A quite radically different IT services industry is now in the making. As I argued in my May column, this is an industry delivering technology-enabled business services, not techie IT services, and an industry divided between suppliers of highly automated infrastructural and back-office business services and suppliers of more people-intensive and specialist business services that underwrite their clients' competitive core competencies in particular subsectors of the economy.

I also detailed why I think this ‘layering' of IT services represents a Rubicon moment for most vendors. Classically, IT services business models have been marked by high people intensity and direct supplier/client engagement.

Suppliers of the new automated infrastructural and back-office business services have replaced people-intensive with technology-intensive business models, including those in client engagement. Two supply-side business models fundamentally so different in their investment, human resource and management requirements that they cannot co-exist within a single vendor enterprise framework.

But some IT services vendors are not yet ready to grapple with this imperative to transform their business models.
One client I know of is coming towards the end of a 10-year outsourcing deal with an established supplier. The deal has the supplier managing all the underlying infrastructural services and back-office transactional services under a classic facilities management outsourcing contract, along with a specialised information management capability that is at the heart of delivering what the client's business is about. The bespoke applications underwriting this specialised capability have been developed by the supplier under the outsourcing contract.

There is a well-established and positive working relationship between client and supplier. When the client asked my advice as to the choice between negotiating an extension of the current deal and re-tendering the deal, I explained that as they both had much invested in the relationship, negotiation of an extension of the deal made better sense, but on the right terms. Those terms need to recognise the major change in supply-side economics and business models now in play.

The economics of ‘infrastructural services and back-office transactional services stuff' has been so transformed in recent years that to my mind the client's objective should be an 80 per cent-plus reduction in the cost of these services over the next few years. The supplier faces the commodity-versus-specialist decision: if they choose to focus on the specialised information management capability that is at the heart of delivering what the client's business is about, then competitive third-party suppliers of infrastructural services will need to be brought into play.


But in recognition of the radical shift in the supplier's business models that this implies, the client should offer, I advised, a supportive ‘transformational partnership', drawing on the experience built into the client/supplier relationship, to help the supplier transform its business models.

The IT industry promotes its ability to deliver transformation of the business models and business processes of its customers. From the arrival of business process re-engineering to the rolling out of e-commerce, the means for transformation has been at the heart of the industry offer.

That an established IT services vendor might now take a large dose of its own transformational medicine ought not to be regarded as an unnatural development. The ability to tackle these transformational changes in partnership with a well established client should be judged as a real plus by the supplier: as an alternative to a re-tendering of the business, it's a win/win offer, surely?

Wrong! Round one of the discussion, involving the supplier's group CEO, was best described to me as ‘soggy'. Doors have not been closed but the up-front message was not of a supplier positively striding to its Rubicon moment.

The reality is that a supply-side transformational revolution is in the making and every CIO needs to prepare to exploit it. Established procurement models, processes and dynamics need to be reworked in two new directions.
Procurement of ‘generic infrastructural and transactional back- and front-office stuff' as commodity business services is not about complex, competitive bidding processes, but about direct sourcing of such services in real time, based on straightforward online market research.

In contrast, where the focus of service procurement lies in the heart of supporting a business's core competencies, the real attention has to be on the sourcing of relevant, specialised business services. At issue is the sustainably competitive delivery of business outcomes: the procurement challenge lies in identifying service vendors whose business experience and strategic focus makes their ‘offer' relevant to these ends. I just hope that the supplier group CEO wakes up to the opportunity soon.