For the past 15 years the focus on IT outsourcing has been primarily on standard services and shopping for the lowest price. Long-term contracts were preferably closed. The external IT suppliers have responded by setting up large factories on efficiency-oriented delivery. The changing circumstances on the demand side, has left little space in this construction to design a different way of value.

1. Value creation in IT
outsourcing
From strategic needs to a fitting IT outsourcing
construction
Leon Dohmen and Joop Nabbe
July 2011
Review and translation by Dennis Coll, Francoise Eemsing, Gianfranco Franceschi, William Martin.
This article is translated from the original Dutch article ‘Waardecreatie met IT-outsourcing’ published in Outsource Magazine in July 2011.
For the past 15 years the focus on IT outsourcing has been primarily on standard services
and shopping for the lowest price. Long-term contracts were preferably closed. The external
IT suppliers have responded by setting up large factories on efficiency-oriented delivery. The
changing circumstances on the demand side, has left little space in this construction to design
a different way of value.

2. Value creation in IT outsourcing
Introduction
Creating the expected value of IT outsourcing is not as easy as it seems. This is explained in
the book ‘Kampioen organisatieverandering’ 1 which talks about how significant improvement
need to take place when it comes to IT outsourcing and governance. The value that was
created (the result achieved) of 9 projects that dealt with IT outsourcing, in one way or
another, measured on average only a 4.8 on a scale from 1 (being very poor) to 10 (being
excellent). This result is 8% lower than the average result of the 46 involved research projects.
Governance2 also offers opportunities for improvement with an average score of 5.7.
Value creation
Technological developments of devices such as the iPhone, iPad, BlackBerry and increasing
applications in the Internet domain, such as social media marketing and the realization of
links between social media and customer relation management systems, for example, are not
so easily captured in standard IT services. Adding these technological developments to those
organisations that take part in active acquisitions and sales policy, and when creating new
business joint ventures are entered, then the internal IT department will have a hard time
following this and translating this into plausible IT services that adds value to the business.
Working with the IT department’s approved or authorized hardware and software lists, and
(rigid) standard services is not sufficient enough (anymore). Some organisations also have the
courage not to apply any longer the principle of forced trade with the internal IT organisation.
The internal IT organisation will therefore have to create value for the demand side (also
known as business) with IT services, otherwise the risk arises that the demand side goes
shopping elsewhere. In order to deliver IT services, many IT organisations seek the help of
external IT suppliers. Welcome to the world of IT outsourcing! 3
IT outsourcing
The decision to (partly) outsource IT services has several underlying reasons, cost reduction
being the most dominant. This is confirmed in the article "De toekomst van Outsourcing” in
Outsourcing Performance 2010.4 Cost reduction being the most dominant is not surprising
when you look at the basic structure of many IT outsourcing deals: standard service set up in
long-term contracts with service level agreements, purchased at the lowest price with annually
imposed efficiency improvements during the course of the contract for the involved supplier.
This basic structure leaves little room for other (strategic) reasons of IT outsourcing such as
accelerating innovation, knowledge improvement and improving the quality of IT services.
This does not prove that purchasing IT services at a low cost is wrong. If this is a desired
requirement from the demand side, then there’s nothing wrong with that. IT service then
creates value for the demand side by being inexpensive, in addition to providing basic
required functionality.
Demand side
To be able to create value in IT outsourcing, it is important to understand the complexity and
dynamics of the demand side. This applies as well to the internal IT organisations that have
little or nothing to do with IT outsourcing. Complexity is associated with the product/service
needs of the demand side. If these product/service needs are characterized as being standard,
then the complexity is low. If the product/service needs are (very) specific, then complexity
1
Dohmen, L. (2011). Kampioen organisatieverandering. Unibook.
2
This article use the tern governance or governing whereas the terms control(ling) and direct(ing) are also suitable terms.
3
This article should not be read as a plea for IT-outsourcing. Taking a decision for IT-outsourcing should be done with care
and needs investigation. This article deals about the strategic design for value creation in IT-outsourcing after the decision to
do this has been taken.
4
Riet, S. van de, M. Gianotten, J. Huige (2010). Outsourcing Performance. Giarte Media Group.
2

