“Annual global spending on external IT services is about $900 billion” according to McKinsey, but the relationships between IT buyers and providers could be better. Both buyers and providers struggle to set and prioritize their objectives, meaning that neither is fully prepared to work with the other. In an article for McKinsey & Company, Rahil Jogani, Aditya Pande, and Vikrant Shirdade share five ways that sourcing relationships can improve, based off data from hundreds of sourcing contracts:
- Develop a shared understanding of business outcomes.
- Emphasize the long term with contracts.
- Actively collaborate on critical IT architecture decisions.
- Pursue transformation with clear planning and boldness.
- Devise win-win contract mechanisms.
Often, IT buyers are not given enough time to communicate with stakeholders on the full value that is intended to be brought by outside IT services. When that is the case, IT buyers typically default to just focusing on cost during contract construction. And since that is not much to go on, the IT provider itself is left unsure how to best allocate resources to satisfy the buyer. Thus—to backtrack a bit—IT buyers need to invite (demand?) their stakeholders into the value discussion much sooner. The authors also say that IT buyers and providers should rethink the request-for-proposal process as a “request-for-solution” process instead, where everyone puts their heads together and agrees on the true problem to be addressed.
A second point to examine is whether contracts are addressing the long term. The authors believe that too many businesses believe that contracts encourage long-term vision by their very nature—when in reality contracts encourage no such thing. The future must be consciously considered when drafting contracts. For instance, it would be wise to include provisions for resetting aspects of the contract once actual use/output can be compared to estimates. You are leaving value on the table if you only write the contract to address the current or expected state.
Next, on the subject of collaborating for decisions of IT architecture, the authors share this:
Win–win relationships cannot exist when IT purchasers do not treat IT-service providers as strategic partners. To facilitate this partnership, companies can activate a provider-success team that includes sourcing experts, technicians, and business leaders from both the purchaser and the provider. This team should create a seat at the table for IT-providers in forums like an architecture-enablement board, where the purchaser discusses ideas on IT architecture and underlying platform innovation jointly with providers.
The fourth point—pursuing transformation with clear planning and boldness—is basically just a high-level version of saying, “Work hard and stick with it.” They in fact even use the word “grit” in place of boldness. At any rate, IT buyers and providers should together build a transformation roadmap. Particular attention should be placed not just on tracking costs but on ensuring that there are mechanisms to measure progress.
Ultimately, the best contracts depend upon buyer and provider assuming good will of each other and practicing transparency where possible. With regard to pricing, the authors suggest the possibility of a total-cost-of-ownership approach, which “incorporates all possible costs, consumption patterns, and other factors, given different scenarios.” Additionally, be aware that each party in the contract might derive the brunt of its value on a different timetable from the other. One party may require value within the first year, whereas the other may expect value over a longer duration. In any case, get clear about your expectations.
Stronger sourcing relationships with more fully realized value are well within reach. You just have to work for it. You can view the original article here: https://www.mckinsey.com/business-functions/digital-mckinsey/our-insights/five-ways-to-unlock-win-win-value-from-it-services-sourcing-relationships