Every business in every market is being impacted by the surge in digital technologies, the rise of customer power and the demand for ever more omnichannel experiences. The large wave of customer requirements and expectations for a digital experience – comprising Web, mobile, social, digital device, analytics and CRM initiatives – is creating a widening gap between IT resources required and qualified talent available.
McKinsey recently forecast, “The U.S. alone faces a shortage of 140,000 to 190,000 people with analytical expertise and 1.5 million managers and analysts with the skills to understand and make decisions based on the analysis of big data.”
Furthermore, technology skills make up a sizable proportion of the “US Skills Gap, a gap which costs the US economy more than $13 billion a month, or roughly $160 billion a year,” according to researchers from London-based Centre for Economic Research in November 2014.
Add this talent constraint to the growth in business complexity, the need for agile business models and tightening of profit margins. Most companies are beginning to move beyond demanding staffing from their technology service providers; they need true partners in talent sourcing and development. This will get worse.
The smartest companies are locking in their skilled resource pipeline the same way they lock in their raw materials or distribution channels for long-term competitive advantage.
The industrialization of IT
This is often referred to as “IT moving into the Industrial Age,” a cultural shift that manufacturing and other business competencies went through 25, 50, even 75 years ago. In the 1990s and into the 2000s, many technology service providers tapped craftsmen and women, who provided specialized skills in local markets on demand. Occasionally specialized skills, unobtainable locally or which could be provided more cost competitively elsewhere, were sourced in overseas markets.
Today technology production is a systematic process, much as in the automotive, electronics, pharmaceuticals, consumer goods and most other industries. Service providers need specialized firms that can do specialized things in specific locations, often globally, just like product companies have retailers, distributors, component manufacturers and assemblers, all the way down to mining, growing or productions of raw materials, located around the world. And service providers need systematic processes for managing that like Six Sigma, JIT, Lean and in IT CMM, Agile, ITIL and others.
Service providers no longer get to provide time-and-materials or cost-plus pricing in 2015 manufacturing, unless they are delivering truly groundbreaking innovation. Sometimes they make a little more profit, sometimes they lose a little more.
As technology solutions have moved beyond innovation, technology service providers similarly need to move to a new relationship model.
The trend of partner ecosystems
Companies are achieving this by creating partner ecosystems, in which each player has a specific role, a mandate to demonstrate leadership in that area, and offers the customer company pricing, contract terms and preferred staffing commitments in return for this defined and established role.
These ecosystems may be renegotiated every year or two but some kind of runway is essential for effectiveness and efficiency. And border skirmishes are inevitable because they want hungry aggressive partners, but aggressive intrusion into the territories of other partners will of course ruin an ecosystem.
A scattershot approach to procurement does not work either. If the ecosystem is constructed correctly, RFPs decline in number and importance and suppliers can lower their cost of sale – further increasing the efficiency of the process.
A client recently described the change in their desired technology services sourcing model as the difference between four-year-old soccer and 24-year-old soccer. “On a field of four-year-old players, it is 22 players all running around after the ball together, including the goalies. With 24-year-old players, we see 22 players spread across the field with a specific job to do to win the game.”
Procurement needs to treat the new supplier community accordingly and the community needs to act.
Don’t pay innovation rates for execution work
Due to the volume of transformation work involved in achieving the “digital customer company,” smart financial structuring is critical. Service providers are walking a tightrope in price per unit of production versus capability.
Everyday I hear client companies firmly stating they cannot afford to pay innovation rates for execution work. Their belief: if execution can be achieved at 50 percent of the cost of innovation then we should be able to get twice as much done, and/or spend even more on innovation, if we get the mix right. Some assignments demand high levels of innovation, while some do not.
The market transition to a digital world and a new relationship model requires that service providers make significant changes in operating models and, more importantly, also make a dramatic change in culture from company business, technology and procurement “buyers.”
11.5 key principles driving the new company/service provider relationship
Here are 11.5 key principles that company executives say they are looking for from their technology service providers today:
1. Industry and functional domain knowledge. In today’s world we are moving too fast for you to learn a new industry and still respond quickly. I need you to understand my business problem and the impact the technology has on it.
2. Technology knowledge. Technologies are increasingly powerful but also increasingly complex. You need to know the technology I am using and preferably have a specialization in my technology.
3. Architecture knowledge. Understand how all my applications, data and infrastructure fit together.
4. Responsible partnership. I really want partners who are willing to accept responsibility to get things done and that I trust to get things done, I don’t have time to monitor everything you do.
5. Agility. Business isn’t about three-year strategies and annual plans. I need to respond to market and competitive changes and I need my partners to respond quickly also.
6. Knowing I know you. Looking back 20 years, there were company people and there were vendor people. Today almost every executive has spent time on both sides of the relationship. So companies know how the service provider relationship is structured.
7. Accepting of risk – and reward. As an executive, I get rewarded well when things go well and get punished when things do not go well. I want my preferred technology services providers to share in that. And I know your business model, so you cannot play games with this. I will pay you your cost but want as much of your profits at risk in return for upside rewards.
8. Willingness to align incentives. My CEO moved all the executives onto a Net Promoter Score (NPS) driven incentive plan. I only have a tiny influence on NPS, but that’s what we are paid on because we all influence it. So do you my partners. Align your incentives with mine.
9. Ability to manage long-term goals and short-term needs. The most talented resources are scarce. And people have different personal objectives. But I need great people not only for the first six months initial install but two to three years into my process. You need to make it clear what your business model is and act and price accordingly. There is nothing wrong with getting higher rates for initial implementation with a strategy to hand over to the longer-term committed execution partners, but don’t have me depend on your key people and have them reassigned without my consent.
10. Partnership commitment. You need to partner with me and my people, but you also need to learn to partner with others who are likely to be your competitors but are in my systems and partner with my technology platform providers. I need the system to work.
11. Understand pricing by role.
11.5 Walk your talk. Tell me who you are in all of these and other elements. Walk and talk who you are. And be bold enough to make me live up to my own expectations.
Operating in the new partnering way is critical to success
A recent executive IT leader issued this mandate in a procurement and supplier council. “I need my providers to change the way you operate, for which I will give you a small increase in pricing – note: a small increase. Those who continue to act as staffing companies will get a cut of five percent in pricing per year in the next three years to pay for the others. My procurement people should either learn to operate in this new way or get out into another function in our company. All of us are critical to our company’s ongoing success.”
Graham Clark is the vice president & global head, Customer Experience Management, for Mphasis, a global technology company offering consulting, operations outsourcing and enterprise solutions.