Extract value from 3rd party IT contracts to boot-strap to Digital Transformation

After a brief interlude, in case you missed it, I am back to writing my articles on Solutions/Presales consulting capability build-up and/or turnaround. A buyer takes into account a number of aspects to consider a proposal as commercially viable and robust. The winning bidder is usually the one that has driven the value wedge, catered to the “unmet” demands or the most acute pain of the customer, which is also typically unstated.

In this write-up, I will focus on Solutions for 3rd party contracts. I have to admit that I rather stumbled onto this goldmine in a pursuit in 2006, when we found a route to unlocking more value for the customer than the intended scope of the #RFP. As a Leader, I had the opportunity to learn and improve from each pursuit & team member and particularly, by engaging with and listening to partners & customers. This then became a good case for yet another Continuous Capability Improvement or CCI.

As Corporations became bigger with mergers & acquisitions and global or smaller with divestitures, they then started to have a number of small to medium untouched contracts – Global, Regional & Local. These 3rd party contracts, was never solutioned for and value was never extracted. There aren’t many surveys which help you determine what is the typical spend break-down since what is small differs based on size on complexity of the organization. http://www.zdnet.com/article/it-budgets-2016-surveys-software-and-services/ article provides a good indication.

This Gartner report http://www.gartner.com/downloads/public/explore/metricsAndTools/ITBudget_Sample_2012.pdf is useful too. In my personal experience of large strategic deals, I have come across spend ranging from $5 Million per year to hundreds of Millions per year depending on the size of the organisation. I am only talking about contracts which have a value of <$50K or <$500K.

These “smaller” 3rd party contracts were meant to be simply governed or managed by In House staff or the larger Outsourced service provider or by a SIAM service provider. These 3rd party contracts, despite possibly being the largest of the internal IT spend when looked from its entirety, are typically left “unsolutioned” due to a variety of reasons:

- Why fix it when it ain’t broke is a typical one or “Business” may not agree to change

- Too small and too many and may apparently, require a large number of highly experienced and super expensive resources

- Understanding of the contract lost but stuck due to an undefinable critical dependency

- Confidentiality issues or Changes to the contract may make it expensive

Customers benefit from these 3rd party contracts when they are properly known, documented, managed, aligned to pricing benchmarks, aligns to SIAM transparency, secured and governed. What if some of these preventing business agility? What if the lack of service transparency or lack of serviceability is resulting in business losses? What if there is a security breach impacting business? What if the costs are high or even unnecessary leading to immediate benefit?

#SaaS and #IaaS providers may not know but it is often the case that an IT Organization is hamstrung by this baggage and hence unable to transform to a modern hybrid environment. The termination costs, exit transition costs, reverse people transfer, reverse asset transfer or IP (when introduced by supplier) costs are all elements that affect the business case to switch. It takes a lot of diligence from smart Solution consultants with the right experience of service delivery, contracting and transformation architecture & programme management experience to determine the right treatment for each of these contracts to extract business value. The right timing of the treatment is equally important to avoid and/or mitigate risks.

So, what could you do to extract value from these 3rd party contracts? It would be tempting to consider a service provider capability based bias to the solutions for these 3rd party contracts. Both the Financial Buyer and the Technical Buyer find it difficult to appreciate it. You must therefore articulate your solution from a Buyer perspective and yet makes sense to the delivery & contracts team that will execute the treatments.

What types of contracts?

Customers will have a variety of contracts. Ascertaining the type of contracts will help you to identify whether your organization has the capability and willingness. Pure-play service providers may not want to take in any hardware or lease type contracts. Whereas, a technology led service provider may find it in their sweet spot. I am excluding the large preferred supplier outsourcing contracts from purview since they are frequently benchmarked and/or optimised. Whilst you may want to categorise and sub-categorise differently, the main ones are:

- Telecoms, Networks, Security, Mobile, Voice/Data contracts

- Data centre Hardware, Hardware leasing, Hardware Break-fix or “Old Cloud” #contracts

- End user computing Hardware, leasing, Break-fix, support contracts

- Software licenses and maintenance contracts

- Business Application software licenses, maintenance, support and utility hosting contracts

- Agency contracts for a variety of freelancing, staff augmentation or support services

What do you have to know to determine optimisation outcomes?