3. Value creation in IT outsourcing
is considered to be high. Dynamics can be linked to the predictability of delivery (time
aspect). When the supply of IT services can be planned, then this is interpreted as low
dynamics. When delivery is primarily ad hoc (and speed of delivery is desired), then there is a
high dynamic demand. To create value it’s important to know the (strategic) needs of the
demand side. This is an important starting point to set up a basic construction. Figure 1
divides the strategic needs of demand into four areas.
Complexity Complexity
customer request
Ad hoc
low; high;
Predictability of
dynamics dynamics
Planned high high
Complexity Complexity
low; high;
dynamics dynamics
low low
Standard Customized
Complexity: Dif f iculty of the
product/service
Dynamics: Movement, time
Variation in customer
related product/service
Figure 1: Complexity and dynamics of demand
Each quadrant offers different requirements for the delivery of IT services from the supply
side.
Supply side
External providers are positioned at the supply side of IT outsourcing. To create value, these
have to match the delivery of their products and services with the strategic needs of the
demand side. The requirements associated with this delivery are different for each quadrant
and they do influence also the relationship of the demand side with external providers. In the
lower-left quadrant - standard and easy to plan service delivery (low complexity and low
dynamics) - a low cost delivery price will indeed add value for the demand side. This can be
well supported by aligning on processes that support the delivery of these products and
services. In the upper-left quadrant, what is delivered is well known but the moment when it
happens is less predictable (low complexity but high dynamics). In the logistics sector, this
situation leads to frequent use of on-call contracts. In IT outsourcing, value for the demand
side can be created through the availability of a pool of employees that can be assigned when
the demand side requires it. This capacity has to show flexibility in its availability. In the
lower-right quadrant, predictable to deliver but (highly) specific products and services (high
complexity, low dynamics), value is created at the demand side through high quality products.
The craftsmanship of the external IT provider will steer the creation of value at the demand
side. The upper-right quadrant is to most challenging to serve. Value is created with highly
specific products or services that have to be delivered at unpredictable moments. Both
(flexible available) capacity and craftsmanship are needed to generate value. Here both the
demand and supply side, to quickly move forward together, have to form a solid and open
3

4. Value creation in IT outsourcing
partnership bond. Figure 2 illustrates the relationship between the strategic needs of the
demand side and the desirable connection with the external provider at the supply side.
customer request
Ad hoc
Predictability of
Capacity Partner
Planned
Process Crafts-
alignment manship
Standard Customized
Variation in customer
product/service
Figure 2: Relation between strategic needs demand and relation type supply
Most delivery models of today’s IT outsourcing or relationship types are located in the
quadrant of standard and easy to plan services. Here the emphasis is placed on process
alignment, for example on the basis of ITIL processes.5 When the strategic needs of the
demand side consist mostly of specific, ad-hoc, and quick to deliver IT services, such a
standard delivery model will not help generating much value for the demand side. A lot of
problems in current IT outsourcing contracts can eventually be traced back to this strategic
mismatch between demand and supply side. Albert Plugge 6, in his 2011 graduation research
paper, lays the blame almost exclusively by the external providers. However, the question
arises: What is the role of the internal IT organisation in the alignment mismatch between
strategic needs of the demand side and the delivery of IT services by the external providers?
Governance
The delivery and support of IT services in (large) organisations has evolved into an exciting
and spectacular form of teamwork, where more and more (external) parties are involved
through IT outsourcing. From the original function of specialist and internal supplier, the IT
organisation has transformed into a director who is less and less required to build and deliver
solutions itself. The main task evolved towards governing external providers, which on the
basis of agreed requirements with the demand side, take care of developing, running and
supporting suitable IT solutions. Governance in IT outsourcing is then the linking function
between demand and supply side and contributes a substantial share in the creation of value in
delivering IT services to the demand side. Governance focuses on the management of the
Technology, Organisation and People complex (TOP-mix). In each of the identified strategic
quadrants, the TOP-mix shows different features, thus governance will have to be shaped
differently, in order to generate value. If the strategic requirements of the demand side have to
5
ITIL is the acronym for Information Technology Infrastructure Library. ITIL is a best practices based method for the set up
of IT management processes.
6
Plugge, A. (2011). IT-sector snapt weinig van dienstverlening. Automatiserings Gids, 25 maart.
4

