MITSloan Management Review The Long-Tail Strategy for IT Outsourcing WINTER 2016 IT outsourcing used to be driven by cost savings.Today,it's also driven by a need for innovation-and some leading companies are reinventing their supplier portfolios to achieve that goal. Ning Su Natalia Levina Jeanne W.Ross Vol.57,No.2 Reprint#57206 http://mitsmr.com/1Py2lxN
WINTER 2016 Ning Su Natalia Levina Jeanne W. Ross The Long-Tail Strategy for IT Outsourcing IT outsourcing used to be driven by cost savings. Today, it’s also driven by a need for innovation — and some leading companies are reinventing their supplier portfolios to achieve that goal. Vol. 57, No. 2 Reprint #57206 http://mitsmr.com/1Py2lxN
INFORMATION TECHNOLOGY The Long-Tail Strategy for IT Outsourcing IT outsourcing used to be driven by cost savings.Today,it's also driven by a need for innovation-and some leading companies THE LEADING are reinventing their supplier portfolios to achieve that goal. QUESTION How can BY NING SU,NATALIA LEVINA,AND JEANNE W.ROSS companies structure IT outsourcing to deliver innovation? TODAY'S RAPID PACE of technological change has fundamentally transformed global IT outsourcing.Traditionally viewed as a cost-saving measure,IT outsourcing is increasingly lever- FINDINGS Combine a few key aged as a strategic tool for acquiring cutting-edge innovation.Many companies are expanding partnerships with their portfolios of IT suppliers to include smaller,highly innovative companies.This pursuit of many smaller contracts. emerging technologies and capabilities,however,has elevated the complexity of managing sup- Create incentives for plier portfolios.The outsourcing practices that companies have been maturing in the past decade new niche suppliers. are under a new level of duress.Today,organizations need to reimagine IT outsourcing strategies ●Pay attention to governance of the in increasingly turbulent business environments. supplier portfolio. The Downside to Traditional Outsourcing In the past,companies have been advised to op- timize their portfolios of IT service providers by relying on several major partners with extensive technology and industry experience'while lim- iting the number of ad hoc suppliers.To mitigate the significant lock-in risk associated with such a portfolio,companies have been advised to use shorter-term contracts with well-designed in- centives.Collectively,this limited set of partners could offer a comprehensive and complemen- tary set of capabilities,while competition among partners could motivate them to invest time and resources in the client.By centrally managing this"optimized"portfolio,a company could achieve the economies of scale necessary for low cost and high efficiency. Although this approach to outsourcing was designed to ensure economies of scale and gain efficiency,?companies also hoped that their out- sourcing partners would introduce innovative technologies and associated services.3 Few PLEASE NOTE THAT GRAY AREAS REFLECT ARTWORK THAT HAS BEEN INTENTIONALLY REMOVED. WINTER 2016 MIT SLOAN MANAGEMENT REVIEW 81 THE SUBSTANTIVE CONTENT OF THE ARTICLE APPEARS AS ORIGINALLY PUBLISHED
WINTER 2016 MIT SLOAN MANAGEMENT REVIEW 81 TODAY’S RAPID PACE of technological change has fundamentally transformed global IT outsourcing. Traditionally viewed as a cost-saving measure, IT outsourcing is increasingly leveraged as a strategic tool for acquiring cutting-edge innovation. Many companies are expanding their portfolios of IT suppliers to include smaller, highly innovative companies. This pursuit of emerging technologies and capabilities, however, has elevated the complexity of managing supplier portfolios. The outsourcing practices that companies have been maturing in the past decade are under a new level of duress. Today, organizations need to reimagine IT outsourcing strategies in increasingly turbulent business environments. The Downside to Traditional Outsourcing In the past, companies have been advised to optimize their portfolios of IT service providers by relying on several major partners with extensive technology and industry experience1 while limiting the number of ad hoc suppliers. To mitigate the significant lock-in risk associated with such a portfolio, companies have been advised to use shorter-term contracts with well-designed incentives. Collectively, this limited set of partners could offer a comprehensive and complementary set of capabilities, while competition among partners could motivate them to invest time and resources in the client. By centrally managing this “optimized” portfolio, a company could achieve the economies of scale necessary for low cost and high efficiency. Although this approach to outsourcing was designed to ensure economies of scale and gain efficiency,2 companies also hoped that their outsourcing partners would introduce innovative technologies and associated services.3 Few The Long-Tail Strategy for IT Outsourcing IT outsourcing used to be driven by cost savings. Today, it’s also driven by a need for innovation — and some leading companies are reinventing their supplier portfolios to achieve that goal. BY NING SU, NATALIA LEVINA, AND JEANNE W. ROSS INFORMATION TECHNOLOGY THE LEADING QUESTION How can companies structure IT outsourcing to deliver innovation? FINDINGS Combine a few key partnerships with many smaller contracts. Create incentives for new niche suppliers. Pay attention to governance of the supplier portfolio. PLEASE NOTE THAT GRAY AREAS REFLECT ARTWORK THAT HAS BEEN INTENTIONALLY REMOVED. THE SUBSTANTIVE CONTENT OF THE ARTICLE APPEARS AS ORIGINALLY PUBLISHED
INFORMATION TECHNOLOGY business and IT leaders,however,are satisfied with to prosper in turbulent business environments.This the level of innovation introduced by their suppliers. strategy requires a carefully designed governance Yet today,more than ever,as rapid technological framework that rewards best-performing suppliers changes disrupt industries,established companies by increasing the client's commitment while specify- need access to fresh ideas,new technologies,and cut- ing a set of policies and architectural requirements ting-edge expertise.In IT,these capabilities are often for partners.The small set of key partners assists the found among smaller,more agile suppliers.3 This is client in operating core technologies and business not surprising,as the very idea behind disruptive in- processes while integrating the local,temporary,or novation is that many established players tend to experimental capabilities of long-tail suppliers into ignore disruptive changes to their business until the company's architecture.If orchestrated effec- newer companies replace their products and services tively,this strategy can turn into a reality the by providing better value to customers.In response, seemingly unattainable twin goals of introducing savvy business leaders are devising far more proactive innovation while ensuring cost and efficiency. outsourcing practices and are not just relying on a stable,limited set of technology partners to identify Leveraging the Long Tail for Technology Leader- and introduce innovations. ship Global Bank(not its real name)is one of the These proactive practices,however,conflict with largest global financial services companies and has many companies'aspirations for consolidating been ranked among the world's most innovative their IT supplier portfolios.Having encountered investment banks multiple times by financial industry the pain of managing multiple suppliers in the associations.Global Bank has a history of pioneering past,many companies,especially those with a cutting-edge technologies in financial services.For de- well-established sourcing-management office, cades,IT outsourcing was considered a strategic tool have created policies that mandate contracting only by the company.An early adopter of global sourcing, with a small group of strategic partners.Yet even in the bank began pursuing a global sourcing strategy in such companies,business-unit leaders tend to cir- the 1980s.In the decade that followed,Global Bank cumvent policies and engage the services of niche, partnered with a small set of major IT service compa- value-adding suppliers to keep up with technologi- nies in both onshore and offshore locations.These cal changes critical to their units'competitiveness. suppliers provided IT support and maintenance for This often results in a large set of shadow suppliers the bank's worldwide business.The bank's corporate working on smaller,fragmented projects,often policies focused on promoting these key relationships under the radar of sourcing-management offices so as to achieve efficiency in operations. and enterprise architects.Absent systematic orches- In the 2000s,however,with the rapid matura- tration and proper incentives,companies will miss tion of offshore IT service markets,the bank started the opportunity to integrate the local innovations adding new outsourcing relationships to include of these diverse suppliers into the organization. suppliers from new regions,as well as smaller,local suppliers offering new capabilities.In addition, The Long-Tail Strategy through mergers and acquisitions,the bank ac- In this article,we introduce a"long-tail"strategy for quired organizations that had their own supplier IT outsourcing.(See"About the Research.")This in- relationships.This diverse portfolio,often includ- novative I'T-outsourcing model combines a few key ing hundreds of suppliers within the same service partnerships with a dynamically changing and unre- category,allowed the bank to tap into new sources stricted number of smaller contracts with other of value and to access"best-of-breed"skills and tal- suppliers to deliver specific value propositions ent across the globe.At the same time,much beyond the capabilities of the key partners.Repre- redundancy existed among the suppliers,and sig- senting a dynamic,diversified,and yet disciplined nificant value was left on the table due to unrealized approach toward outsourcing,the long-tail strategy economies of scale,scope,and expertise.The col- embraces and even fosters a flow of new suppliers of- lective cost of managing transactions with this fering new capabilities that can enable the company diversified portfolio of suppliers was also very high. 82 MIT SLOAN MANAGEMENT REVIEW WINTER 2016 SLOANREVIEW.MIT.EDU
