will continue to make agility a priority.3

38%

34%

15%

8%

5%

Driving factors

Cost

Flexibility

Service Quality

Time-to-market

Competenceand technology

Figure 2. Which is the most important driving factor in your sourcing strategy? (Respondents=61)

REALISING THE VALUE OF OUTSOURCING THROUGH AN AGILE APPROACHTo see how agile thinking can be applied to ensure flex-ibility in an outsourced delivery, we first need to define what agility is. In a business context, agility is the ability of an organisation to rapidly respond to change by adapting to market and environmental changes in pro-ductive and cost-effective ways (Wikipedia). In software development, agility has formed a philosophy summa-rised in The Manifesto for Agile Software Development:

We are uncovering better ways of developing software by doing it and helping others do it. Through this work we have come to value:

• Individuals and interactions over processes and tools

• Working software over comprehensive documenta-tion

• Customer collaboration over contract negotiation

• Responding to change over following a plan

That is, while there is value in the items on the right, we value the items on the left more.4

Hence, agility is about attitudes and behaviours. For the purpose of this whitepaper, we define agility as the abil-ity to achieve the flexibility required in outsourcing.

Agile software development has successfully been used by IT organisations for years. Benefits include rapid delivery of measurable outcomes, the ability to focus on highest priority first, transparency in status tracking and greater employee retention. Today however, agile think-

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ing is not restricted to software development, but has found its way into a number of different fields where it has been shown to successfully increase efficiency when managing projects. In the book Agil projektledning, the author Tomas Gustavsson discusses factors when agile project management is particularly valid, such as in man-aging change and bringing value to the customer during the entire project.5 He also sets out criteria for when an agile methodology will be successful: when objectives are unclear, the environment is changing, project objec-tives are complex and when a fast result is required.

These factors and criteria are important even in out-sourcing, why an agile approach to outsourcing is indeed valid. Outsourcing as such is a complex project, and with prerequisites often changing during the contract period, it is essential not to wait until the end of the period to achieve the desired value. Figure 3 above shows how agile thinking can be translated to outsourcing.

APPLYING AGILE IT OUTSOURCING REQUIRES A NEW APPROACH TO EACH STEP

Outsourcing is typically done in four steps. As the out-sourcing market is maturing, the process is becoming more standardised. To achieve an agile outsourcing, a number of actions need to be taken in each phase of the process. Step by step, this white paper provides tangible recommendations and actions to consider.

The outsourcing processPhase 1 , Strategy: The first phase involves reviewing the sourcing strategy and available options. This means deciding why and what to outsource. A clear decision and management commitment is essential.

Phase 2, Commercial: The second phase involves prepar-ing the outsourcing by designing the delivery model, planning the outsourcing and starting the commercial transaction process. It also includes specifying and issu-ing an RFP (Request for Proposal), evaluating vendors

Interaction over processes

Build a relationship that is fair and mutually beneficial to gain trust. Shared objec-tives, transparency and governance are all essential to foster good relationship. Train employees in communication and how to interact across entities and organi-sational borders. Process is needed, but leave technical details to the vendor.

Delivery and results over comprehensive documentation

It is important to have an attitude of delivery and results first, and documentation later. Promote innovation and behaviour that puts business needs first. Instill a mindset to swiftly resolve issues within the framework of the contract. Documen-tation remains important, but extensive documentation should be avoided when opportunities for new technologies and solutions arise.

Collaboration over contract negotiation

Collaboration is key in a functioning outsourcing agreement. A collaborative approach in the commercial phase opens up for the best solution. Implementation of good governance is essential to enable continuous development of the out-sourcing. Many contracts focus on SLAs with operational metrics. While these are needed, you should zero in on achieving common strategic objectives.

Responding to change over following a plan

Implement an agile planning process with emphasis on the ability to change. Frequent reviews and adjustments of existing plans are important. Change control procedures, commercial committee, innovation committee etc. are excellent tools to manage change.

Figure 3. Four key themes to achieve agile outsourcing.

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and negotiating and signing a contract.

