Summary of the IDC Digital Leaders Community Peer Discussion on Successful Outsourcing

Marc Dowd (Principal, European Client Advisory)
Chris Weston
Chris Weston (Principal, European Client Advisory)

Meeting held on October 28, 2021

What follows is a summary of some of the important points discussed in the meeting. If you would like to take part in future, please let me know.

The meeting started with a general view of outsourcing and why it can be the right solution for organisations. Sometimes leaders outsource to get specific competencies. These can be competencies that are hard to evolve in-house or are not used frequently enough to build or are simply too expensive to acquire.

For organisations that are large or growing quickly, outsourcing can help with scale; for instance, to roll out a major program or major hardware upgrade across the world. Sometimes outsourcing is a step on the road towards a final goal. One of the participating organisations is considering models to outsource in the short term via a joint venture with the knowledge that they will be insourcing that same work later.

That brought us back to the practical note one CIO brought in the consideration of what the goal of outsourcing is — whether you are buying skills or outcomes.

The discussion then moved on to what has changed recently. COVID-19 has shown everyone that remote working can function and has for many made it easier to accept the idea of outsourcing — sending the work to a remote place.

With the shift to the cloud, many of the services that used to be included in big outsourcing deals, such as desktop applications, we now get via SaaS, and so the profile of outsourcing is different. This has benefits and disadvantages. COVID has also increased the prevalence of shadow IT in a lot of organisations, fragmenting outsourcing and making it harder to manage.

Often this takes the form of different departments purchasing their own capacity. AWS was used as an example where if this is not coordinated, it can cause major cost overruns and potential security problems. It was agreed that the IT organisation must provide the needed guardrails to guide the use of external technology services.

Another key element to consider when outsourcing is what your target operating model is. How do you work now and how do you want to work in the future? You want to make sure your outsourcing partner can support that future model. For many companies, the target operating model focuses on platform computing. One of the participants pointed out that to get full value out of platforms you need a lot of skills, either in-house or from outsourcers, and that sometimes as industries follow fashionable software trends these can be hard to acquire.

The cost side of in-house vs. outsourcing can be tricky to calculate. It takes time and experience to figure out the total cost of building your own team and capabilities. This must be balanced against how many times you’re going to get things wrong when you’re doing it on your own vs. what it costs to outsource.

One participant mentioned the need to make sure that the outsourcer is making a profit. You as their client should be able to see where the margin is through open book accounting. A CIO suggested the need to make sure the outsourcer is making a margin so that you know that this is worth it for them going forward. Without this, it is unlikely that they will provide good service and will be a reliable partner over time.

There are many challenges with outsourcing. Organisations have challenges to outsource well; to know how to package up work prior to outsourcing it. As one CIO put it — how to be an intelligent customer of outsourcing.

A participating leader raised an important question: “How many times have your expectations been exceeded by your outsourcing partner?” “Precisely zero” was his conclusion. So, by outsourcing, are you limiting your potential outcomes?

Another challenge to keep in mind is that outsourcing providers themselves can have a hard time finding the needed skills. “They may have a slick presentation and pitch but sometimes the reality is quite a bit different in terms of the capacity and capabilities that they are able to deliver.” The challenge is to get to know them well enough to see to the reality.

One of the best practices is really to focus on the planning of outsourcing. Tech architects are an important part of that planning stage — to set the tech framework in which the outsourcing partner can work. Another is to focus on governance, including service level agreements and key performance indicators. Good metrics can make an outsourcing agreement work for everyone.

One best practice is to be sure to include renegotiation clauses in the outsourcing contract. This goes against the idea of cheaper pricing for long deals. It is important to invoke renegotiation from time to time to get better pricing or higher quality services. This can be more valuable than initial discounts over time.

Another thing to pay attention to is the demarcation of areas of responsibility — what outsourcers are responsible for and what your company is responsible for. Be very clear here.

Bringing all the stakeholders together prior to outsourcing is quite important, whether that’s the legal team HR, IT, or whoever to agree on the desired outcomes of outsourcing and what business outcomes are important for the different stakeholders.