82 MIT SLOAN MANAGEMENT REVIEW WINTER 2016 SLOANREVIEW.MIT.EDU INFORMATION TECHNOLOGY business and IT leaders, however, are satisfied with the level of innovation introduced by their suppliers.4 Yet today, more than ever, as rapid technological changes disrupt industries, established companies need access to fresh ideas, new technologies, and cutting-edge expertise. In IT, these capabilities are often found among smaller, more agile suppliers.5 This is not surprising, as the very idea behind disruptive innovation is that many established players tend to ignore disruptive changes to their business until newer companies replace their products and services by providing better value to customers.6 In response, savvy business leaders are devising far more proactive outsourcing practices and are not just relying on a stable, limited set of technology partners to identify and introduce innovations. These proactive practices, however, conflict with many companies’ aspirations for consolidating their IT supplier portfolios. Having encountered the pain of managing multiple suppliers in the past, many companies, especially those with a well-established sourcing-management office, have created policies that mandate contracting only with a small group of strategic partners. Yet even in such companies, business-unit leaders tend to circumvent policies and engage the services of niche, value-adding suppliers to keep up with technological changes critical to their units’ competitiveness. This often results in a large set of shadow suppliers working on smaller, fragmented projects, often under the radar of sourcing-management offices and enterprise architects. Absent systematic orchestration and proper incentives, companies will miss the opportunity to integrate the local innovations of these diverse suppliers into the organization. The Long-Tail Strategy In this article, we introduce a “long-tail” strategy for IT outsourcing. (See “About the Research.”) This innovative IT-outsourcing model combines a few key partnerships with a dynamically changing and unrestricted number of smaller contracts with other suppliers to deliver specific value propositions beyond the capabilities of the key partners. Representing a dynamic, diversified, and yet disciplined approach toward outsourcing, the long-tail strategy embraces and even fosters a flow of new suppliers offering new capabilities that can enable the company to prosper in turbulent business environments. This strategy requires a carefully designed governance framework that rewards best-performing suppliers by increasing the client’s commitment while specifying a set of policies and architectural requirements for partners. The small set of key partners assists the client in operating core technologies and business processes while integrating the local, temporary, or experimental capabilities of long-tail suppliers into the company’s architecture. If orchestrated effectively, this strategy can turn into a reality the seemingly unattainable twin goals of introducing innovation while ensuring cost and efficiency. Leveraging the Long Tail for Technology Leadership Global Bank (not its real name) is one of the largest global financial services companies and has been ranked among the world’s most innovative investment banks multiple times by financial industry associations. Global Bank has a history of pioneering cutting-edge technologies in financial services. For decades, IT outsourcing was considered a strategic tool by the company. An early adopter of global sourcing, the bank began pursuing a global sourcing strategy in the 1980s. In the decade that followed, Global Bank partnered with a small set of major IT service companies in both onshore and offshore locations. These suppliers provided IT support and maintenance for the bank’s worldwide business. The bank’s corporate policies focused on promoting these key relationships so as to achieve efficiency in operations. In the 2000s, however, with the rapid maturation of offshore IT service markets, the bank started adding new outsourcing relationships to include suppliers from new regions, as well as smaller, local suppliers offering new capabilities. In addition, through mergers and acquisitions, the bank acquired organizations that had their own supplier relationships. This diverse portfolio, often including hundreds of suppliers within the same service category, allowed the bank to tap into new sources of value and to access “best-of-breed” skills and talent across the globe. At the same time, much redundancy existed among the suppliers, and significant value was left on the table due to unrealized economies of scale, scope, and expertise. The collective cost of managing transactions with this diversified portfolio of suppliers was also very high
As the global supply market matured,the costs ABOUT THE RESEARCH of such fragmentation and redundancy became in- We have been studying portfolio strategies for IT outsourcing since 2005 creasingly noticeable.This resulted in a decision to The main objective of the research program is to understand the changing nature of IT services in today's increasingly digitized and globalized business strengthen the bank's global sourcing governance. environment.We have conducted 150 interviews with 30 companies- By the mid-2000s,the bank started to consolidate including 15 buyers of IT-outsourcing services,mostly Fortune Global 500 smaller contracts into larger partnerships with companies,and 15 major technology-services suppliers.The 30 companies multinational IT companies.However,business- are based in North America,Europe,Australia,New Zealand,Latin America, unit leaders continued to enter into small-scale Russia,Japan,India,and China,and span the financial services,business ser- vices,technology,manufacturing,and energy sectors.The financial services contracts with new suppliers,justifying their ac- industry,as a pioneer of global IT outsourcing,represented a main context of tions by the need for skills and innovation.Instead the study. of banning these practices or looking the other way, Global Bank's sourcing-management office started Second,the bank incentivized the program implementing policies that allowed local business- managers to develop their own "best-of-breed" unit managers to discover and experiment with suppliers by helping suppliers acquire valuable new suppliers.In this process,two issues had to be knowledge about the financial industry,facilitating addressed.The first was how to avoid adding sup- the suppliers'market competitiveness and their pliers that did not bring unique capabilities but likelihood of winning further business from Global were added to the mix because of the local manag- Bank.These "groomed"suppliers viewed Global er's personal preferences.The second issue was how Bank as a strategic client and were willing to invest to motivate new suppliers to invest in relationships in the relationship without being promised a long- with Global Bank when they viewed the bank as term commitment. committed to its existing partners. Such mutual investment created strategic value What ensued was the creation of a long-tail for both Global Bank and its suppliers.For example, sourcing strategy that leveraged carefully designed in one business unit,managers spent significant organizational practices to combine the advantages time educating their new suppliers about the bank's of accessing the innovative capabilities of niche work flows in risk management.Such teaching en- players with the efficiencies offered by major part- abled one supplier to rapidly create a series of highly nerships.To implement this strategy,Global Bank successful software applications supporting this mobilized distributed,bottom-up decision making business function.Both the program managers and among its large number of“program managers'” the supplier recognized that these new applications middle-level managers responsible for creating and could be offered to other clients in the financial ser- maintaining IT systems serving particular business vices industry,since they automated standard functions-while using multilevel,top-down gov- industry processes.Legal agreements were negoti- ernance to continually evaluate and consolidate the ated as to how the supplier could sell these new supplier portfolio.Specifically,several initiatives software"assets"and related services while reward- were taken across the organization. ing Global Bank for its intellectual property. First,the bank gave its program managers from In a similar mode,an award-winning customer diverse business units a high level of autonomy in relationship management system was developed in supplier selection for smaller projects.In search of partnership with another supplier,although Global capability and cost advantage,these program man- Bank decided to keep IP rights.One of the suppli- agers experimented with hundreds of different er's senior managers described the bank's mode of niche players.As one of the leaders in the bank's working with new suppliers: global sourcing office explained: At [Global Bank]there is a willingness to We let people make relationships with whom- experiment with new types of partnerships. ever they wanted-do small projects offshore The bank has also shown us a significant so that people see that it works and then en- commitment.They have shown a tremendous courage them to do bigger projects. willingness to educate us about how a bank SLOANREVIEW.MIT.EDU WINTER 2016 MIT SLOAN MANAGEMENT REVIEW 83