Phase 3, Transition. People, assets, third party contracts and knowledge must be transferred to the new vendor before the service commencement (handover to the vendor). Interim procedures, processes and governance must also be put in place. During this phase, excellent communication is key.

Phase 4, Transformation. The final phase is where the real work begins. It involves transforming the service delivery with technology, processes and organisational matters into the desired state to achieve the objectives of the outsourcing.

There are a number of key considerations and measures companies can use to achieve agile outsourcing. The fol-lowing sections present insights for each phase – Strat-egy, Commercial, Transition and Transformation.

StrategyThe strategy phase is about defining why and what to outsource. To be successful in outsourcing, it is key to understand and express what you want to achieve and how objectives should be prioritised. Examples of flex-ibility objectives that promote an agile approach are:

• Scalability: Ability to scale up in growth and scale down in downturn.

• Cost flexibility: Ability to adapt costs depending on changing business needs

• Flexible service levels: Ability to increase or decrease service levels depending on the shift in business demand.

• Innovation: Ability to easily and proactively bring in new innovative technologies and services.

A trend in outsourcing is a shift to more outcome based managed services and solutions.6 Using a result oriented sourcing strategy instead of a traditional transaction oriented approach will facilitate agile outsourcing. It will also impact your strategy for scoping and defining what services to source.

Approach for achieving objectives

The objectives above are typical drivers in outsourcing, but few managers ask themselves how these will affect their way of working. Furthermore, managers need to ensure that the measures taken are being followed up.

After the transition, in the beginning of the execution of the contract, the client often feels that reality dif-fers considerably from the outsourcing objectives. The client’s way of working has a significant impact on the delivery, and to improve fulfilment of the objectives, the measures outlined in figure 4 “Client strategy to reach objectives” below, should be taken.

FORECAST

ALIGN PROCESS

FOLLOW UP

BE TRANSPARENT

Proactively work with the roadmap and future requirements. Balance vari-ances in workload to forecast required capacity early enough so vendors can comply with needs. (Results: scalability, flexibility)

Adoption of new processes and new way of working is key. Managers should train their staff in processes and together with the vendor calibrate the need for documentation and collaboration. Ensure you have involved the right stakeholders and don’t neglect the need to train the business side as they will be affected too. (Results: faster time to market, lower cost)

Bring in vendors early in the process and ensure they have access to informa-tion. See your vendor as a partner and be transparent. Ensure that they too are transparent in the way they estimate costs, understand requirements etc. Do not mix partnership with business acumen. (Results: innovation, lower cost)

Define KPIs and metrics that cover what you and your partner would like to gain from the partnership in addition to operational SLA. Ensure continuous monitoring of KPIs and share them with your vendor.

Figure 4. Client strategy to reach objectives

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Recommendations — strategy phase

• Identify and prioritise drivers for outsourcing

• Identify what objectives require an agile out-sourcing

• Secure commitment from top management.

• Devise internal measures to ensure the organ-isation has the ability to meet the objectives. Signing a contract with a vendor and transi-tioning the service will not achieve desired benefits unless an internal transformation also takes place.

For more detailed recommendations, see 3gamma’s whitepaper Unleashing IT’s potential – delivering cor-porate value through agile IT sourcing.7 For managing a multi-vendor sourced setup, we recommend reading the whitepaper Are you getting stuck in the blame game? Service Integration in a multi-sourcing environment.8

CommercialThis phase is about driving the commercial transaction process to a signed agreement. It also involves preparing the internal organisation for change. An effective part-nership requires understanding, trust and relationship that are essential to start building as early as possible.

Approach for collaboration

A tool we recommend is the collaborative negotiation approach. This involves not specifying the details of the solution in the RFP, but instead asking the vendor to pro-pose how they would deliver the services. In the negotia-tion that follows, the details are then outlined together with the vendor before signing the contract. This approach enables the vendor to positively influence processes and solutions, enabling an efficient service delivery. One draw-back of the approach is difficulty in comparing different offers, which may lead to limited competition. The process can also be lengthy depending on how many vendors you invite to the process.

