August 7, 2011

On the Road to IT Sourcing: Getting It Right the First Time

In an effort to reduce costs and improve operations, chief information officers (CIOs) often seek expertise and partners to implement large, complex IT projects effectively. Additionally, boards are increasingly pressuring CIOs to derive maximum value from IT projects. As a result, CIOs are relying on partners to maximise the value of their IT investments as they often find it difficult to have the internal resources necessary to deliver their IT projects. Booz & Company state that CIOs that invest the time up front to define their sourcing strategy and undergo a thorough selection process will increase the chances of reaping the benefits of a successful IT implementation.

Many large organisations have been forging such partnerships for years. Others are travelling down this road for the first time. For those organisations just venturing into business Information Technology sourcing, the process is challenging—especially when it comes to selecting the right partners. CIOs of these organisations need to adopt a project-by-project sourcing approach. As organisations place more accountability and risk on the vendors through various procedures, selecting the right partner is critical to success.

To create successful partnerships, a project sourcing strategy should answer three critical questions: What is the desired target or result for the project? Who should the organisation partner with to deliver results? How should a partner be selected? The success or failure of these projects hinges on defining clear objectives at the project’s inception. It is also crucial that organisations do not underestimate the importance of determining who to partner with and how to select one or more partners. According to a report by Booz & Company, CIOs that invest the time up front to define their sourcing strategy and undergo a thorough selection process will increase the chances of reaping the benefits of a successful IT implementation.

Importance of Sourcing

Over the years, IT have emerged as an increasingly important lever that companies use to lower costs and boost revenues. IT has evolved far beyond the automation of specific tasks and today encompasses complex enterprise business models.

“CIOs have a number of options in how to approach the implementation of such enterprise IT projects. They can upgrade or transform their IT systems by tapping into internal resources. This option, however, can significantly strain a company’s IT team in terms of expertise or time, diverting employees from their daily activities. CIOs also can elect to partner with external vendors. This is not a risk-free option, either. If CIOs source projects externally, they face a different set of challenges in selecting partners and structuring relationships to ensure delivery is on time and within budget,” said Ramez Shehadi, Partner, Booz & Company.

Many organisations now engage one or more external vendors because of the increased complexity of IT projects. In choosing this route, companies need to be very selective and focused on partnering with the right vendors. Otherwise, projects’ chances of success are limited; they can stall, go over budget, extend past deadline, or fail to deliver what was expected. Indeed, more than two-thirds of large Information Technology research projects fall short of initial goals. Basically, larger and more complex projects mandate that CIOs be especially vigilant and mitigate risks appropriately.

“In our experience, CIOs cite the sourcing process as one of the most common reasons for project challenges. There are three key phases in an effective sourcing process: project scope definition and sourcing, contracting and negotiations, and project management and governance. The first phase—defining the project’s scope and sourcing strategy—often receives less attention than the other two, but it is critical for several reasons. First, it allows an organisation to plan and control its costs. Second, a project sourcing strategy provides the platform for an organisation to articulate its problems clearly and identify potential solutions. Third, such a strategy allows the organisation to document its specific project requirements and identify benchmarks by which it can measure progress and success,” commented Shehadi.

Key Factors That Shape Sourcing

Booz & Company, a leading global management consulting firm, states that before defining the ‘who’ and ‘how’ of sourcing, organisations need to assess eight key factors. Some of these factors can help organisations determine the type of structure they need to deliver the project—whether it is sourced internally, externally, or a combination of two. Other factors address the issue of how to select a partner. Some factors address both topics:

Execution capability is critical in determining which sourcing scenario is likely to work best. An organisation might recognise during the assessment phase that it can deliver the project faster and at a lower cost than an external vendor can and that it has sufficient internal capabilities. In this scenario, delivering the project internally might be the ideal option. However, if an assessment reveals that an organisation lacks the resources or expertise to staff the project internally, then it must explore the option of sourcing the project to an external vendor. Once the organisation has made the decision that it cannot approach the issue internally, it needs to determine the necessary number of partners—a decision that is subject to the organisation’s project management capability, the maturity of the markets in which it operates, and the project’s complexity.