SLOANREVIEW.MIT.EDU WINTER 2016 MIT SLOAN MANAGEMENT REVIEW 83 As the global supply market matured, the costs of such fragmentation and redundancy became increasingly noticeable. This resulted in a decision to strengthen the bank’s global sourcing governance. By the mid-2000s, the bank started to consolidate smaller contracts into larger partnerships with multinational IT companies. However, businessunit leaders continued to enter into small-scale contracts with new suppliers, justifying their actions by the need for skills and innovation. Instead of banning these practices or looking the other way, Global Bank’s sourcing-management office started implementing policies that allowed local businessunit managers to discover and experiment with new suppliers. In this process, two issues had to be addressed. The first was how to avoid adding suppliers that did not bring unique capabilities but were added to the mix because of the local manager’s personal preferences. The second issue was how to motivate new suppliers to invest in relationships with Global Bank when they viewed the bank as committed to its existing partners. What ensued was the creation of a long-tail sourcing strategy that leveraged carefully designed organizational practices to combine the advantages of accessing the innovative capabilities of niche players with the efficiencies offered by major partnerships. To implement this strategy, Global Bank mobilized distributed, bottom-up decision making among its large number of “program managers” — middle-level managers responsible for creating and maintaining IT systems serving particular business functions — while using multilevel, top-down governance to continually evaluate and consolidate the supplier portfolio. Specifically, several initiatives were taken across the organization. First, the bank gave its program managers from diverse business units a high level of autonomy in supplier selection for smaller projects. In search of capability and cost advantage, these program managers experimented with hundreds of different niche players. As one of the leaders in the bank’s global sourcing office explained: We let people make relationships with whomever they wanted — do small projects offshore so that people see that it works and then encourage them to do bigger projects. Second, the bank incentivized the program managers to develop their own “best-of-breed” suppliers by helping suppliers acquire valuable knowledge about the financial industry, facilitating the suppliers’ market competitiveness and their likelihood of winning further business from Global Bank. These “groomed” suppliers viewed Global Bank as a strategic client and were willing to invest in the relationship without being promised a longterm commitment. Such mutual investment created strategic value for both Global Bank and its suppliers. For example, in one business unit, managers spent significant time educating their new suppliers about the bank’s work flows in risk management. Such teaching enabled one supplier to rapidly create a series of highly successful software applications supporting this business function. Both the program managers and the supplier recognized that these new applications could be offered to other clients in the financial services industry, since they automated standard industry processes. Legal agreements were negotiated as to how the supplier could sell these new software “assets” and related services while rewarding Global Bank for its intellectual property. In a similar mode, an award-winning customer relationship management system was developed in partnership with another supplier, although Global Bank decided to keep IP rights. One of the supplier’s senior managers described the bank’s mode of working with new suppliers: At [Global Bank] there is a willingness to experiment with new types of partnerships. The bank has also shown us a significant commitment. They have shown a tremendous willingness to educate us about how a bank ABOUT THE RESEARCH We have been studying portfolio strategies for IT outsourcing since 2005. The main objective of the research program is to understand the changing nature of IT services in today’s increasingly digitized and globalized business environment. We have conducted 150 interviews with 30 companies — including 15 buyers of IT-outsourcing services, mostly Fortune Global 500 companies, and 15 major technology-services suppliers. The 30 companies are based in North America, Europe, Australia, New Zealand, Latin America, Russia, Japan, India, and China, and span the financial services, business services, technology, manufacturing, and energy sectors. The financial services industry, as a pioneer of global IT outsourcing, represented a main context of the study
INFORMATION TECHNOLOGY works.We have shown a lot of commitment Leveraging the Long Tail for Rapid Innovation to [Global Bank]in terms of making The long-tail strategy can help multinationals tap investment[s]in people and time. into the latest technologies,but in order to do so more rapidly than the competition,this strategy re- The final piece of this new approach was that pro- quires strong technology design and architecture gram managers evangelized their success stories capabilities.Toyota Motor North America Inc.has across the organization,promoting"their"successful outsourced 80%of its IT workforce,which has suppliers among other business units.Through this enabled the company to cut information-systems distributed decision-making process,a portfolio of support costs.s Several strategic partnerships are preferred suppliers emerged.The portfolio was regu- critical for maintaining the organization's com- larly evaluated by the bank's sourcing-management modity technologies and implementing office,which identified the top-performing suppliers incremental improvements.However,Toyota across the company.The top suppliers were then Motor North America's management recognized shortlisted in subsequent contracts.Over the years, that,while their core partners consistently pro- some of these"new"suppliers were promoted to the vided efficient infrastructure services and legacy list of key strategic partners.This set of strategic part- systems support,the company also wanted to lever- ners still accounted for the majority of Global Bank's age emerging technologies-often based in the IT-outsourcing activities. public cloud-to offer new services to dealers and This distributed,internal championing process consumers.Thus,management looked to smaller, enabled Global Bank to foster and proactively more agile suppliers to address their pressing need manage an influx of diverse suppliers that offered for innovation,especially in customer-facing areas. unique value propositions.Instead of seeking The consumer portal delivery(CPD)group at Toy- a static portfolio with an“optimal”number ota Motor North America was responsible for the of limited suppliers,the long tail of suppliers consumer-facing Web portal一a“big ecosystem” continually brought in new capabilities and tech- accommodating users with diverse digital devices. nologies.The diversified portfolio also helped CPD's unique technology requirements led to new hedge the risk of lock-in with strategic partners. kinds of supplier arrangements for Toyota-in The long-tail strategy,however,incurred a signifi- particular,working on one-off projects with na- cant total cost to coordinate a large set of suppliers.? scent startups instead of long-term engagements This cost was somewhat mitigated by the fact that with major partners.As Zack Hicks,chief informa- the sourcing-management office not only man- tion officer and group vice president of Toyota aged the core group of strategic partnerships but Motor North America,said: also provided support for contracting with new suppliers. CPD needs vendors that can build very quickly, As a result of the long-tail strategy,Global Bank and then tear it down the next day.And we are was able to rapidly tap into nascent supply markets dealing with smaller shops.When you were first in the mid-2000s,obtaining a first-mover advan- able to spin a car graphic,there were only a cou- tage in the global race for capability and talent.As ple of shops that could do it,and most of those digital disruption became a key concern in the last guys were working out of their garage. decade,the long-tail strategy enabled Global Bank to proactively scan and experiment with new tech- Such sourcing arrangements have demanded nology offerings from smaller,more agile suppliers, new governance approaches,because integrating allowing it to emerge as an industry leader of digital the services of these small suppliers into a seamless innovations such as enterprise social media,cloud customer experience requires access to enterprise computing,mobile technologies,and crowdsourc- data.In the past,developers supporting Toyota ing.Today,Global Bank continues relying on the Motor North America's consumer portal delivery long-tail strategy to stay at the cutting edge of group tended to create multiple new databases for global technological innovation. the applications they created locally.In the new 84 MIT SLOAN MANAGEMENT REVIEW WINTER 2016 SLOANREVIEW.MIT.EDU