5. Value creation in IT outsourcing
be satisfied with specific, ad-hoc services and products, it won’t be possible to effectively
govern only on the basis of ITIL processes. Besides, the balance of powers tends to be
different in each of the four quadrants, and this reflects on either governance or the foundation
of the relationship between the demand and supply side of IT outsourcing.
Technology
In order to set up solid governance, the technology requirements are different in each of the
four quadrants. Effective support tools for operational processes are useful in the lower-left
quadrant, and there is a wide commercial availability of tools that support service delivery
based on standard ITIL processes. However, where the need for ad-hoc products and services
is outstanding, collaborative tools tend to be more useful.
Organisation
The organisation component of the TOP-mix includes the process, structure and location
aspects. When the demand is rather foreseeable, but the product or service is very specific
(lower-right quadrant) then investing in the continual improvement of the (software)
development process should be considered.
People
Attitude, competence and experience play a role in the P-component of the TOP-mix.
Effective teamwork in the upper-right quadrant (high complexity and dynamics) requires
different kind of individual qualities than the teamwork in the lower-left quadrant (low
complexity and dynamics).
Tooling f or Pool
contract; Flexible; Proactive;
support
Tooling f or long term
customer request
collaboration quick access decentra- Proactive;
Ad hoc
commitment;
Predictability of
resource
and to people lized; experts
planning personal
knowledge with required communities development
sharing skills
Formal
Tooling f or processes to
Planned
Tooling f or Mature Reliability;
support
support arrange sof tware basic Reliability;
service experts
sof tware operational development knowledge
management ef f iciency;
development processes and skills
processes
centralized
Standard Customized
Variation in customer
product/service
Technology Organisation People
Infra- Middle- Appli- Loca- Struc- Pro- Atti- Know- Skills
struc- ware cations tion ture cesses tude ledge
ture
Figure 3: TOP-characteristics for governance per strategic quadrant
Each quadrant determines specific requirements for the TOP-mix to satisfy, in order to set up
effective governance. In the last 15 years, IT outsourcing and the associated governance have
set their sights from the IT service management sector mainly upon the lower-left quadrant of
standardized and foreseeable IT service delivery. The (new) outside-in approach from the
viewpoint of value creation helps to remove this limitation. Figure 3 gives a comprehensive
5

6. Value creation in IT outsourcing
overview of the features of governance for the technology, organisation and people
components, for each quadrant.
IT outsourcing basic constructions
In order to create value for the demand side through IT outsourcing, four different basic
constructions were identified that show different TOP-features. In the first construction, called
Standard, value is generated through low-cost delivery. The organisation and technology
aspect of the TOP-mix define the process alignment for purchasing and operational service
management. The principles of operational excellence, according the value disciplines of
Treacy and Wiersema 7 are fairly applicable. In the second construction, named Preferred, the
delivery speed is the main factor of value creation. Agreements concerning the availability of
on-call capacity determine the basic settings. The value creation discipline, customer
intimacy, is well applicable here. The third construction is called Excellent and the value
generation is determined by the quality of the products and/or services. Attitude, competence
and craftsmanship lay the foundation for the IT outsourcing construction. The value creation
discipline, product leadership, is the most applicable in this case. The IT outsourcing
construction Partner is a blend of Preferred and Excellent; specific attitude, competence and
craftsmanship that include high availability and flexibility determine the value generation
through high quality products and quick deliveries. Figure 4 shows a comprehensive overview
of the four identified basic constructions that are identified to generate value in IT
outsourcing.
IT-Outsourcing types and characteristics:
Value 1. Relation type Standard
creation via: -> Process is leading
Cheap
-> Organisation and tooling aspects form basis for relationship
delivery
-> Price of standard service and/or product creates value
-> Following principles of operational excellence
Value
2. Relation type Excellent
creation via: -> Craftsmanship is leading
Quality of -> Knowledge and skills of people form basis for relationship
product -> Quality of the customized product and/or service creates value
/service
-> Following principles of product leadership
3. Relation type Preferred
-> Delivery capacity is leading
Value -> Organising and making agreements for needed capacity (flexible availability) form
creation via: basis of the relationship
Fast delivery -> Fast delivery creates value
-> Following principles of customer intimacy
4. Relation type Partner
Value
creation via: -> Craftsmanship and delivery capacity are leading
Fast delivery -> Knowledge and skills of people and organising and making agreements for needed
and quality capacity (flexible availability) form basis of the relationship
of product / -> Fast delivery and quality of the customized product or service creates value
service -> Following principles of product leadership and customer intimacy
Figure 4: IT outsourcing basic constructions and TOP-characteristics
7
Treacy, M. en F. Wiersema (1995). Discipline of Market Leaders, Persues Publishing.
6

