Cloud Migration - Suppliers blame clients and advisors for innovation barrier

I recently re-read HfS's article (really, a blog post) from a few months ago that looked deeper into some recent research. They asked 238 representatives from Service Providers to identify the main obstacles blocking their ability to sell as-a-Service products, services, and transformations. The top three obstacles were: lack of client lack of willingness; lack of advisory expertise; and lack of education. At the bottom of the list - in 11th place - was Supplier talent to evolve into Cloud-like business models. 

In other words, over 200 of the 238 Service Providers sampled believed they were capable and ready to transform clients if only clients knew more and would let them (and advisors would get out of their way). 

I occasionally attend industry seminar-events (I was a speaker at IAOP's World Conference year before last), and hear similar laments from Suppliers. But in practice, I rarely see suppliers deftly presenting visionary solutions to solve client problems. Several years ago, Tom Young, founder of RumJog Enterprises (then North America leader at TPI)  created an accelerated transaction process called Request for Solution (RFS). The idea was to ask an open-ended question whereby the client described a problem statement - a desired 'destination' such as replace legacy Data Center fabric with an agile, 'as-a-service' consumption model. Unlike an RFP, it did not prescriptively describe the mechanics of solution (the 'journey'). Several suppliers were invited to offer their best thinking on how to solve the problem from a blank sheet of paper.

After running dozens of RFS's, one thing is clear: Supplier deal-teams struggle with open-ended questions - when handed a blank-sheet-of-paper, they freeze. So they ask a a lot of questions to essentially create an RFP. Eventually, they create a solution that almost always leaves the difficult parts to the client - they want the easy stuff, but not the difficult. 

In looking at Service Provider responses to the HfS survey, maybe the explanation is that service providers want to sell one thing but clients (and their advisors) want to buy something more comprehensive. Clients want a supplier to solve their entire problem whereas the supplier wants only to accept the portion that they can easily solve. 

Charismatic leadership and Outsourcing projects

Often, charisma trumps experience (look no further than Donald Trump). Harvard B-School looked at this in 2002 and concluded that charismatic "celebrity" CEOs can be distracting and, unless spot-on in their vision (example: Steve Jobs), counterproductive (example: too numerous to list, but C. Michael Armstrong was highlighted, though few remember his disastrous AT&T tenure in 2015). Those conclusions are being revisited for the C-Suite, but it got me thinking, don't most large outsourcing projects have a central driver, and do the same principles apply?

A veteran of several dozen large transformation projects, it got me thinking: large projects often have a central champion, does the same principle apply? The challenge is that a strong personality can be a bully and push aside contrary thoughts. In an effort to unify a vision, a charismatic leader can stifle dissent too soon thereby suppressing innovation. Using the Steve Jobs example, strong leadership seems to work best when the goal is innovation and best-of-breed performance. But if the goal is anything short - personal agenda, biding time to tick-the-box and simply get through the exercise, a charismatic leader will force the performance-bar lower. 

Traditional outsourcing is a serious commitment - 5+ years and millions of dollars (which is why Fine Line has developed a more flexible approach - Adaptive Sourcing). What seems to work best are highly inclusive leaders who drive teams to their best thinking. If your outsourcing leader responds best to consent versus dissent, you're at risk (so-called confirmation bias), Best defense are vendor management best practices that are rigorously applied: business case analysis, procurement policies, etc. 

Zero Based Budgeting in Outsourcing

A recent research report from McKinsey found that the number of corporations using zero-based-budgeting (ZBB) has increased more than five-fold over the last three years. What is ZBB? It is the process of starting from scratch each year to build a budget based on forecast need versus historical trends. Traditional “delta-view” budgets assume the budget for the prior period was correct, and adjusts as needed.

ZBB is time consuming – it’s a bottoms-up build that takes significantly more effort than the delta-view budget. But the benefits are compelling. Delta-view budgets tend to become bloated over time because department heads are hesitant to relinquish prior year budgets. McKinsey cites one client who realized 11% savings in operations 4-months after committing to ZBB. On average, companies reinvest about 40% of their savings back into the business to drive additional savings or efficiencies.