84 MIT SLOAN MANAGEMENT REVIEW WINTER 2016 SLOANREVIEW.MIT.EDU INFORMATION TECHNOLOGY works. We have shown a lot of commitment to [Global Bank] in terms of making investment[s] in people and time. The final piece of this new approach was that program managers evangelized their success stories across the organization, promoting “their” successful suppliers among other business units. Through this distributed decision-making process, a portfolio of preferred suppliers emerged. The portfolio was regularly evaluated by the bank’s sourcing-management office, which identified the top-performing suppliers across the company. The top suppliers were then shortlisted in subsequent contracts. Over the years, some of these “new” suppliers were promoted to the list of key strategic partners. This set of strategic partners still accounted for the majority of Global Bank’s IT-outsourcing activities. This distributed, internal championing process enabled Global Bank to foster and proactively manage an influx of diverse suppliers that offered unique value propositions. Instead of seeking a static portfolio with an “optimal” number of limited suppliers, the long tail of suppliers continually brought in new capabilities and technologies. The diversified portfolio also helped hedge the risk of lock-in with strategic partners. The long-tail strategy, however, incurred a significant total cost to coordinate a large set of suppliers.7 This cost was somewhat mitigated by the fact that the sourcing-management office not only managed the core group of strategic partnerships but also provided support for contracting with new suppliers. As a result of the long-tail strategy, Global Bank was able to rapidly tap into nascent supply markets in the mid-2000s, obtaining a first-mover advantage in the global race for capability and talent. As digital disruption became a key concern in the last decade, the long-tail strategy enabled Global Bank to proactively scan and experiment with new technology offerings from smaller, more agile suppliers, allowing it to emerge as an industry leader of digital innovations such as enterprise social media, cloud computing, mobile technologies, and crowdsourcing. Today, Global Bank continues relying on the long-tail strategy to stay at the cutting edge of global technological innovation. Leveraging the Long Tail for Rapid Innovation The long-tail strategy can help multinationals tap into the latest technologies, but in order to do so more rapidly than the competition, this strategy requires strong technology design and architecture capabilities. Toyota Motor North America Inc. has outsourced 80% of its IT workforce, which has enabled the company to cut information-systems support costs.8 Several strategic partnerships are critical for maintaining the organization’s commodit y technolog ies and implementing incremental improvements. However, Toyota Motor North America’s management recognized that, while their core partners consistently provided efficient infrastructure services and legacy systems support, the company also wanted to leverage emerging technologies — often based in the public cloud — to offer new services to dealers and consumers. Thus, management looked to smaller, more agile suppliers to address their pressing need for innovation, especially in customer-facing areas. The consumer portal delivery (CPD) group at Toyota Motor North America was responsible for the consumer-facing Web portal — a “big ecosystem” accommodating users with diverse digital devices. CPD’s unique technology requirements led to new kinds of supplier arrangements for Toyota — in particular, working on one-off projects with nascent startups instead of long-term engagements with major partners. As Zack Hicks, chief information officer and group vice president of Toyota Motor North America, said: CPD needs vendors that can build very quickly, and then tear it down the next day. And we are dealing with smaller shops. When you were first able to spin a car graphic, there were only a couple of shops that could do it, and most of those guys were working out of their garage. Such sourcing arrangements have demanded new governance approaches, because integrating the services of these small suppliers into a seamless customer experience requires access to enterprise data. In the past, developers supporting Toyota Motor North America’s consumer portal delivery group tended to create multiple new databases for the applications they created locally. In the new
Smaller,innovative niche players allow Toyota to experiment with new technology trends and,more importantly,to accom- modate the diverse local needs of its dealership network. governance model,Toyota created an architecture strengths to the table.Combined,they make Toyota team that defined key business capabilities,as well more efficient,reliable,and agile. as both technology and data standards.By adher- ing to architectural standards,smaller suppliers Deriving Value From the Long Tail can now build new functions and applications that As evidenced by the experiences of Global Bank and are integrated with Toyota's core infrastructure Toyota Motor North America,deriving strategic and data.The shared technology and data plat- value from the supplier portfolio requires a forms offer a wider range of partnerships and methodical approach to managing a diverse and accelerate the CPD group's time to market. dynamic set of outsourcing relationships.Prior re- Toyota Motor North America is part of a com- search has documented the need for as few as three plex ecosystem that includes numerous dealerships, strategic partners to minimize management over- ranging from small,rural,family-owned locations head and ensure the value of global I'T outsourcing. to major-metropolitan,multilocation mega-dealer- Companies'experiences with the long-tail approach ships.Management feels it is important to enable corroborate the wisdom of a small number of stra- dealerships to create their own applications and tegic partners.But companies that manage their websites suited to their local needs and budgetary strategic partnerships effectively and institute archi- constraints.To facilitate this local flexibility,Toyo- tectural practices that preserve enterprise platforms ta's IT organization has worked with the Toyota can have a much higher number of small niche National Dealer Advisory Council to vet and final- partnerships.In fact,companies and their strategic ize a list of 19 Web-development providers from partners can institute practices that lead to a grow- which individual dealerships can choose.All 19 ing set of both one-off and ongoing targeted providers take advantage of Toyota's standardized supplier arrangements that generate a constant flow access portal to its centralized customer database of innovative technologies and approaches. when developing websites and applications for With each strategic partner in the portfolio,the local dealerships. client should continue investing time and resources Like Global Bank,Toyota Motor North America in order to reach the long-term goals of these rela- leverages the long-tail strategy to ensure efficiency tionships.The close ties between the client while facilitating localized innovations.The core company and its key partners enable and motivate partners deliver reliable services and constitute the these partners to develop knowledge and processes majority of Toyota's IT outsourcing expenditures. specific to the client so as to deliver greater value. In contrast,the smaller,innovative niche players Meanwhile,the client company should also foster allow Toyota to experiment with new technology healthy competition among key partners by engag- trends and,more importantly,to accommodate the ing suppliers with both complementary and diverse local needs of its dealership network.These substitutable capabilities.The long-tail part of the smaller suppliers leverage the technology and data portfolio,in contrast,has a different objective.It platforms that core providers build and manage.In enables the client to acquire emerging technologies most cases,they do not aspire to become big strate- and capabilities in an agile fashion.Strategic part- gic partners.Rather,the long-term payback is often ners will help to identify and integrate the services in the ability to generate new relationships with of these niche providers. similar companies.Toyota's two types of suppliers In order to identify new suppliers as well as man- must work together,but they bring different age the complexity and costs associated with the SLOANREVIEW.MIT.EDU WINTER 2016 MIT SLOAN MANAGEMENT REVIEW 85
