Principles and Practices for Orchestrating Digital Value Chains

This post is a follow up on this one and it described my thoughts on some of the outsourcing contracts which have been signed in the last 1,5 years. These contracts had to be signed as fast as possible and this meant cutting corners. Cutting by standardizing services which should not be standardized, transferring valuable knowledge, and a contacts structure which fits a shrinking economy, but not a growing one. As a result will many outsourcing contacts signed in 2008-1009 increase the gap between demand and supply instead of closing it. Contracts solely aimed at reducing price/cost are typically very rigid and do not leave a lot of room for flexibility. Flexibility is however something the business needs now the economy is picking up again. The market dynamics are slowly moving back into the fast paste from before the crisis. This means the business will want to move quickly on new opportunities for growth and does not want to be confronted with outsource contracts which limit its m...

Because of the economic crisis have many companies deployed aggressive scenario’s to cut cost. This resulted among others in stretching the definition of ‘non-core’ activities in order to outsource them to an external party (including selling off offshore captives to cash rich vendors). Balancing the benefits (cash for asset transfer, lower prices) with the risk, most companies opted not to engage in high profile, high value deals. To further reduce the risk, many companies outsourcing focused on contracts which used labor arbitrage and increased economies-of-scale to reduce cost. Complex transformations of business and IT which would increase the risk (and potentially reduce flexibility/agility when the economy picked up again) were often left out. This to the dismay of vendors as the hours related to these programs are an important area of margin for the vendor (and potential value for the client if done well). The pressure to cut cost thus resulted in a substantial volume of small...

The post will be less valid to American readers and I guess also readers from the U.K. and several Asian countries as it will be a little rant against all the IT process models which are smothering the average Dutch IT organization. Readers from counties which also have a ‘consensus’ culture might however find some common ground in the text below. My country (The Netherlands) is both blessed and cursed with a culture where everybody wants to talk about every decision. This is totally unlike for example the American style where the department head decides and the rest executes. This approach has as a site effect that potential lower in the organization remains untapped, but it also enhances focus and speed.We have a large (IT) service industry and this combined with our consensus culture created an ideal feeding ground for process models like ITIL (infra support), ASL (application support), and BiSL (information management). For process models to be effective they require part of t...

Usually sustainability is thought of as cutting down CO2 emissions and planting more trees. But sustainability is more than just acquiring a green image. It is another way to look at your own company, the external environment and thus also your sourcing strategy. Organizations can actually profit from better financial results by a smart application of the modern aspects of this theme. A large oil and gas company outsourced a part of its BPO activities to Asian supplier. This supplier had contracted another co-supplier for data-entry activities who used illegal under aged employees. A non-governmental organization found this out by accident which resulted in a lot of negative press for the oil and gas company. In order to outperform the competition they outsourced several activities, but this backfired due to severe image damage. Several clients which outsourced part of their IT activities to a Tier 3 vendor indicated that they needed more insight in their carbon footprint as part o...

A recent survey by Colemen Parks shows that 90% of senior decision makers believe that the business cycles remain very volatile in the coming years and 80% believe that their organizations should become more flexible in their approach of business and technology. Business agility and common sourcing practices in IT are two words which are drifting apart. And the gap between both worlds increases only with the current pressures on cost (see also this post ). The CIO is now still able to sell its traditional sourcing decisions to the business as having no other choice due to the economic situation. But signing a five year outsourcing contract for the whole infrastructure or application portfolio puts both IT and business in a straight jacket with limited ability to maneuver. The economy will be picking up soon and that means that business are looking forward again and beyond short term cost cutting. The organization as a whole will have to shape up and make sure it has adequate long t...

The use of financial business cases to guide sourcing decisions is common practice. And with the current pressure on lowering cost, needs even the smallest investment to be accompanied with a business case showing a solid financial return. The effectiveness of the typical financial business case can be further improved in two key area’s. These are: Monitoring whether the expected return and investment envisioned in the business case materialize and,  The limitations of the standard Discounted Cash Flow (DCF) methods as it ignores the required flexibility required to define, execute and manage investments. In this post I explore how Real Options can help to overcome these drawbacks. The typical DCF calculation assumes a static scenario, ignoring the financial value represented by the flexibility to change course during an (outsource) project. In real life people learn during a project, and want to adjust their decisions accordingly, effecting the business case. Think of a manag...

In the first part of this post I stated that the continuous drive to reduce IT cost by standardization will come to a point where the reduced IT cost are outstripped by the ‘damage’ it causes to the business. The drive for standardisation is further increased by the commonly used method to scope outsourcing contracts. In this post I provide an scoping approach which I believe will gain substantially in the coming years: selective sourcing contracts with a scope derived from differentiated business demands. The importance of accountability towards the Business regarding the quantitative and qualitative added value of IT will only increase more and more. The Business demands to know how IT supports the opportunities and risks the Business faces due to increasing complexity, competition, globalization and other trends. It is up to the Business to provide insight in the opportunities and risks it faces, while the IT organization is responsible to translate them into IT value and ris...