The results are impressive – why not use them in outsourcing agreements? Fine Line’s adaptive sourcing approach enables this type of flexibility.

At Fine Line, we encourage clients to dream big: don’t settle for simply being competitive. Set your goals to be a leader in your market segment. Establish a culture that sets a high bar for measuring success. I can think of few other levers that will drive high-achievement than ZBB.

Few CFO’s would argue ZBB is a bad idea, so why do so few companies do it? Well, it’s hard, and it takes time because it’s thorough, rigorous, and transparent.

One of my biggest frustrations in sourcing advisory is echoed in client complaints of lack of supplier focus on innovation. Best practices in vendor management have shifted the traditional stagnant outsourcing agreement to a more nimble and agile adaptive sourcing agreement. Part of adaptive sourcing is, in effect, ZBB whereby the client and the supplier sit down periodically and revise their plan for the road ahead, not behind.

ZBB should be part of any IT Strategy, including Cloud and Data Center Strategies in order to stop the value leakage. ZBB creates a contagious culture of excellence which drives both supplier and client to bump-up their performance. 

Earnback: Why let a Supplier off the hook for a missed SLA?

Earnback defined.

Earnback, as the name implies, allows a supplier to negate a previously incurred service level default (meaning, they wipe-out a financial penalty). The idea is to allow a service provider to have a ‘bad month’ and achieve financial forgiveness as long as the poor performance no worse than a defined ‘yellow’ zone (meaning, disappointing but not business impacting); and the poor performance is not chronic.

Why on earth would anyone grant a Supplier relief? Isn’t the idea of SLA’s in an outsourcing agreement, to be clear and unambiguous? This is where it helps to have an operational view, not just a procurement or negotiation perspective - we at Fine Line believe Earnback, when coupled with Continuous Improvement, is a Vendor Management Best Practice

Earnback results in better service deliver, which is a Vendor Management Best Practice

Consider the example of Severity 1 Incident Restoration time. Let’s say the SLA is that the Supplier must restore services in under 2-hours at least 95% of the time. And let’s further state that the Client generally has about 35-40 Severity 1 Incidents per month, meaning the Supplier can be late on no more than two events per month (two misses would be 95% if there are 40 events; 94% if there are only 35 events).

One month, the Supplier has a couple employees out on leave. In the first week of the measurement period, there are 10 Severity 1 events and the Supplier is about 15-minutes late on three of them – the Supplier knows they have effectively blown the month and will need to pay the SLA credit. Here are the options:

1.       Without Earnback, Supplier knows they have already blown the SLA – they shift resources to another part of the account;

2.       With Earnback, Supplier knows they need to try especially hard and perhaps recover from early mistakes.

Everyone at the negotiating table knows that the SLA incentives are not compensatory (there are legal levers for compensatory damages). The idea is to encourage corrective behavior. From an operational perspective, the second scenario is clearly where most clients want to land.

The other side of the coin

While Earnback makes sense, it’s a tough sell to get clients to buy into the concept. Procurement wonks find the concept counterintuitive. And “Sourcing 2.0” clients who have had bad experiences with Suppliers running amok with provisions like Earnback are understandably wary. And without the other two legs of the stool – are we measuring the right things; and are the metrics correctly set - there is risk that service is awful but the Supplier never gives a dime in credit. Fail to make the entire stool sturdy, and you will be at-risk of a difficult Supplier relationship. But take away incentives, and you may create unintended consequences.

Summary: Take a balanced approach

SLAs are primarily an operations’ tool to promote strong service and are a key part of Fine Line's Adaptive Sourcing process. For clients, try to stay focused on the operations aspect and try not be distracted by natural negotiation instincts to be tough-minded on incentives – there should be other contractual mechanisms for brute-strength levers. Clients should stay balanced, focused, and build-in many tools into their SLA toolbox. From the service provider perspective, be candid and forthcoming and willing to assume operational responsibility that delivers results, not simply achieves an SLA target

Adaptive Sourcing - Gartner's take

Interesting article from Gartner on future of contracting. As typical, it's long on consultant-speak ("many CIOs are creating a bimodal IT organization"); and short on detail.