7. Value creation in IT outsourcing
Case study
In 2008, the internal central IT and purchasing department of organisation Z asked an external
IT service provider to take over their network infrastructure, formally managed by another
external IT service provider, for a reduced price and subject to further annual price reductions.
During the term of the contract from 2008 to 2011, the internal central IT department and the
new IT service provider were 'trapped' in dispute regarding service level agreements for an
inflexible service. Both have lost sight of the user, which are mostly local IT departments
and/or other external IT suppliers, their service value and further development.
By realising their centralization and outsourcing strategy within the organisation Z, the local
IT departments disappeared, and the landscape for external IT suppliers changed. Knowledge
shifted or disappeared, and roles and responsibilities changed. The imposed annual cost
reduction causes much ‘pain’ for the external IT service provider and the internal central IT
department does not contribute enough to the much higher saving targets of the demand side.
The model of low costs contracts and standardisation (lower-left quadrant of figure 1) does
not comply (anymore).
The contract expires in 2011. The service requires a new global infrastructure. The internal
central IT and purchasing department of organisation Z, challenge themselves and their
external suppliers, to fulfil the needs of the users, and begin the contract renewal phase. The
chosen approach is agile and copied from 'Spiral', a continuous improvement and prototyping
based software development method. Three potential suppliers, based on an initial set of
requirements, have offered a budget proposal 8 and each supplier built a demonstration
environment (prototype 1). A budget proposal means that the supplier’s proposal is
subsequent to change following the requirements of the demand side. Evidently, only the
initial sets of requirements are known. Based on the findings of prototype 1, one supplier is
sent home.
The internal central IT organisation invites the service users. They will be asked to supply
work scenarios and test them through workshops with the central IT organisation, internal and
external suppliers on two demonstration areas (prototype 2). Contract negotiations will start
with the supplier with the best results. Hereafter, the construction of the service will start and
the implementation for a number of local branches (operational prototype) and a global
rollout.
The specification of the service, the basis of the contract, will be modelled on the ‘Critical to
Quality Tree’, part of Lean Six Sigma, which is a process improvement method. ‘Critical to
Quality Tree’ makes the service continuously measurable, during the term of the contract
based on user relevant criteria. The central internal IT department, the owner/IT controller of
the service, takes the lead on the continuous improvement process and ensures the alignment
between demand and supply. It is intended to establish a win-win situation for both customer
and supplier, hence continuously developing the service.
The rationale behind the approach is to evolve from an IT outsourcing basic construction
Standard (old contract situation) to a basic construction Excellent. The change to lower right
must ensure that the right attitude, the right contract and the right service implementation is
8
Parallel to requirements, also the proposal is a developing prototype. Selection is done from high level to low level, the
supplier will not be forced to stick to the first price indication provided.
7

8. Value creation in IT outsourcing
chosen for ongoing service and planned development to guarantee the service. The service in
this case is about a ‘standard administration’ which objective is to improve security and
reduce operational risk. Development is required, because the user is changing. The user is
more diverse and has less knowledge (available nearby), because the local IT departments are
reduced. The total cost of the service should also go down. Based on these developments on
the demand side, an external supplier who thinks along and participates as an expert is
required.
Summary
For the past 15 years the focus on IT outsourcing has been primarily on standard services and
shopping for the lowest price. Long-term contracts were preferably closed. The external IT
suppliers have responded by setting up large factories on efficiency-oriented delivery. The
changing circumstances on the demand side, has left little space in this construction to design
a different way of value.
-----------------------------------------------------------------------------------------------------------------
Leon Dohmen is principal management consultant at Logica and teaches
Management of Technology at the Rotterdam Business School for Master- and
MBA-programmes.
Joop Nabbe is project director at Logica.
8