Another collaborative approach is co-sourcing, where a vendor first is selected on a number of general criteria. Then a frame agreement is signed and the outsourcing plan is developed in close collaboration with the vendor. Outsourcing is then executed step by step, sometimes starting with one or two projects or only staff augmenta-tion, with the intention of growing according to the plan. This reduces competition and the possibility of gaining the lowest price, but can be beneficial when sourcing maturity is low or the scope is unclear. Co-sourcing can be a suitable first step in the outsourcing journey, to be replaced by a more competitive procurement after a year or two.

Formulating a contract to enable flexibility

Although collaboration is more important than con-tract negotiation, a contract is still needed as a base for

CASE STUDY 1: INCLUDING INTERNAL MEASURES INTO THE STRATEGY After outsourcing, a large insurance company understood that the weakest link of their IT process was the demand and requirement process. They were also pressured by a major systems release that needed to take place during the outsourcing transition. It was crucial to ensure clear interfaces between the vendor, business and IT. The com-pany took a number of measures to improve their ability to manage the new situation.

One immediate action was to implement a tool for secur-ing the workflow that kept track of requirements, thus avoiding any misunderstanding regarding the status of the requirements and when they turned into an order. The order was then priced by the vendor and finally agreed upon.

The next step was to set up a training program for IT managers, business managers and project managers. The training focused on how to manage the commercial pro-cess and write requirements, but also included a forum for sharing experiences and highlighting role models.

After the training, it was clear that this change process would take time. The establishment of a centre of excel-lence was initiated to be the focal point for improving the demand and requirements process, and to address concerns from both vendor and employees.

In conclusion, internal changes must be considered up-front when defining the outsourcing strategy and objec-tives to ensure that the benefits of agility and flexibility are fulfilled.

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the delivery. For a successful implementation, certain principles and cornerstones are critical for the contract. Flexibility can be achieved by building an outcome focused relationship and collaboration with the vendor. This method is the building block of the Vested way of sourcing 9 and is summarised in five simple rules:

• Focus on outcomes, not transactions. Base the com-pensation to the vendor on objective achievements rather than transactions.

• Focus on the what, not the how. Statements of work that in detail describe how to deliver a service inhibit innovation and flexibility.

• Clearly defined and measurable desired commercial results.

• A reasonable pricing model with incentives. Use a pricing model where the price changes if the prereq-uisites for the model change. Also include incentives for the vendor to achieve the desired results.

• A collaborative governance model that provides insights and not just overview. The model should support changes and development of the agreement and enable innovation.

Similar to the fourth rule, Gartner recommends imple-menting a gain-share strategy to motivate vendors to improve performance.3

Other contract terms, such as effective exit clauses, are today standard and should be included in any outsourc-ing contract. However, an exit clause is not effective in creating agile behaviour in the daily delivery.

Vendor evaluation

Evaluation of vendor proposals is typically based on a combination of price and a set of evaluation criteria. The criteria should reflect how well the vendor proposal meets the outsourcing needs such as delivery solution, compliance to processes, principles and commercial terms. Another area that should be included in the evaluation criteria is cultural fit. This can be difficult to evaluate, but the basic question is: “How well will we be able to co-operate and together develop the delivery after contract signing?”

Gartner recommends that organisations share their technology plan and road map with vendors, and require the same from them. The purpose is to avoid lock-in to standard technology and to ensure implementation of expected changes, such as cloud technology.3

Governance of relationship

The agile manifesto values collaboration over contract negotiation. To set a good base for relationship and successful collaboration, include game rules with client principles and relationship intentions in the contract (see case study 2 on the next page). In addition, contract schedules such as governance structure, change control procedure, transition and transformation plan play an important role.

Relationship is difficult to prescribe in a contract. However, it is of utmost importance to build relation-ships between vendor and client on many levels as this will enable easier issue resolution, contract changes, and delivery improvement. Sharing strategic views and values is important and relationship development should start early in the process. Continuity of people involved in the different phases is also fundamental.

Continuity

Building a positive relationship early in the process is essential. Worst-case scenario is when the customer has a sourcing team negotiating with a vendor bid team and none of the participants represent the delivery capabil-ity. Ensure continuity, involve your service manager and require that the vendor include their delivery manager in both the transaction process and negotiation.