The big takeaways are

  1. IT is moving from Cost Center to Revenue Generator. This is a big shift - it means that instead of being measured on their bottom-line impact; IT is being more closely linked to Technology; which is driving top-line revenue
  2. Impact on Sourcing Advisory is significant. For 30-years, clients have complained about lack of innovation in their outsourcing agreements. The technology-driven value proposition absolutely requires innovation. Unless innovation can be infused into the supplier/client relationship, a sourcing advisor's terabyte's of templates are meaningless.
  3. Focus on "Adaptive." My colleague, Tom Young (www.rumjog.com) has said for several years now that the relationship needs to be broadly defined - closer to a handshake. He describes that wide swim-lanes, with agreed upon rules of engagement, will define the Adaptive Sourcing relationship.

Obviously, we at Fine Line believe strongly in the Adaptive Sourcing framework. Having spent 15-years negotiating Outsource agreements from both sides of the table, it now really seems backwards to exclude a supplier from the solution portion of the deal. Why not bring them in early and get them to buy into the solution?

Price Transparency and Bundled Pricing

I recently read an article on CIO.com about alternatives to Benchmarking. There are a lot of standard points made in the article - Benchmarking is combative (no news there) so some alternative language should be considered. While several contractual remedies are put forth, the one item that all feel would make a difference in the Client/Supplier relationship is Pricing Transparency.

I have to think back on my career in sourcing advisory and, well, I cannot agree more. While I'm not sure price transparency will solve every need for clients to occasionally have a tough conversation about whether their deal conforms to current market standards (be it via a Benchmark or other efforts), price transparency is a great start.

So what is price transparency? The ability to isolate and identify key cost/price drivers. Many sourcing advisors still advocate highly bundled pricing units that are a single price for the Supplier's labor-based management costs; underlying assets (HW + SW); maintenance; and other costs (transport for example). The argument is that if you're giving the Supplier full responsibility, give them all the costs and allow them the degree of freedom to provide a fully managed service, which is manifested in a high level of SLA.

What could possibly go wrong with a bundled pricing unit? Well, if it's a cloud-based service where the underlying infrastructure is 100% fungible, it makes perfect sense. But if the Supplier is assuming (or undertaking) financial responsibility for assets, maintenance contracts, and support FTE, you absolutely must have 100% visibility into each price component (and preferably separation of each price component).

Clients who are on their 2nd, 3rd, or other round of outsourcing are absolutely adamant about price transparency - for good reason: unwinding an agreement based on bundled pricing is expensive and frustrating. And trying to Benchmark a bundled pricing unit is also difficult - you end up compared to similar situations with similar obscurity.

 

Will Infrastructure Outsourcing cease to exist?

Writing in Horses for Sources, Thomas Mendel writes "Cloud is already mainstream and legacy infrastructure outsourcing will cease to exist"  (horsesforsources.com/winners-circle-cloud-infra-svs_050814). Now, Phil Ferst et al have made a living out of hyperbolic proclaimations, but this one really caught my attention: to what degree is it accurate?

While Network Services is the fastest growing segment of IT, Data-related real estate (previous known as "Data Center") has to be the most transformational. For example, SunGard, that perennially financially troubled DRP player, has a shrinking market even though data is exploding. Why? By vastly syndicating data assets, risk and vulnerability has shrunk. Compared to the days when tape backup and storage was relatively expensive, enterprises can now protect their data by managing the sources and residence.

The article is interesting because of who is in the magic-quadrant lookalike (okay, it's pretty useful and I'm jealous that he came up with a credible alternative to the Gartner franchise); and who is not in the "Magic Circle."

