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Use an outcome-based relationship model to manage IT vendors

Company IT leaders shouldn't need to spend their time micromanaging IT vendors, which is where implementing an outcome-based relationship model comes into play.

A global retailer faced tremendous profitability pressure. The situation was further exacerbated by the fact that even though it was making significant investments in its IT capabilities, its competitors were developing more innovative and cost-efficient methods of IT service delivery. Meanwhile, the retailer's focus on IT offerings was diverting resources that reduced its ability to focus on its core competencies. Ultimately, the executive leadership team recognized that it faced a two-pronged problem: How could it improve its IT capabilities while also continuing to innovate in its core competencies as a retailer? 

The company determined that it would need to shift toward an outcome-based relationship (OBR) model in which the IT provider(s) would focus on business outcomes to improve IT capabilities through a multiyear risk/reward contract. The supplier(s) would also drive IT innovation, freeing the company to focus on its core offerings -- a shift of liability in line with the broader market trend toward OBRs.

As a decision-maker, your mandate is to deliver against business outcomes. You must remain focused on the most strategic and business-critical activities, not the micromanagement of nuanced operational details of non-core functions. In fact, many of these non-strategic and non-core activities can be trusted to specialists that can provide a higher level of IT services and efficiencies. 

Identifying the right suppliers

Be warned that the supplier selection process is rarely a straightforward assignment; there's no simple checklist to follow. Your IT vendor ecosystem likely already has many competent suppliers that meet specific business needs, but in aggregate, this group likely will not lead you to your target vision of success. Now is the time to step back and reevaluate your business and IT needs. Imagine co-creating a holistic business solution with a shared vision of success tailored to your specific business needs in tandem with your most important service supplier(s), then home in on one or a handful that can provide the needed IT services with a fair degree of autonomy.

Developing symbiotic, outcome-based partnerships

Once you have identified strategic suppliers that can ensure quality and a competitive advantage, the benefits will compound over time. In effect, you will create a flywheel motion that reinforces gains and perpetuates the efficiencies from a joint relationship with your OBR. You will see costs decrease while capabilities grow, and your own organizational value will be elevated as the business comes to focus on mission-critical priorities. Your IT partners will also be able to confidently make planned investments into their relationship with you, allowing them to develop long-term capabilities that further enhance the flywheel motion.

A managed service OBR allows you to mitigate both short- and long-term risk across your organization. Additionally, it empowers your key partners to drive IT innovation with enhanced automation scalability and technology adoption. This innovation helps the business to deliver faster while ensuring the key partner is accountable for meeting your expected outcomes and service levels. Additionally, partners can also bridge any talent gaps across the business, as per business needs. 

Managing partnership outcomes

After you have identified the right supplier partner, it is critical to define outcomes in order to ensure that they are achieved. This entails establishing the right set of metrics by carefully selecting the key performance indicators (KPIs), with potential bonuses or penalties for exceeding or falling short of penalties. Metrics have the twin benefits of defining what the end state looks like for the on-the-ground team and holding the team accountable to deliver on them. It is also critical to communicate the metrics throughout both organizations to ensure alignment and further drive accountability.  

In the case of our particular retailer, the most suitable partner was selected from its incumbent pool of suppliers. Transitioning to an effective partner management model required revamping the existing supplier management system from the ground up and enabling a more symbiotic and transparent partnership. To realize this vision, IT leadership codified five key requirements to managing the partnership: 

  • Data-driven performance management and reporting;
  • Relationship building and management via a reciprocal feedback system;
  • A standardized communication cadence and channels;
  • A robust compliance and risk management structure; and
  • A transparent demand management framework.

Together, these measures proved successful for this company as it transformed its IT from a system of vendors to a single partner that is driving its IT innovation. The journey it took exhibits a universality that is scalable across industries and helps to ensure successful outcomes without micromanaging the IT operations. Its philosophy ultimately echoed the famous words of General George S. Patton: "Don't tell people how to do things, tell them what to do and let them surprise you with their results."

The authors would like to thank DJ McKerr, Rishi Kanungo and Anahat Danewalia for their contributions to this article.

About the authors

Suketu Gandhi is a partner in the Digital Transformation practice at global strategy and management consulting firm Kearney. Anshuman Jaiswal is a Kearney principal, Ariel Zhao is a Kearney associate and Earwin Tape is a Kearney senior business analyst.

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