One participant emphasised the importance of the relationship owner for the outsourcing relationship rather than a contract owner. Contracts help when the relationship breaks down, but you are better off not getting to that point.

You want to make sure there is a good relationship. Make sure there is an ongoing conversation so that you don’t only talk when things go wrong. If you only interact with the outsourcer when you need to invoke contractual clauses, this will not lead to successful outcomes for either party.

These points and many more were presented, illustrated, and discussed by the Digital Leaders taking part in the meeting. This summary cannot hope to capture the flow of insights and only gives a sketch of what was important. To get the real insights you should join the community (free) and take part in the meetings so you can experience it first-hand. As a Digital Leader, you can apply to take part by contacting me at mdowd@idc.com.


Successful Outsourcing – What Do You Need to Change?

Marc Dowd (Principal, European Client Advisory)
Chris Weston
Chris Weston (Principal, European Client Advisory)

Outsourcing is one of those things that everybody in digital leadership gets involved with at some point. The question that is important right now is how well you do it and what could you do better?

Over 90% of large organisations rely on external service providers to deliver reliable technology and business process services. This is accelerating as we move from a period of extreme volatility and change to a steadier but still very uncertain business environment. The decisions that business leaders are making now will set the stage for their organisations over the next few years.

Why Focus on This Now?

IDC saw an exceptional period of growth for the technology sector globally in the first half of 2021. We forecast that growth in IT spending will reach close to 9% year-on-year for the full year. How much are you spending with your outsourcing partners? Are you spending it in the most effective way possible?

IDC research shows that European managed services spending in 2021 is more likely to stay the same or increase rather than decrease across all sectors and all European countries. Clearly, enterprises are taking the reins off their spending cuts. In all countries surveyed, the number of firms cutting managed services spending in 2021 has fallen. Moreover, in 6 out of 8 countries surveyed, IDC observes a rise in the number of firms increasing managed services spending.

Another recent IDC study showed a marked change in datacentre services. “The current forecast differs quite significantly from the previous one,” said IDC’s Libor Dvorak. “The main reason for the forecast update is the fierce growth in demand for cloud services, strongly driven by the COVID-19 pandemic. While platform as a service (PaaS) and infrastructure as a service (IaaS) expanded by over 40% year on year, traditional offerings, such as virtual private servers, web hosting, and dedicated servers, grew much more slowly but still well above the average growth rate of traditional IT services. The managed services segment was the only traditional datacentre services category to record considerable growth. New opportunities are arising related to hybrid IT, managed multicloud, and hybrid cloud.”

The Outsourcing Dilemma

The problem with outsourcing from the perspective of the digital leader is that it requires a very different skillset. Employees go from being the internal expert who was skilled at delivery to a role of ensuring someone else delivers. For many, this is, at least to start with, an unwelcome change. Have you trained your IT staff to adapt to this change?

Delivering through a third party can lead to a standardisation that matches the contractual agreement but loses flexibility and innovation. It takes expertise and skill to avoid the roadblocks and lack of agility that can come with delegating to your outsourcer(s).

In theory, outsourcing is the cheaper option. I would comment that this is only true if you are adept at determining what should be outsourced and controlling the risks and consequences of what is most often a huge change.

I have seen organisations fail spectacularly when they have outsourced without adequate preparations. A good partner is essential, but also strong governance and controls are necessary to ensure continued communications and relations with your outsourcing partners.

Outsourcing Shifts

In this period of uncertainty, the need for business agility is high. But the internal pressure is frequently to opt for managed hosting, managed cloud services or outsourced business functions to stay focused on the main business.

To get that right, you must check that you are doing the best you can to be a good manager of, or partner to, your outsourcers. This means better communication and an understanding of how to get greater flexibility.

Are Your People and Processes Up to the Job?

If you are considering outsourcing new areas for the first time, then this is an opportunity to get it right. If you have had an outsourced relationship for a while, have you reviewed it recently? Could it be better?

Are you getting the innovation and agility that you need? If not, how do you change that?

This topic was discussed by the Digital Leaders Community on Thursday October 28. It was a lively meeting with lots of good ideas and suggestions shared by the attendees. We do hope that you will enjoy the summary of the meeting when it comes out. Please get in touch with Marc Dowd if you’re an IT leader in a European organisation so that we can invite you to be part of our community and the ongoing conversations.