SLOANREVIEW.MIT.EDU WINTER 2016 MIT SLOAN MANAGEMENT REVIEW 85 governance model, Toyota created an architecture team that defined key business capabilities, as well as both technology and data standards. By adhering to architectural standards, smaller suppliers can now build new functions and applications that are integrated with Toyota’s core infrastructure and data. The shared technology and data platforms offer a wider range of partnerships and accelerate the CPD group’s time to market. Toyota Motor North America is part of a complex ecosystem that includes numerous dealerships, ranging from small, rural, family-owned locations to major-metropolitan, multilocation mega-dealerships. Management feels it is important to enable dealerships to create their own applications and websites suited to their local needs and budgetary constraints. To facilitate this local flexibility, Toyota’s IT organization has worked with the Toyota National Dealer Advisory Council to vet and finalize a list of 19 Web-development providers from which individual dealerships can choose. All 19 providers take advantage of Toyota’s standardized access portal to its centralized customer database when developing websites and applications for local dealerships. Like Global Bank, Toyota Motor North America leverages the long-tail strategy to ensure efficiency while facilitating localized innovations. The core partners deliver reliable services and constitute the majority of Toyota’s IT outsourcing expenditures. In contrast, the smaller, innovative niche players allow Toyota to experiment with new technology trends and, more importantly, to accommodate the diverse local needs of its dealership network. These smaller suppliers leverage the technology and data platforms that core providers build and manage. In most cases, they do not aspire to become big strategic partners. Rather, the long-term payback is often in the ability to generate new relationships with similar companies. Toyota’s two types of suppliers must work together, but they bring different strengths to the table. Combined, they make Toyota more efficient, reliable, and agile. Deriving Value From the Long Tail As evidenced by the experiences of Global Bank and Toyota Motor North America, deriving strategic value from the supplier portfolio requires a methodical approach to managing a diverse and dynamic set of outsourcing relationships. Prior research has documented the need for as few as three strategic partners to minimize management overhead and ensure the value of global IT outsourcing.9 Companies’ experiences with the long-tail approach corroborate the wisdom of a small number of strategic partners. But companies that manage their strategic partnerships effectively and institute architectural practices that preserve enterprise platforms can have a much higher number of small niche partnerships. In fact, companies and their strategic partners can institute practices that lead to a growing set of both one-off and ongoing targeted supplier arrangements that generate a constant flow of innovative technologies and approaches. With each strategic partner in the portfolio, the client should continue investing time and resources in order to reach the long-term goals of these relationships. The close ties between the client company and its key partners enable and motivate these partners to develop knowledge and processes specific to the client so as to deliver greater value. Meanwhile, the client company should also foster healthy competition among key partners by engaging suppliers with both complementary and substitutable capabilities. The long-tail part of the portfolio, in contrast, has a different objective. It enables the client to acquire emerging technologies and capabilities in an agile fashion. Strategic partners will help to identify and integrate the services of these niche providers. In order to identify new suppliers as well as manage the complexity and costs associated with the Smaller, innovative niche players allow Toyota to experiment with new technology trends and, more importantly, to accom- modate the diverse local needs of its dealership network
INFORMATION TECHNOLOGY long tail,companies need to build a special set of We have a very,very close look at what's on the sourcing practices that institutionalizes both cen- market and how the market reacts.The whole tralized and decentralized decision making when it notion of having big vendors in big rooms can be comes to discovering,nurturing,incentivizing,con- turned upside down.We had a parallel internal trolling,and integrating relationships with multiple development,which we are now thinking of stop- suppliers.Through interviews with 150 managers ping because the new niche supplier is bypassing from 30 major multinational corporations,we have us.They are just moving much faster than we identified five such best practices for leveraging the can.So why don't we jump on their train? long-tail approach to IT outsourcing. 1.Distribute responsibility for scanning for 2.Nurture relationships at the tail end.One pit- new technologies.The design and evolution of the fall of the long-tail strategy is that it demotivates new portfolio,to a large extent,relies on an emergent, suppliers from investing in client relationships.In- bottom-up process.This process is driven by the deed,each supplier in the long tail may feel that its role distributed decision making of middle and senior is temporary and focus its best efforts on other clients managers who have the best understanding of their that are willing to make long-term commitments.It is business and technological needs.These managers thus important that both business-unit managers and should therefore take on a proactive role,scanning the sourcing-management office incentivize suppliers for new technologies and leaving the door open for to invest in the relationship.Top-down incentives suppliers,both existing and new,to pitch innova- shouldbe clear:Ifexperimental projects show positive tive solutions to them.These local managers are in results,the supplier will get internal referrals and po- the best position to distinguish the latest fads from tentially make its way into the mix of strategic potentially valuable innovations.Based on their partners.This was the case,for example,with cloud- analysis of promising technologies,they can start computing providers,which often started as niche identifying who can most effectively help them players but have moved into partnership roles as further probe new opportunities through experi- cloud technologies became more prominent. mentation-internal IT,incumbent partners,or Bottom-up nurturing requires more creativity new suppliers.The sourcing-management office and relationship-management skills.Business-unit should introduce informal and formal communi- managers cannot always promise long-term com- cation channels so that managers across diverse mitment,but they can design more creative business units can recommend new technologies incentives-such as invitations to work on innova- and suppliers to their peers. tive projects,strategic learning opportunities about For example,a major European insurance com- the client's industry,willingness to serve as a refer- pany historically relied on about a dozen major ence,and even financial investments in the suppliers. IT-services suppliers worldwide.Even with this It is important for managers to realize that the via- relatively large number of partners,it still had to bility of outsourcing relationships often lies in the venture into proactive search and engagement with alignment between the client's IT-sourcing strategies newer niche suppliers to keep up with digital and the supplier's long-term growth strategies.A large disruption.The sourcing director explained how U.S.financial services company,for example,had been the company was always prepared to open up its relying on a concentrated portfolio of a handful of portfolio: strategic partners.Yet over the years it also developed One pitfall of the long-tail strategy is that it demotivates new suppliers from investing in client relationships.Indeed,each supplier in the long tail may feel that its role is temporary. 86 MIT SLOAN MANAGEMENT REVIEW WINTER 2016 SLOANREVIEW.MIT.EDU
86 MIT SLOAN MANAGEMENT REVIEW WINTER 2016 SLOANREVIEW.MIT.EDU INFORMATION TECHNOLOGY long tail, companies need to build a special set of sourcing practices that institutionalizes both centralized and decentralized decision making10 when it comes to discovering, nurturing, incentivizing, controlling, and integrating relationships with multiple suppliers. Through interviews with 150 managers from 30 major multinational corporations, we have identified five such best practices for leveraging the long-tail approach to IT outsourcing. 1. Distribute responsibility for scanning for new technologies. The design and evolution of the portfolio, to a large extent, relies on an emergent, bottom-up process. This process is driven by the distributed decision making of middle and senior managers who have the best understanding of their business and technological needs. These managers should therefore take on a proactive role, scanning for new technologies and leaving the door open for suppliers, both existing and new, to pitch innovative solutions to them. These local managers are in the best position to distinguish the latest fads from potentially valuable innovations. Based on their analysis of promising technologies, they can start identifying who can most effectively help them further probe new opportunities through experimentation — internal IT, incumbent partners, or new suppliers. The sourcing-management office should introduce informal and formal communication channels so that managers across diverse business units can recommend new technologies and suppliers to their peers. For example, a major European insurance company historically relied on about a dozen major IT-services suppliers worldwide. Even with this relatively large number of partners, it still had to venture into proactive search and engagement with newer niche suppliers to keep up with digital disruption. The sourcing director explained how the company was always prepared to open up its portfolio: We have a very, very close look at what’s on the market and how the market reacts. The whole notion of having big vendors in big rooms can be turned upside down. We had a parallel internal development, which we are now thinking of stopping because the new niche supplier is bypassing us. They are just moving much faster than we can. So why don’t we jump on their train? 