Recommendations — commercial phase

• Choose a collaborative approach in the com-mercial phase.

• Ensure flexibility and change procedures. Focus on outcome in the contract.

• Include cultural fit in the vendor evaluation.

• Ensure a clear governance structure on all levels.

• Ensure a good base for future collaboration by including relationship related content in the agreement.

• Start building a continuing relationship by involving delivery in the negotiation.

TransitionTransition involves preparing the new set-up and the handover of people, knowledge, assets and contracts to the vendor. Key elements in an agile outsourcing

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arrangement include governance and relationship. A clear governance structure is essential. It should be defined in the contract and established during the com-mercial phase. A best practice governance structure typi-cally consists of operational, management and executive levels.

To achieve an agile outsourcing, a commercial commit-tee should be formed as a preparation for a strategic monthly/quarterly management meeting. In the com-mercial committee, a contract manager from the cus-tomer and an account manager from the vendor prepare all requests for additions and changes to the contract. It is normal that requests for change occur even before signing the original contract.

Other committees that should be established are an innovation committee and an operational development committee. The innovation committee has an external outlook and considers potential hinders for parties to reach the objectives. The operational development com-mittee is internally focused on the design of IT processes and continuous improvement. Both committees support the delivery and the relationship to achieve business objectives, rather than pure contract fulfilment.

Good communication is essential in every phase of the transition. As soon as the contract is signed, the com-munication between vendor and client must be aligned. We strongly recommend a common approach to com-munication, especially if the deal includes the transfer of people.

Recommendations — transition phase

• Ensure good governance and relationship on all levels, starting early in the process.

• Implement a commercial committee to man-age changes and additions to the contract.

• Create a common communication team and communication plan

Transformation and onwardsDescribe and agree upon desired changes in a transfor-mation plan. However, agile outsourcing is about adjust-

CASE STUDY 2: USING THE CONTRACT TO FOSTER GOOD RELATIONSHIPS An international company in the pharmaceutical industry sought to improve service delivery as current perfor-mance did not meet expectations. The company decided to move into a multi-source solution, including insourc-ing of critical activities to ensure control across the deliv-ery of end-to-end services. They established a new ser-vice delivery model to transform services and to provide a solid platform for investment and growth. The current infrastructure vendor was replaced by five new ones. The objectives of the multi-sourcing were to give the com-pany more agility in shifting vendor and to get the best of breed in different key areas. After the new agreements with the five infrastructure vendors, they ended up with a total of eight vendors as they already had contracts with three vendors for application management. To man-age the relationships, the company defined an ecosystem with the purpose to encourage co-operation, foster good behaviour and make each stakeholder understand its contribution to the system.

They aligned the current contracts to have one common co-operation policy across the vendor base, which incor-

porated the following guidelines:

1. Put the client first: Resolve the business problem first and disagreements later

2. Be accountable: Demonstrate accountability and demand accountability

3. Share knowledge: No change is successful if the entire ecosystem is not prepared.

4. Non-solicitation: The client succeeds when we bring new talent and play within our space.

5. Work collaboratively: We collectively make the client succeed or collectively fail.

6. Demonstrate thought leadership: Challenge the client to do the right thing.

7. Think long term: The ecosystem will grow if we all have a shared long-term vision.

The co-operation policy put a focus on fostering good behaviour and the company followed up KPIs on how well the parties in the system contributed. The company regarded itself as one of the parties that should follow the guidelines.

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ing to new requirements along the way. An outsourcing contract is typically 3-7 years while a transformation plan is 1-2 years. Both are long time periods during which the business and environment will change.

Completion of the agreed basic changes in the IT envi-ronment is key to gain the efficiency that the vendor has anticipated in its commercial offer and to achieve the cost, time and quality objectives set up in the project. Since technology and business continuously change the conditions and prioritisation, the transfor-mation project should jointly be reassessed by the client and the vendor. Agile project management is suitable for a long and complex project such as a transformation project.

Moving forward, it is important to ensure correct prioritisation based on business needs. This requires a common view on strategy and vision, which is espe-cially important in a multi-vendor environment. Ways of achieving this include conducting strategy sessions, establishing shared business objectives, designing a scorecard and building vendor-customer teams. See also figure 4 regarding approach for achieving objectives.