How do We Scale AI? Vendors Point the Finger at IT

Jack Vernon (Senior Research Analyst, European AI Systems)

This three-part series of blogs will reflect on three major talking points from the September Big Data London conference.

The main grumble for many AI platform vendors at the conference was why their customers’ AI and ML projects aren’t making it into production. Although many organisations are starting to do some innovation leveraging AI, very few projects make it into production. AI platform vendors are seeing their technology deployed but, in some customer cases, only leveraged in relatively limited ways and not at scale.

Vendors report that a typical “good” customer will complete and put into production between 1% and 5% of the models they develop — suggesting tolerance of project failure needs to be relatively high when developing and implementing AI. However, there is a relatively large number of customers that are installing AI platforms and failing to get any models into production — a big concern for AI platform vendors.

Vendors are highly incentivised to see customers put models into production. From a revenue perspective, they can provide further implementation services, license infrastructure for inferencing or even license the IP for models themselves. Also, if a team with access to a platform can convert its efforts into a meaningful use case, then it can serve as an excellent advertisement to the rest of the business.

The most common issues cited by vendors is that IT remains hugely segmented from the wider organisation and not incentivised to support lines of business (LOBs) in productionising AI at scale. Unless organisations have a chief data officer in place, reporting directly to the CEO and tasked with driving AI and ML capabilities through the business, then it can often be incredibly challenging for LOB teams to get IT to manage the introduction of AI-enabled use cases.

Organisations need to wake up to the fact that if they want to see AI lead innovation, they need to ensure buy-in across the business, especially in IT.

Vendors report the difference between organisations that can successfully productionise AI and those that struggle to make it past proof-of-concept projects often comes down to a small change in internal management structure. Appointing an executive leader to fight the corner of the business’ AI proponents can be crucial to swinging the balance back in favour of delivering AI-related innovation.

Nearly all AI platform vendors report issues with customer projects failing to make it into production. However, due to their business models, some vendors typically see far higher rates of production for their models than others. For instance, DataRobot typically charges by the model (instead of per seat) or bundles models within an infrastructure package. As a result, its customers are typically already committed to introducing a particular use case and only leverage its technology once other crucial implementation and data challenges are addressed.

There are downsides to the managed approach taken by DataRobot, as many customers are looking for far greater freedom to iterate and experiment in a platform; they simply need to have the flexibility to produce what will be in effect redundant models without being charged for the IP.

AI platform vendors still need to work to better understand the crucial barriers preventing organisations from scaling AI. Business model innovation might not necessarily be the answer.

However, enterprises looking to leverage AI also need to better consider technical and organisational challenges that might stand in the way of them putting AI use cases into production. Simply purchasing an AI platform system and giving it to a captive group of data scientists and business users is often not the best recipe for success.

 

To learn more about our upcoming research, please contact Jack Vernon, or head over to https://www.idc.com/eu and drop your details in the form on the top right.


4 Reasons Why a Hybrid Work Model Is the Way to Go

Meike Escherich
Meike Escherich (Associate Research Director, European Future of Work)

After experimenting with new ways of remote work during lockdown, 65% of European employers still expect staff to work primarily from the office post-vaccine. Despite successful technology transformation, many companies have preserved the in-office business ethos and are now struggling with cultural aspects like trust and effective teamwork when managing employees looking for a more flexible, hybrid work model.

COVID-19 has shown that many employees can work from home successfully, yet European managers fear a loss of control compared with pre-pandemic times. Reversing remote-working policies and promoting a back-to-the-office mentality is primarily driven by worries about lack of management oversight and visibility — if they are not in their chair, how do I know they are doing their work efficiently?

Staff see this differently. Many have enjoyed the greater freedom granted by working from home, with a sense of increased productivity primarily based on longer working hours. Employees working remotely are more engaged and have a stronger sense of well-being than those in non-remote jobs. At the same time many remote workers also admit to missing the water-cooler brainstorming sessions and other more social aspects of meeting colleagues in an office.