2. Nurture relationships at the tail end. One pitfall of the long-tail strategy is that it demotivates new suppliers from investing in client relationships. Indeed, each supplier in the long tail may feel that its role is temporary and focus its best efforts on other clients that are willing to make long-term commitments. It is thus important that both business-unit managers and the sourcing-management office incentivize suppliers to invest in the relationship. Top-down incentives should be clear: If experimental projects show positive results, the supplier will get internal referrals and potentially make its way into the mix of strategic partners. This was the case, for example, with cloudcomputing providers, which often started as niche players but have moved into partnership roles as cloud technologies became more prominent. Bottom-up nurturing requires more creativity and relationship-management skills. Business-unit managers cannot always promise long-term commitment, but they can design more creative incentives — such as invitations to work on innovative projects, strategic learning opportunities about the client’s industry, willingness to serve as a reference, and even financial investments in the suppliers. It is important for managers to realize that the viability of outsourcing relationships often lies in the alignment between the client’s IT-sourcing strategies and the supplier’s long-term growth strategies. A large U.S. financial services company, for example, had been relying on a concentrated portfolio of a handful of strategic partners. Yet over the years it also developed One pitfall of the long-tail strategy is that it demotivates new suppliers from investing in client relationships. Indeed, each supplier in the long tail may feel that its role is temporary
several relationships with other suppliers,mostly for 4.Govern your entire outsourcing portfolio.The cost-saving reasons.The company gradually discov- portfolio of suppliers emerging from the distributed ered the significant potential of some ofthesesuppliers decision-making process needs to be effectively or- and allowed them to work on more innovative proj- chestrated at the enterprise level.The critical role of ects.Leveraging these projects as incentives,the governance is to distinguish between the company's company achieved significant success in outsourcing. core processes-which long-term strategic partners As one senior procurement executive said: can manage for efficiency,security,and scale-and temporary,experimental,local processes that local You always want to be a customer of choice.And business or IT managers can outsource to nichesuppli- to be the customer of choice,you want to have the ers.This distinction will clarify accountability for kind of partnership where you are making your sourcing decisions.Governance must also specify supplier work on some of your most innovative standard,repeatable processes for due diligence,con- activity.And if you do that consistently and hon- tracting,and performance measurement.In addition, estly,the suppliers will give [your organization] governance is needed to periodically rationalize the the most talented resources [it has. portfolio to increase the client's commitment to the top-performing players while ensuring competition. 3.Encourage sales pitches from your suppliers. This rationalization requires a deep understanding of Capitalizing on the suppliers'investment in the out- value drivers of different types of outsourced services.2 sourcing relationships,the client's program It requires asking questions such as the following: managers should encourage the suppliers to actively Does this service benefit more from scale and propose innovative services.Suppliers'technology scope economies or best-of-breed approaches? capabilities,coupled with knowledge acquired from Would using a one-off niche supplier for this ser- the clients,can become a driver of value creation.Yet vice create significant risk of lock-in without clients often express disappointment with their ex- proper control mechanisms? isting suppliers'capacity for innovation.A key idea Is this a business-critical process that requires sig- of the long-tail strategy is to stimulate innovation by nificant redundancy,with at least two suppliers inviting both existing and new suppliers to propose that can substitute for each other? new services and win new business.While client The portfolio's precise breadth and depth can managers sometimes institute policies precluding vary significantly depending on a company's indus- proactive sales pitches from current suppliers,invit- try and strategy,as well as external supply markets. ing these proposals is an effective way of learning To evaluate the performance of the portfolio,a com- about innovative technologies and service offerings. pany should look into its unit costs for IT services. As an example,the global technology company Continually decreasing costs with sustained or im- EMC Corp.,headquartered in Hopkinton,Massa- proving service levels are indications of effective, chusetts,successfully leveraged suppliers to strategic partnerships.A company should also be introduce innovations ranging from new business able to calculate the increasing revenues from tech- processes to emerging technologies.During sup- nology innovations as a measurement of the success plier evaluation and contract renewal,EMC of the long tail.Overall,a company should closely emphasized innovative capacity as an important monitor the evolution of its portfolio,ensuring the differentiator.A former senior vice president and company's survival and competitiveness in an ever- IT chief operating officer explained: changing technology landscape. Large corporations with complex outsourcing Suppliers have got to demonstrate that they are portfolios will need a dedicated outsourcing-gover- bringing something different to the table that is nance office that works together with business-unit strategic to EMC.I always say to them,they've got managers to understand value drivers for each ser- to make me a hero.So they proactively suggested vice,institute proper controls,and support specific ways to change the process and the technology relationships.For example,a multinational finan- platform,and then we have a mobile app. cial services company has been recognized as one of SLOANREVIEW.MIT.EDU WINTER 2016 MIT SLOAN MANAGEMENT REVIEW 87
SLOANREVIEW.MIT.EDU WINTER 2016 MIT SLOAN MANAGEMENT REVIEW 87 several relationships with other suppliers, mostly for cost-saving reasons. The company gradually discovered the significant potential of some of these suppliers and allowed them to work on more innovative projects. Leveraging these projects as incentives, the company achieved significant success in outsourcing. As one senior procurement executive said: You always want to be a customer of choice. And to be the customer of choice, you want to have the kind of partnership where you are making your supplier work on some of your most innovative activity. And if you do that consistently and honestly, the suppliers will give [your organization] the most talented resources [it has]. 3. Encourage sales pitches from your suppliers. Capitalizing on the suppliers’ investment in the outsourcing relationships, the client’s program managers should encourage the suppliers to actively propose innovative services. Suppliers’ technology capabilities, coupled with knowledge acquired from the clients, can become a driver of value creation. Yet clients often express disappointment with their existing suppliers’ capacity for innovation. A key idea of the long-tail strategy is to stimulate innovation by inviting both existing and new suppliers to propose new services and win new business. While client managers sometimes institute policies precluding proactive sales pitches from current suppliers, inviting these proposals is an effective way of learning about innovative technologies and service offerings. As an example, the global technology company EMC Corp., headquartered in Hopkinton, Massachusetts, successfully leveraged suppliers to introduce innovations ranging from new business processes to emerging technologies.11 During supplier evaluation and contract renewal, EMC emphasized innovative capacity as an important differentiator. A former senior vice president and IT chief operating officer explained: Suppliers have got to demonstrate that they are bringing something different to the table that is strategic to EMC. I always say to them, they’ve got to make me a hero. So they proactively suggested ways to change the process and the technology platform, and then we have a mobile app. 4. Govern your entire outsourcing portfolio. The portfolio of suppliers emerging from the distributed decision-making process needs to be effectively orchestrated at the enterprise level. The critical role of governance is to distinguish between the company’s core processes — which long-term strategic partners can manage for efficiency, security, and scale — and temporary, experimental, local processes that local business or IT managers can outsource to niche suppliers. This distinction will clarify accountability for sourcing decisions. Governance must also specify standard, repeatable processes for due diligence, contracting, and performance measurement. In addition, governance is needed to periodically rationalize the portfolio to increase the client’s commitment to the top-performing players while ensuring competition. This rationalization requires a deep understanding of value drivers of different types of outsourced services.12 It requires asking questions such as the following: • Does this service benefit more from scale and scope economies or best-of-breed approaches? • Would using a one-off niche supplier for this service create significant risk of lock-in without proper control mechanisms? • Is this a business-critical process that requires significant redundancy, with at least two suppliers that can substitute for each other? The portfolio’s precise breadth and depth can vary significantly depending on a company’s industry and strategy, as well as external supply markets. To evaluate the performance of the portfolio, a company should look into its unit costs for IT services. Continually decreasing costs with sustained or improving service levels are indications of effective, strategic partnerships. A company should also be able to calculate the increasing revenues from technology innovations as a measurement of the success of the long tail. Overall, a company should closely monitor the evolution of its portfolio, ensuring the company’s survival and competitiveness in an everchanging technology landscape. Large corporations with complex outsourcing portfolios will need a dedicated outsourcing-governance office that works together with business-unit managers to understand value drivers for each service, institute proper controls, and support specific relationships. For example, a multinational financial services company has been recognized as one of