It is crucial to understand that change takes time and expected results will not come automatically. A clear strategy must be in place for the transformation regard-ing retained organisation, vendor management, govern-ance structure, adoption of processes, new capabilities etc. Do not assume that the line organisation will solve this without guidelines and training. After the transition, the organisation will require support to work with opti-misations in parallel with securing delivery. These areas are imperative for success and will cause significant problems in the future if left ignored.

Management needs to ensure stable performance from the organisation despite any uncertainty employees may feel during the outsourcing. This means working to increase understanding, predictability and continuity of the change process. There are five key guidelines for management to achieve this:

1. Continue to work with adopting processes to out-sourcing in a planned way

2. Give employees extensive training in the new way of working

3. Put mechanisms in place to encourage ethical behav-iour from all parties

4. Use role models for change behaviour

5. Support the organisation and line managers in the change

Recommendations — transformation phase

• Agree on a transformation plan but execute the transformation in an agile way.

• Ensure good governance on all levels and transparency on strategies, plans and objec-tives.

• Train employees and support managers in change management.

End noteThis paper has explored how agile thinking successfully can be translated to outsourcing. The advice and insights offered do not represent a complete guide of how to achieve agile outsourcing, but they support a suitable start on the process to achieve agility and your sourc-ing objectives. Agility is about attitudes and behaviour. Consider how to interact and collaborate with your out-sourcing partner to attain the flexibility, scalability, cost reduction and innovation that you target. 

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REFERENCES1. Gartner on Outsourcing, 2013, Ruby Jivan, Frank

Ridder, Gartner 2013

2. 3gamma Annual IT Sourcing Survey 2014

3. Outsourcing trends 2013: Exploit alternatives to infrastructure outsourcing services for agility, David Edward Ackerman, Gianluca Tramacere, Gartner 2013

4. Agile Manifesto http://www.agilemanifesto.org/

5. Agil projektledning, Tomas Gustavsson (ISBN: 9789152323540)

6. Predicts 2014: Business and IT Services Are Facing the End of Outsourcing as We Know It, Frances Karamouzis, Claudio Da Rold, Gartner 2014

7. Unleashing IT’s potential – delivering corporate value through agile IT sourcing, whitepaper by Lars Narvelius and Jens Ekberg, 3gamma, 2014

8. Are you getting stuck in the blame game? Service Integration in a multi-sourcing environment, white-paper by Peter Wahlberg and Aprill Allen, 3gamma December 2013

9. Vested, Kate Vitasek and Karl Manrodt, 2012 (ISBN

978-0-230-34170-8)

ABOUT THE AUTHORSGöran Kördel, CEO for Nordwise Management and Business Development Executive at 3gamma. Göran has extensive experience in IT management. He has been member of the IT management team of Ericsson during a period of extensive outsourcing. In the role as CIO and Vice President for Sandvik, he developed the group’s IT strategy and carried through major outsourcing. Göran has also worked as a senior consultant within IT man-agement and sourcing and is an appreciated speaker at conferences. Göran has recently become CIO for Boliden.

Maria Ekberg, Director, 3gamma Sweden. Maria has significant experience in all aspects of outsourcing across several domains, with a specialization in transforma-tional outsourcing and outsourcing transition. She has worked for PA Consulting group and has actively con-tributed in building fast growing international software companies in the financial sector.

3G A M M A I N S I G H TS

ABOUT 3GAMMA3gamma is a leading professional services firm focusing on IT management. As an independent specialist in IT management, 3gamma provides advisory, consulting services and fact-based insights to many of the world’s most respected companies. 3gamma operates globally from offices across the Nordics and UK. 3gamma is a knowledge firm that bases its expertise of six core capabilities:

• IT strategy and governance

• IT sourcing lifecycle

• IT legal advisory

• IT risk and assurance

• IT operational excellence

• IT project management and delivery

3gamma has, in a series of whitepapers, explored how companies employ agile methodologies and innovative approaches to IT sourcing to become more aligned with the businesses’ needs and requirements11.

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