In order to address the selection of one or more partners, an organisation needs to assess its access to pertinent legal support, as well as its available time and financial constraints. As organisations move toward fixed-price contracts, access to legal expertise is necessary to design contracts with sufficient incentives (payments on the completion of agreed-upon milestones) and penalties (liquidated damages). Organisations with tight financial constraints have to design a selection process that maximises competition among bidders to ensure an optimal price.

Required Expertise

“Once an organisation has made its assessment and shaped its strategy, it can determine who will deliver the project, whether an internal Information Technology services team or an external team. With complex technology projects, both of these options mitigate certain constraints while requiring specific capabilities from organisations,” explained Dr. Walid Tohme, Principal, Booz & Company.

In-house Implementation: Organisations that have significant execution capability, access to internal expertise, and a solid track record of delivering key projects internally in a cost-effective and timely manner might opt not to partner with external vendors.

Project Sourcing: When an organisation finds that it lacks the requisite capabilities and internal expertise, it must consider partnering with external vendors. Organisations can partner with a single vendor that offers all the required expertise or with multiple vendors.

“However, the maturity of the local market is a key consideration when sourcing complex projects from a single vendor; in some cases, it may not be possible to find a single local vendor with the requisite capabilities and expertise for a large transformation project. In these cases, organisations can consider multiple vendors, which presents them with two options; partner with a ‘prime vendor’ that will manage other vendors, or partner directly with multiple vendors. Organisations with limited project management capabilities typically should adopt the prime vendor option, in which a lead company acts at the organisation’s main interface with other vendors. The other vendors are the responsibility of, and managed by, the prime vendor,” added Tohme.

Resourcefully Selecting Partners

Once an organisation has made the decision to partner with an external vendor, its next step in defining the sourcing strategy is to identify the vendors that can best complement the organisation.

There are two typical solutions: source directly from a preferred vendor or initiate a selection process with a comprehensive request-for-proposal (RFP) process:

Sole Sourcing: When an organisation has significant time constraints, few financial constraints, limited legal capabilities, or an IT project with a relatively low level of complexity, it is dealing with a project of limited scope and low risk. Here organisations may source the project directly, using either a single vendor, a prime vendor that oversees other vendors, or multiple vendors. However, adopting this approach can lead to inflated prices because of the lack of a competitive process.

Competitive Sourcing: Organisations not constrained by time can adopt an indirect sourcing approach involving competitive negotiations. This will ensure a cost-effective selection process. With this approach, organisations have two options: negotiate directly with multiple vendors without a preliminary selection process, or adopt a multistage RFP process with an initial selection process followed by negotiations with selected vendors.

If a project’s complexity is relatively low and the requirements are well defined, the organisation can negotiate contracts with several vendors simultaneously in order to get the best deal. However, it needs sufficient legal capabilities to handle parallel contract negotiations. If a project is very complex and its requirements are not well defined, this approach will most likely not work because there is a high probability that technical proposals from multiple vendors will be significantly different.

“In such cases, organisations would need to go through a detailed technical selection process to be able to compare responses from the different vendors. Often in this process, the organisation benefits from the ideas that bidders propose based on their experiences with other organisations. Following this technical selection process, the organisation needs to conduct negotiations with one or more vendors that are selected through the technical evaluation,” stated Jad Bitar, Principal, Booz & Company.

Effective Implementation

CIOs looking to source partners for large technology projects need to develop a comprehensive sourcing strategy. For years, many large organisations have successfully developed such strategies and avoided the traps that often plague complex technology projects. The likelihood of success increases when organisations address at the onset of the project several critical questions.

“There is no universal solution; no single sourcing strategy can be applied across all situations with success. Companies have different capabilities and challenges. Therefore, they must first assess the eight key factors—including internal capabilities and budgetary constraints—before they can tackle the two main challenges: whether the business Information Technology project should be delivered internally or externally, and if externally sourced, how to choose the right partner or partners. Once these issues are addressed, organisations can focus on the execution and structured process to effectively implement the strategy. Implementing a ‘Strategic Implementation Office’ is especially important when multiple stakeholders are involved so the organisation can ensure its project meets expectations and is delivered on time and on budget,” concluded Bitar.