INFORMATION TECHNOLOGY We propose that in this time of rapid technological change, relying on a limited number of suppliers,no matter how diversified,is insufficient. the best private banks in the world.The bank in- financial industry awards for its technological vested in establishing a centralized governance innovation and emerged as an industry leader in organization responsible for designing the compa- technology.The bank emphasized the importance of ny's overall outsourcing model,supervising a small retaining and investing in architectural capability as number of major partnerships,and collaborating it moved toward a more diversified and dynamic with business units to coordinate relationships with outsourcing environment.As a senior executive of diverse long-tail suppliers.Under the management technology and operation explained: of the governance office,local business units still had the flexibility to select best-fitting capabilities. The bank retains the architectural oversight.The As one senior I'T executive at the bank said: bank has a keen interest in ensuring that we have broad design authority.We took the business up The choices about who the strategic vendors are into a multisourcing environment.We retain the and where they have a right to play,as well as high-level engineering capability and the service what top-down targets we'd like to see over time, integration role.And that's quite deliberate. about how much of a footprint is done with these vendors,are pretty centralized decisions. Changing the Outsourcing Culture The above five practices are key to successfully leverag- 5.Design for integration.With diverse suppliers ing the long-tail strategy for managing IT-supplier delivering specialized services,the long-tail strategy portfolios.While outsourcing researchersand advisors places significant emphasis on the client's integra- have pointed out the pitfalls of using only"megadeals" tion capability.At the core of this capability are and the need for expanding to some form of"multi- investments made into a strong technical architec- sourcing,we propose that in this time of rapid ture,shared data sources,and common standards, technological change,relying on a limited number of which enable the client to develop a holistic and suppliers,no matter how diversified,is insufficient. detailed view of different processes within the orga- The focus of the long-tail strategy is not managing a nization.This in turn shouldallow the localbusiness- particular number of suppliers so much as managing unit managers,the centralized IT staff,and the an architecture that permits varied numbers of suppli- sourcing-management office to make better deci- ers by regulating key standards and placing limits on sions about when to allow for a local niche solution where variability of suppliers is acceptable and where it and when to demand top-down engagement.Archi- is not.Based on the architecture,managers should take tectural investments that build capabilities for aclose look at the supplier portfolio,carefully assessing integration are expensive,but they save time and and cultivating different outsourcing arrangements money when a company attempts to extend its capa- for different types of functions. bilities with a new technology. This long-tail model allows organizations to As an example,a multinational financial services more effectively adapt to today's technology dis- company based in the Asia-Pacific region increas-ruptions.The very nature of disruptive innovation ingly embraced the long-tail IT-outsourcing is such that new players replace incumbent compa- strategy.Through effective outsourcing,the com- nies.IT-service suppliers are no exception.Some pany reduced costs,improved service levels,and forward-thinking suppliers are themselves proac- invested in collaborative innovation with suppliers. tively engaging niche technology players in open In recent years,the bank received a number of innovation projects to boost their company's 88 MIT SLOAN MANAGEMENT REVIEW WINTER 2016 SLOANREVIEW.MIT.EDU
88 MIT SLOAN MANAGEMENT REVIEW WINTER 2016 SLOANREVIEW.MIT.EDU INFORMATION TECHNOLOGY the best private banks in the world. The bank invested in establishing a centralized governance organization responsible for designing the company’s overall outsourcing model, supervising a small number of major partnerships, and collaborating with business units to coordinate relationships with diverse long-tail suppliers. Under the management of the governance office, local business units still had the flexibility to select best-fitting capabilities. As one senior IT executive at the bank said: The choices about who the strategic vendors are and where they have a right to play, as well as what top-down targets we’d like to see over time, about how much of a footprint is done with these vendors, are pretty centralized decisions. 5. Design for integration. With diverse suppliers delivering specialized services, the long-tail strategy places significant emphasis on the client’s integration capability. At the core of this capability are investments made into a strong technical architecture, shared data sources, and common standards, which enable the client to develop a holistic and detailed view of different processes within the organization. This in turn should allow the local businessunit managers, the centralized IT staff, and the sourcing-management office to make better decisions about when to allow for a local niche solution and when to demand top-down engagement. Architectural investments that build capabilities for integration are expensive, but they save time and money when a company attempts to extend its capabilities with a new technology. As an example, a multinational financial services company based in the Asia-Pacific region increasingly embraced the long-tail IT-outsourcing strategy. Through effective outsourcing, the company reduced costs, improved service levels, and invested in collaborative innovation with suppliers. In recent years, the bank received a number of financial industry awards for its technological innovation and emerged as an industry leader in technology. The bank emphasized the importance of retaining and investing in architectural capability as it moved toward a more diversified and dynamic outsourcing environment. As a senior executive of technology and operation explained: The bank retains the architectural oversight. The bank has a keen interest in ensuring that we have broad design authority. We took the business up into a multisourcing environment. We retain the high-level engineering capability and the service integration role. And that’s quite deliberate. Changing the Outsourcing Culture The above five practices are key to successfully leveraging the long-tail strategy for managing IT-supplier portfolios. While outsourcing researchers and advisors have pointed out the pitfalls of using only “megadeals” and the need for expanding to some form of “multisourcing,”13 we propose that in this time of rapid technological change, relying on a limited number of suppliers, no matter how diversified, is insufficient. The focus of the long-tail strategy is not managing a particular number of suppliers so much as managing an architecture that permits varied numbers of suppliers by regulating key standards and placing limits on where variability of suppliers is acceptable and where it is not. Based on the architecture, managers should take a close look at the supplier portfolio, carefully assessing and cultivating different outsourcing arrangements for different types of functions. This long-tail model allows organizations to more effectively adapt to today’s technology disruptions. The very nature of disruptive innovation is such that new players replace incumbent companies. IT-service suppliers are no exception. Some forward-thinking suppliers are themselves proactively engaging niche technology players in open innovation projects to boost their company’s We propose that in this time of rapid technological change, relying on a limited number of suppliers, no matter how diversified, is insufficient
