sourcing revolution speedo

Recent CIO round table events and market investigations have highlighted the growing pressure on CIOs to move quickly to deliver ‘agile’ technologies and services that can keep pace with ever-changing business needs.

Many solutions are typically developed by small startup companies that are able to react quickly to shifting market and technology trends, but dealing with such companies is clearly potentially more risky than doing business with less innovative, but long established tier-one suppliers.

But even after the recent financial crisis when demands to rein in costs for many organisations have been unprecedented, playing it safe is becoming more and more commercially untenable as rivals seek competitive advantage through strategic technology roll-outs. In this environment it is increasingly evident that the way in which forward-thinking companies go about sourcing products and services is undergoing a transformation. Established and lucrative vendor revenue models are being challenged by a powerful confluence of forces – technological and cultural – including social media, tablets, smartphones, BYOD, the cloud and the trend towards consumerisation of IT.

In light of these pressures, CIOs are increasingly evolving their sourcing strategies to deliver diverse application landscapes that can incorporate innovative additions from small, fast-moving technology startups, rather than relying principally on large suites of applications from single top-tier providers.

Mike Wright, global head of technology at hedge fund Man Group, says there is evidence of migration and movement in almost all dimensions of the technology spectrum in today’s market. “There are extraordinary vibrant factors in operation and there is a push and a conflict between consolidation of supplier base for cost efficiency verses seeking innovation from a variety of suppliers,” he says.

“We are all under pressure to increase agility and by agility we mean reducing the elapsed time to support business change. That can either be because it takes less time to develop something or that it takes less time to reduce an inhibition such as a legacy system. Cost remains a constant pressure, as does risk.”

Richard Warner, CIO of insurance giant LV=, agrees that, in today’s diverse world where there is a wide range of legacy applications combined with emerging new technologies, CIOs are facing ever more stringent demands for innovative technology to address rapidly changing business needs. He believes that the issue of addressing the broad universe of suppliers required to support such complex heterogeneous technology and business ecosystems is becoming more complex in many organisations.

Read the CIO Profile interview with Richard Warner LV=

Warner says that effective technology and intellectual property (IP) sourcing strategies must strike a balance between engaging leading-edge companies and safe but less pioneering tier-one suppliers.

“For many years people perused the Nirvana of how to simplify and consolidate estate,” says Warner.

“And while we need to strive to do this when we can, the reality is in every large enterprise where I have worked there has been in the region of 200 to 400 major applications. It never seems to get much lower than that.

“We need to live with this and go on to understand how we manage this complexity and how to identify new and emerging technologies that we can plug into this landscape. And more importantly we need to work out how we can plug them in and leverage them quickly and effectively. One of the challenges is that some of these emerging technologies may be very well known and we are seeing many of these new ideas developed by small- to medium-sized enterprises.

“I would say it is ‘horses for courses’,” he adds. “Bigger suppliers still have a role in that they can provide access to leveraged assets and IP which we would find difficult to access ourselves or through smaller suppliers - purchasing mainframe processing (MIPS) is a good example. They can also provide a safe bet for some commoditised resources at times.”


Fast-tracked technology

Warner points out that typically more radical emerging ideas and technologies are usually better accessed through smaller companies where there tends to be more “breakthrough thinking” and commercial flexibility. In addition to partnering with highly innovative small companies, LV= has encouraged internal innovation and speeded up in-house project delivery.

“To differentiate in our market we need to move quickly and exploit emerging technology as it comes out. Some projects will work and some will fail, but how do we set ourselves up to do this? We have set up a small internal team called Fast Track to see how to apply emerging technologies to solve business problems. These guys are working independently, scanning the market and looking through various research organisations to see what is coming out,” Warner explains.

Identifying the micro and macro trends driving large enterprises to increase their engagement with smaller suppliers of technology and IP, Paul Feldman, CTO Thomson Reuters UK and Ireland Legal, points out that ease and speed of technology deployment is emerging as a key driver.

“I think there have always been niche players that added value which have been used. The key difference is that deployment of solutions is so much easier now than it used to be. There is a lot less risk and it is easy to put something in because it is comparatively easy to take it out if it does not work as expected. It is easier to do the things that we have always wanted to do, and to some extent have done,” says Feldman.

“I believe there has been fundamental shift in the industry. But we are still going to need the very big companies – the Oracles, the IBMs, the Apples and the Microsofts. They all provide the solid foundations that our businesses run on, and nothing I am seeing is changing that. The vast majority of services will be delivered through the capability delivered by the large industry players.

“But where there has been a fundamental shift is with the ease with which we can deploy niche solutions and try things out in ways that was not feasible 10 years ago, or even less than that. That is where some of the market-breaking ideas will come from in the future.”

LV=’s Warner believes that moves towards “digitisation of everything” are changing consumer behaviour and altering expectations of how people interact with businesses at multiple levels. He notes that, when adopting a diverse sourcing strategy, picking out the winners from a large field of small to medium-sized firms is a key issue. He explains that to manage these risks LV= has partnered with Clustre, an organisation that identifies and then partners with viable smaller companies developing innovative technologies and charges them a fee to connect them with potential buyers of their offerings.

Robert Baldock, Clustre’s managing director noted that “virtually all” of the company’s member firms have experienced a significant spike in interest and activity, despite these difficult economic times.

“This clearly points to a growing interest in value-for-money innovation services. Whether this is at the expense of major traditional services it is impossible to say, but with budgets constrained in many global companies, it is reasonable to surmise that the large traditional suppliers may well be the losers,” says Baldock.

He adds that CIOs are currently “genuinely interested” in smaller technology companies.

“They are also open-minded enough to seriously consider smaller, more agile alternatives to conventional solutions. This is a significant shift away from past attitudes. There is a clear kick-back against traditional management consultant fee structures. In these straitened times, the pressure to look for lower-cost solutions is very evident and this plays to SMEs’ key strengths,” Baldock says.

Project pressures

Looking at this trend towards more complex sourcing strategies as a strengths, weaknesses, opportunities and threats (SWOT) analysis provides a useful perspective for CIOs, according to Wright of Man Group. He notes that IT organisations have got smaller over the last few years as cost pressures have intensified in the wake of the credit crunch, forcing much project work to be passed out of house.

“Both the breadth of skills and the depth of resources are less than they were so the need to go out-of-house has increased. The strength of using multiple patterns is that you can marry the security of large providers with smaller firms that are more innovative, or more knowledgeable about specific skills; you then potentially get the best of both worlds. But you need to find effective ways of managing that risk,” said Wright.

“I do not think it is easier or harder for CIOs, it is just different. I am completely convinced that we will see a considerable transfer of capability from in-house to partners both big and small. And that will be irreversible in a way so corporate IT will be different to what it was five years ago. And that creates opportunities.”