A customer may not be able to reveal detailed information since confidentiality agreements prevent them from sharing details. But, during early sales stages solutions consulting exercise to create a business case or during a proposal stage lifecycle, you should seek sufficient information and assess them for optimisation potential. I have often found that knowing the Contract type and when combined scope exists, separation of scope at a high level would help determine whether we look at consolidation or fragmentation as strategy to optimise. Knowing the Service Levels, KPI, Service credits and debits would also help determine the level of strandardisation that is possible. Getting to know the Start dates, end dates, contract review, termination dates, notice periods, termination charges and exit assistance charges have helped determine the timing for optimisation. Whilst the exact price may not be revealed, getting to know the Contract price range, baseline volumes where applicable, break down pricing by assets/capacity, service support charges, license/lease charges have all helped in terms of assessing the level of reductions and whether savings could be achieved within the proposed contract timelines. A further reality check is to know Criticality or dependencies established by precedence or people/assets/license transfer impacts.

What could be your solution for each of these 3rd party contracts to derive value?

No customer will have the Sourcing budget to deploy a large contingent of legal, contract & #procurement teams and sit in on each and every short-listed supplier discussion to maintain confidentiality sanctity. On the other hand, the pursuit management costs will go up for the Service provider leading to higher cost of sale and longer internal ROI on the cost of sale. In a few of the pursuits, we have encountered 1,000+ contracts. You have to work with what you have at the moment, build a base and evolve from there. Similar to an Agile development/deployment model wherein you start with a Minimum Viable Product and build on from there. So, what are the treatments you could provide for each of these 3rd party contracts? You could leverage a number of Solution Strategies to optimise and extract value from the 3rd party contracts following careful evaluation such as:

Retire or terminate the contract - Yes, surprise! We did find a few contracts that was continued since the Commercial and Technical buyer had both left the organization and no one had bothered to look at it. That is a rare black swan event but do look out.

Transfer and optimise - You could transfer the contract to your organization and optimise if you have existing partnership and are in a position to offer future growth potential to the partner. In the process, you could also modernise the contract

Transfer and retain - This is an interesting one. I have seen customers enforce this option because they may want to transfer risks associated with the contract or at the minimum show risk mitigation put in place for balance sheet purposes

Transition the services and terminate part or all of the services - You could choose to transition in part or all of the services and terminate if your organization is capable of delivering the services directly or together with partners at a lower price and better quality of services

Transform and terminate part or all of the services - You could choose to transform in part or all of the services and terminate if your organization is capable of delivering the services directly or together with partners at a lower price and better quality of services. For example, you may have chosen a strategy of “Cloud first, Internet first, Mobile first” to boot-strap to Digital Transformation. You could possibly get rid of most #WAN links. You could possibly get rid of most of customer’s Data centres. You could get rid of most of wired #LAN. You could possibly get rid of a good chunk of software licenses.

Retain with customer but managed by Service provider - You could choose this if you can optimise on customer’s behalf over your contract term. You may provide a solution for partial transfer of services too.

Retain and managed/governed by customer - When you can add no value, leave it with the customer rather than merely increase contract value.

In all of the above, you should always look out for opportunities to (a) modernise the contracts, (b) innovation inputs inclusion, (c) Digital transformation outcomes contributions as potential add-on.