We predict that after returning to the office full-time post-vaccine at the behest of their employers, many employees will start to push for more flexible work arrangements, with models varying from one or two days per week at home, to ad hoc office appearances based on business needs or personal preferences.

2019

Remote work models begin to emerge with 1 in 2 European office workers working occasionally from home
Remote work models begin to emerge with 1 in 2 European office workers working occasionally from home

2020-2021

Over half of the total office workforce in Europe is fully home-based during intermittent COVID19 lock-downs in 2020 and 2021
Over half of the total office workforce in Europe is fully home-based during intermittent COVID19 lock-downs in 2020 and 2021

2023

More than 60% of European companies want their staff to return the office post vaccine — despite successful technology transformations, employers struggle with the cultural aspects of managing remote workers
More than 60% of European companies want their staff to return the office post vaccine — despite successful technology transformations, employers struggle with the cultural aspects of managing remote workers

2024 and Beyond

After 2023, employee demand for more flexible workplace models will permanently increase the share of hybrid work models in Europe.
After 2023, employee demand for more flexible workplace models will permanently increase the share of hybrid work models in Europe

European business leaders need to acknowledge that remote work is not just a convenient short-term solution to ensure business continuity in a crisis — it will also become an integral part of our work/life balance in the not-too-distant future. Denying this inevitability can come at a high price for companies that continue to insist on a work ethics mindset stuck in an analogue world.

Reasons to Take Hybrid Work More Seriously

  • Ignore hybrid and risk employee disengagement
  • Digital skills need updating — a shift to hybrid is your starting point
  • Increase productivity — hybrid is an opportunity for performance management change
  • Time is up
  1. Employee Disengagement — Flex Now or Fail

No longer considered merely an unquantifiable HR concept, “employee engagement” is now widely accepted as a key driver of motivation, commitment and productivity in the workplace, and the link between an engaged workforce and business success is recognised across industries.

Having developed a taste for the freedom offered by remote work, employees are unlikely to appreciate being asked to return to the office full time. Younger workers especially have a more value-based approach to work that is clearly centred around flexibility and well-being. Middle-aged employees appreciate the opportunity to manage child/parent care without feeling they must make an either-or choice between family and work. Staff with longer-term mental or physical health issues can remain valuable contributors if allowed to choose the place and time of their work commitments.

Now imagine a company asking its employees to return full time to the office post-vaccine. Some employees might choose to leave altogether (the “employee exodus” currently dominating media headlines), while others might choose to stay in their jobs. Unless they are fully on board with their company’s in-office strategy, however, the switch away from remote working will have a negative impact on productivity levels and profitability.

Employee Engagement Drives Performance

Crucially, employee engagement goes beyond the freedom to choose where to work or even when to work. However, offering work flexibility plays a key role in employee engagement levels. Employee engagement drives performance. This is because engaged employees clearly understand their role’s purpose and how they, as an individual contributor, fit in with their companies’ business objective. This results in better decision making.

Organisations with an engaged workforce tend to outperform their competitors. They have higher revenue streams and tend to recover more easily after a recession or a financial setback.

Employee Wellness and Mental Health Should be a Primary Focus

When it comes to a choice between fully-in-office or hybrid, European companies need to understand that sustainable hybrid work strategies need to go a long way beyond “laptop + VPN” approaches to also include successful cultural change management that includes employee wellness.

In a hybrid work model, badly organised communication channels, non-transparent project goals and burnout (caused by a poorly managed work/life balance) can all lead to disengaged employees and that is bad for the bottom line.

  1. Closing the Digital Skills Gap — Redefine Your Baseline for Success

Europe is behind in overall digital skills levels and the Digital Economy and Society Index shows that 4 in 10 adults and every third person who works in Europe lacks basic digital skills. Most European organisations are also lacking a clear vision and strategic direction for their digital skills development and have retrograde assessments in place. Even in the middle of last year’s lockdown, with more than half the region’s workforce working from home, 23% of companies were worried that unfamiliarity with remote working technologies would negatively impact productivity, while 20% worried about employees’ competency in accessing relevant data.