Based on their ability to integrate pure cloud; hybridge 'hosted;' and private facilities, the top tier are AWS, Cisco, HP, Accenture, Dell, Wipro, NTT, IBM, and a couple others. AWS and Cisco are new entrants over the last few years, how is that they bolted ahead of the next tier, primarily dominated by telcos (ATT, VZ, BT, OBS)?

And what does it mean for Sourcing Advisory? Contracting for Cloud services is not your grand daddy's sourcing agreement. Cloud services tend to be fairly rigid - suppliers keep things consistent. So the legacy advisors expecting to build highly customized SLAs and provisions will have a long, hard slog trying to negotiate for their clients.

 

Automation - 80% price reduction? Where is the bottom?

I recently had a client who, for the last 15-years, was a legacy style "Big O" outsource shop. A few years ago, they merged with another company with higher operating requirements, which exposed critical flaws in the relationship with the service provider (notice the wording there - not necessarily flaws with the service provider, but in the way the relationship was structured). They tried to restructure the agreement in 2010 and made progress, but apparently not enough.

Late last year, the client tendered to the market a fairly large bundle of device management functions (no hardware, no maintenance). In the 4-years since the rates had been refreshed with the service provider, the market had reduced almost 80%. Not a typo - almost 80%. I have another client who struck a deal in 2009 and for the managed services components, it appears the market has shifted a similar percentage.

What's going on? Well, the recession for one. Similarly to what happened in the dot-com bust of 2001, when the going got rough, the pink slips flowed (telecom alone lost 300,000 jobs in the dot-com bust). As the economy improved, jobs return and life is good again.

Except this time it's different. Instead of hiring back employees, companies are investing in productivity enhancements - tools and processes designed to displace labor. I recently spoke with Erik Brynjolfsson, the author of "Second Machine Age", He noted that Apple Computers recently opened a plant in Austin TX not because labor is cheap, but because labor is irrelevant.

But here's the real challenge - the silent killer of giants. The older legacy providers have embedded business at the old rates. And the new kids on the block are aggressively poaching their business - they smell blood in the water. Think about it: suppose IBM or HP struck a 10-year deal in 2007. At the very least, the underlying labor-related rates are 80% out of market. At no time in my memory have incumbents been more vulnerable.

The bottom? If telecommunications rates are any guide, they will bottom out in about 5-years. A managed router that was $225/month in 2009 is well under $100/month today (under $50/month for very large customers). There is likely another 50% cost take-out in the next 3-4 years. Which is why it's important to (a) go to market to understand the costs; and (b) remain flexible to avoid being locked into a rate that rapidly becomes stale.

Innovation in contracting: Is it possible?

Sourcing agreements carry disappointment - near the top of the list is failure to deliver Innovation. The industry has struggled for years to address with contract provisions such as "Continuous Improvement" and annual "Innovation Plan" submissions (basically, a big idea summit). But the Supplier settles into a groove of simply delivering the Services; and the Client pigeon-holes the Supplier and doesn't include them in major planning sessions.

Maybe the challenge isn't that the contract is missing something, but that the contact (any contract) simply isn't a good vehicle to deliver innovation. After all, what a contract does very well is commit parties to a transaction - I pay $X if you delivery $Y service. How do you contract for the future?

Short answer is, within the confines of the original contract, you can't. One of my colleagues, Tom Young (www.RUMJog.com) advocates more of a hand-shake agreement that remains flexible and remains in place for as long as the parties are deriving value from the agreement. He explains that the buyer and seller must operate from positions of trust - open book.

A more practical solution is, once the agreement is struck, to implement an ongoing governance process that focuses on continuous improvement - both the buyer and the seller have to dig in and look hard at their processes to see where they can reduce waste and distraction. Ultimate goal is to lower the cost of delivery for the Supplier; and have the Client financially participate in the benefit. Fine Line has a process whereby we look at key inputs - People, Process, Tools, and Market Price and produce a scorecard. For strong performers, the relationship continues uninterrupted by RFPs.

The current market is change fast - the age of longterm agreements struck by lengthy RFP processes are becoming increasing irrelevant.