capacity for innovation,14 but it often takes a long 2.M.C.Lacity,L.P.Willcocks,and D.F.Feeny,"IT Out- time for their customers to see the results of such sourcing:Maximize Flexibility and Control,"Harvard Business Review 73,no.3(May-June 1995):84-93. open innovation strategies.Meanwhile,their cli- ents can derive great value from establishing a more 3.N.Levina and N.Su,"Global Multisourcing Strategy The Emergence of a Supplier Portfolio in Services Off- dynamic,diversified,yet still disciplined approach shoring,"Decision Sciences 39,no.3(August 2008): to creating and managing external relationships.By 541570 synergistically combining bottom-up portfolio de- 4.D.Brown and P.Fersht,"Executive Report:The State sign with top-down portfolio governance,the of Services and Outsourcing in 2014,"September 2014, www.kpmg-institutes.com. long-tail strategy should allow companies to main- tain their focus on cost and efficiency while still 5.D.Fogarty and P.C.Bell,"Should You Outsource Analytics?"MIT Sloan Management Review 55,no.2 discovering new sources of value and innovation in winter2014:41-45. today's turbulent business environment.15 6.C.M.Christensen,"The Innovator's Dilemma:When The implementation of this strategy is not easy and New Technologies Cause Great Firms to Fail"(Boston, will be particularly uncomfortable for companies that Massachusetts:Harvard Business School Press,1997). are used to centralized governance of their IT re- 7.N.Su and N.Levina,"Global Multisourcing Strategy: Integrating Learning From Manufacturing Into IT Service sources.It requires continuous nurturing of key Outsourcing,"IEEE Transactions on Engineering Manage partner relationships while facilitating the emergence ment 58,no.4(November 2011):717-729. of new value-adding relationships that may eventually 8.P.Betancourt,J.G.Mooney,and J.W.Ross,"Digital disrupt some of the incumbent partnerships.Mean- Innovation at Toyota Motor North America:Revamping while,it requires significant investment into shared the Role of IT,"working paper 403,MIT Sloan School of Management Center for Information Systems practices and architectural capabilities so as to provide Research,Cambridge,Massachusetts,October 2015. proper incentives to a diverse set of players,reduce http://cisr.mit.edu. coordination and contracting costs,and enable inte- 9.Management scholars Martin Wiener and Carol gration ofservices.Implementing thisstrategy requires Saunders found that in offshore IT outsourcing,some companies could rely on three strategic partners. three changes in companies'outsourcing culture: See M.Wiener and C.Saunders,"Forced Coopetition From reactive problem-solving thinking to proactive, in IT Multi-Sourcing,"Journal of Strategic Information entrepreneurial thinking;from focus on cost to focus Systems 23,no.3(September 2014):210-225. on value created through external innovative capabili- 10.P.Weill and J.Ross,"IT Governance:How Top Performers Manage IT Decision Rights for Superior ties;and from a stable set of partnerships to a dynamic Results"(Boston,Massachusetts:Harvard Business set of relationships.If well executed,the long-tail strat- Review Press,2004). egy can transform IT outsourcing into a driver of 11.As this article was going to press in October 2015, innovation and value creation in the age of globaliza- Dell Inc.agreed to acquire EMC Corp.See,for example, tion and digital disruption B.Womack and D.Bass,"Dell to Buy EMC in Deal Worth About $67 Billion,Bloomberg Business, October 12,2015,www.bloomberg.com. Ning Su is an assistant professor of information systems and J.J.Wettlaufer Faculty Fellow at Ivey 12.Su and Levina,"Global Multisourcing Strategy." Business School at Western University in London, 13.Levina and Su,"Global Multisourcing Strategy"; Ontario,Canada.Natalia Levina is the Toyota Motor and L.Cohen and A.Young."Multisourcing:Moving Corporation Term Associate Professor of Informa- Beyond Outsourcing to Achieve Growth and Agility" tion Systems at the Leonard N.Stern School of (Boston,Massachusetts:Harvard Business School Business at New York University in New York City. Press,2006). Jeanne W.Ross is the research director and a princi- pal research scientist at the MIT Sloan School's 14.H.Chesbrough,"Why Companies Should Have Open Center for Information Systems Research in Cam- Business Models,"MIT Sloan Management Review 48, bridge,Massachusetts.Comment on this article at no.2 winter2007:22-28. http://sloanreview.mit.edu/x/57206,or contact the 15.S.Kaplan and W.Orlikowski,"Beyond Forecasting: authors at smrfeedback@mit.edu. Creating New Strategic Narratives,"MIT Sloan Manage- ment Review 56,no.1(fall 2014):23-28. REFERENCES 1.F.W.McFarlan and R.L.Nolan,"How to Manage an IT Reprint 57206. Outsourcing Alliance,"Sloan Management Review 36, Copyright Massachusetts Institute of Technology,2016. no.2 winter1995:9-23. All rights reserved. SLOANREVIEW.MIT.EDU WINTER 2016 MIT SLOAN MANAGEMENT REVIEW 89
SLOANREVIEW.MIT.EDU WINTER 2016 MIT SLOAN MANAGEMENT REVIEW 89 capacity for innovation,14 but it often takes a long time for their customers to see the results of such open innovation strategies. Meanwhile, their clients can derive great value from establishing a more dynamic, diversified, yet still disciplined approach to creating and managing external relationships. By synergistically combining bottom-up portfolio design with top-down portfolio governance, the long-tail strategy should allow companies to maintain their focus on cost and efficiency while still discovering new sources of value and innovation in today’s turbulent business environment.15 The implementation of this strategy is not easy and will be particularly uncomfortable for companies that are used to centralized governance of their IT resources. It requires continuous nurturing of key partner relationships while facilitating the emergence of new value-adding relationships that may eventually disrupt some of the incumbent partnerships. Meanwhile, it requires significant investment into shared practices and architectural capabilities so as to provide proper incentives to a diverse set of players, reduce coordination and contracting costs, and enable integration of services. Implementing this strategy requires three changes in companies’ outsourcing culture: From reactive problem-solving thinking to proactive, entrepreneurial thinking; from focus on cost to focus on value created through external innovative capabilities; and from a stable set of partnerships to a dynamic set of relationships. If well executed, the long-tail strategy can transform IT outsourcing into a driver of innovation and value creation in the age of globalization and digital disruption. Ning Su is an assistant professor of information systems and J.J. Wettlaufer Faculty Fellow at Ivey Business School at Western University in London, Ontario, Canada. Natalia Levina is the Toyota Motor Corporation Term Associate Professor of Information Systems at the Leonard N. Stern School of Business at New York University in New York City. Jeanne W. Ross is the research director and a principal research scientist at the MIT Sloan School’s Center for Information Systems Research in Cambridge, Massachusetts. Comment on this article at http://sloanreview.mit.edu/x/57206, or contact the authors at smrfeedback@mit.edu. REFERENCES 1. F.W. McFarlan and R.L. Nolan, “How to Manage an IT Outsourcing Alliance,” Sloan Management Review 36, no. 2 (winter 1995): 9-23. 2. M.C. Lacity, L.P. Willcocks, and D.F. Feeny, “IT Outsourcing: Maximize Flexibility and Control,” Harvard Business Review 73, no. 3 (May-June 1995): 84-93. 3. N. Levina and N. Su, “Global Multisourcing Strategy: The Emergence of a Supplier Portfolio in Services Offshoring,” Decision Sciences 39, no. 3 (August 2008): 541-570. 4. D. Brown and P. Fersht, “Executive Report: The State of Services and Outsourcing in 2014,” September 2014, www.kpmg-institutes.com. 5. D. Fogarty and P.C. Bell, “Should You Outsource Analytics?” MIT Sloan Management Review 55, no. 2 (winter 2014): 41-45. 6. C.M. Christensen, “The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail” (Boston, Massachusetts: Harvard Business School Press, 1997). 7. N. Su and N. Levina, “Global Multisourcing Strategy: Integrating Learning From Manufacturing Into IT Service Outsourcing,” IEEE Transactions on Engineering Management 58, no. 4 (November 2011): 717-729. 8. P. Betancourt, J.G. Mooney, and J.W. Ross, “Digital Innovation at Toyota Motor North America: Revamping the Role of IT,” working paper 403, MIT Sloan School of Management Center for Information Systems Research, Cambridge, Massachusetts, October 2015, http://cisr.mit.edu. 9. Management scholars Martin Wiener and Carol Saunders found that in offshore IT outsourcing, some companies could rely on three strategic partners. See M. Wiener and C. Saunders, “Forced Coopetition in IT Multi-Sourcing,” Journal of Strategic Information Systems 23, no. 3 (September 2014): 210-225. 10. P. Weill and J. Ross, “IT Governance: How Top Performers Manage IT Decision Rights for Superior Results” (Boston, Massachusetts: Harvard Business Review Press, 2004). 11. As this article was going to press in October 2015, Dell Inc. agreed to acquire EMC Corp. See, for example, B. Womack and D. Bass, “Dell to Buy EMC in Deal Worth About $67 Billion,” Bloomberg Business, October 12, 2015, www.bloomberg.com. 12. Su and Levina, “Global Multisourcing Strategy.” 13. Levina and Su, “Global Multisourcing Strategy”; and L. Cohen and A. Young, “Multisourcing: Moving Beyond Outsourcing to Achieve Growth and Agility” (Boston, Massachusetts: Harvard Business School Press, 2006). 14. H. Chesbrough, “Why Companies Should Have Open Business Models,” MIT Sloan Management Review 48, no. 2 (winter 2007): 22-28. 15. S. Kaplan and W. Orlikowski, “Beyond Forecasting: Creating New Strategic Narratives,” MIT Sloan Management Review 56, no. 1 (fall 2014): 23-28. Reprint 57206. Copyright © Massachusetts Institute of Technology, 2016. All rights reserved