A successful hybrid work model will fail without the right technologies underpinning it. Digital transformation needs to go beyond using consumer-grade collaboration tools for team meetings and should aim to make use of intelligent technology tools to manage human, financial and other resources. Closing the digital skills gap is critical for organisations to ensure they get the most benefit out of a flexible, hybrid work model that greatly depends on new, smart and above all connection-enhancing technologies for its successful implementation.

  1. Opportunity for Change — Increase Productivity Based on Trust, NOT Keystroke Counts

COVID-19 has forced most countries into lockdown and there have been countless conversations around the globe on measuring productivity and performance for remote workers. Remote work clearly needs a different approach to staff management than onsite work. When managed poorly, remote work can dramatically erode not only engagement but also productivity.

According to IDC’s Future Enterprise Resiliency & Spending Survey from July 2021, 50% of European companies were continuing to use quality score productivity metrics to measure employee performance during the pandemic. 30% of businesses use (or plan to use) real-time analytics to measure team performance. Even worse, to retain visibility during lockdowns, monitoring technologies such as screen capture, measuring keystrokes, webcam photos and web monitoring are increasingly being used by employers to “prove” employees at home are meeting employer expectations.

The need to maintain an online presence to prove that employees are working is a main source of stress threatening employee well-being. This underlines the most important distinction between progressive and regressive performance management — the “why”. Are we doing it to identify individual employees’ strengths and areas of improvement, or are we doing it just as a routine exercise, so we can easily slot employees into different performance categories? What is the objective of performance management — is it meant to be transactional or transformational?

A growing sense of disconnection and frustration among remote employees is becoming apparent: videoconferencing may have gained traction as a tool to collaborate and stay in touch with members of one’s own team, but many workers feel their corporate culture has suffered. Eroding trust, lack of social cohesion and insufficient information sharing are the main sticking points in the world of remote work. Proactive plans for building trust and accountability within the workforce are needed, as well as a robust digital infrastructure to link individual employee productivity efforts to clearly defined strategic business outcomes.

While the responsibility of productivity and performance remains primarily with individual employees, that of providing an enabling culture solidly rests with their leaders and managers. The disparity and inconsistency in measuring employee performance that existed pre-COVID has only amplified post-COVID. In the face of COVID-19, remote work and the shift to a distributed workforce should be considered a once-in-a-lifetime opportunity for European managers to adjust discrepancies in leadership styles and belief systems about what employee performance is and how it needs to be measured to benefit the company as a whole.

According to our Resilience Survey, modern agile performance metrics such as reduced backlogs and speed of burndowns are only used by 22% of European companies, even though they offer great growth potential. We see an opportunity to improve business performance by adopting more outcome-based metrics that focus on the soft skills, such as upskilling and focusing on collaboration and innovation. Both qualitative and quantitative (operational) metrics are important and should be taken on board when deciding on future KPIs to measure remote employee productivity. Without this change in employee management, the shift towards a hybrid model is likely to become a costly, failed exercise.

  1. Plan for Hybrid Work — The Time to Start Is Now

We predict that by 2024, 77% of office workers will work remotely two days a week or more. Businesses unable or unwilling to accommodate this trend will struggle to retain talent or will risk losing productivity.

Worryingly, over half of European companies that have started the transition to hybrid work are still unclear what is realistically achievable, and tend to stop at short-term, tactical technology implementations instead of connecting the dots for a truly holistic workplace transformation strategy.

Sustainable, holistic change does not happen overnight, and if the mad scramble for laptops and secure VPNs during lockdown has shown us anything, it’s that to be successful, workplace transformation needs to be carefully curated and planned for the long term — on both technical and business culture levels.

In our recent IDC Market Analysis Perspective, European Future of Work 2021, we explore strategies for holistic digital transformation in more detail, including the key areas of workspace, smart workplace, human-centric augmentation and people-first work culture. The document offers essential guidance for technology providers looking to identify growth opportunities in a market where almost all technology solutions will play a role addressing the needs of remote and hybrid employees.

 

To learn more about our upcoming research, please contact Meike Echerich, or head over to https://www.idc.com/eu and drop your details in the form on the top right.