Recommendations to Service providers

Some of the contracts could be really old. I have seen contracts with no Transfer rights possibility. If it is significant from a cost savings and transformation potential, you may have to work with the customer to first re-negotiate with the 3rd party or work out a direct partnership arrangement first. You will have to engage & collaborate with Legal, HR, Risk & Compliance as much as you have Delivery stakeholders. Whilst there are hundreds of lessons, the main ones to focus on are:

- Existing contract provisions and when the customer can exercise their rights such as Novation for transfer

- A time bound programme plan is produced for each contract, when you will achieve them, at what cost to your organization and customer, and when the customer should terminate and when the customer will actually start gaining benefits

- A planned ramp-down or wind-down of existing contract and an aligned ramp-up of new contract or service provision should be in place

- Ensure there is a robust SLA/KPI, Service Credit/Debit and liabilities appropriate to the nature of risk involved; not all customers have the same perspective on this subject too

- Transformation for technology’s sake may not on its deliver the best results. Ensure there is a lateral business benefit too whilst exploring options for Transformation to Digital

- Robust service coordination, management and governance must be put in place

- Present a robust business case that is time bound and has a positive NPV

Recommendation to Sourcing advisors / Customers

Customers run IT to a tight budget, under intense scrutiny and high visibility since IT underpins every business process. From my personal experience of working for 3 biggest IT Outsourcing consultancies and having engaged a number of Analysts and Advisors, I observe that:

- Every service provider approaches the treatment to the 3rd party contracts differently, which is based on how they perceive they add value as much as their risks and margin making appetite. Be flexible and adaptive. Depending on the nature of contracts and business benefits of Transformation, there is a route to Digital

- A time bound sourcing cycle with adequate information being shared will make it easy for you and the service providers to maintain their “Say, Do ratio”

- There is a degree of preparedness that has to be done to share the right level of information for the service providers to choose the most appropriate treatment for the 3rd party contracts and therefore deliver the best value

- This is not exactly like the 6 blind men and the elephant but, when working directly with #SaaS and #IaaS providers, they know their business functionality features and/or their technology features and may need additional guidance to shape up the complete business case. It is possible as part of continuous capability improvement, they may too improve on their Professional services capabilities to work out solutions to your 3rd party contracts

- Having a robust 3rd party contracts management system connected with service performance dashboards, configuration, account payables help tracking, monitoring and management

- Service Integration and Management professionals can put in place systems, processes and dashboards for continuous modernisation of contracts

In conclusion

In summary, customers can leverage service providers experience in 3rd party contracts towards achieving costs optimisation, risk mitigation and Digital transformation outcomes. To deliver the best value, Service providers may have to invest in this capability by working together with a number of Global, Regional and Local partners. A realistic and beneficial proposal is possible with the support of the right team of Solution consultants, Legal professionals, Business Technology Transformation Architects & Programme managers, and Procurement and Contracting professionals. Having optimised, I hope this following article helps you with change knowing the role of culture and behaviours in an Integrated Service Management and Transformation framework.

About the Author

The author had first published the article on LinkedIn on September 26, 2017

Jagadish is a Strategic Board adviser, senior Executive leader with specialisation in reimagining business models; who has been successful at building and/or turnaround Practice advisory, Presales, Sales enablement, Solution consulting capabilities for: - Applications & Enterprise applications- Modernising and Transformation to a secure hybrid Cloud- Service Integration and Management in a multi-cloud environment- Digital workplace solutions- Digital transformation using IoT, IIoT, Big Data, Analytics, Artificial Intelligence, Drones and Robots- IT Infrastructure services More recently, Jagadish has influenced re-imagining a digitally enabled business model for a leading enterprise#IoT, #IIoT, #Bigdata, #Analytics, #artificialintelligence, #drones, #robots, #RPA, #cloud, #hybridcloud, #sales, #presales, #salesenablement, #strategy, #managementconsulting, #boardadvisor, #nonexecutivedirector, #applications, #digitaltransformation, #mixedreality, #integration, #collaboration, #API, #microservices, #marketplace, #solutionconsulting, #servicemanagement, #governance, #riskmanagement, #cybersecurity, #saas, #CRM, #ERP, #customerexperience, #customersuccess