Is your enterprise going for more agility? How about your suppliers?
According to Amazon’s Jeff Bezos: “In today’s era of volatility, there is no other way but to re-invent. The only sustainable advantage you can have over others is agility, that’s it. Because nothing else is sustainable, everything else you create, somebody else will replicate.”
Most financial services incumbents seem to have understood this. In response to the threat of digital disruption, they have increased efforts to boost agility by re-organizing the way they work. This includes increasing the number of partners they collaborate with. Accenture’s Banking Technology Vision 2018 shows that 44% of banks and 38% of insurers work with more than double the number of partners than they did two years ago. What many overlook is that the agility of these partnerships has an increasing impact on the overall agility of the enterprise.
Extending your operating model to your partners for more agility
Many financial services incumbents are trying to achieve the time-to-market and customer focus of a startup, while still offering a broad set of services across multiple customer segments, at an enterprise scale. To realize this “enterprise agility”, most are transforming towards an agile operating model. Inspired by how leading digital service providers such as Google, Netflix, Spotify and Amazon organize themselves, financial services providers have now developed their own flavor of agile operating model, for example, the ING Way of working, Scaled Agile at BNP Paribas Fortis, the Ingenico Enterprise Agility and the Crédit Agricole Agile organization.
Given that a significant part of business and IT services for financial services providers is delivered by their suppliers, there’s an opportunity to complement classic sourcing models with new sourcing models that align more closely to their agile operating models.
The advantages & limitations of classic sourcing models in an agile context
Time & Means (T&M) and Fixed Price (FP) have their strengths. However, as sourcing models they don’t fit well with the typical set up of agile operating models.
In the T&M model, the sourcing requirement is defined as the need for a specific profile, in terms of education, experience and certification. As the profile description is the same across all potential suppliers, their offers are typically compared by the daily cost of the person. The benefit of this model is that it can be set up and terminated quite fast. But it can also impede agility:
- The typical incentive of T&M is not timely delivery of customer value but contract prolongation. This is often done through arguing that valuable work remains to be done when a T&M agreement reaches its end date.
- A T&M resource typically matches the requested profile at the lowest rate available on the market, so he/she is unlikely to have additional skills to work on different tasks should business priorities shift.
- As T&M resources work in the same role over multiple years, they often gain deep and specific knowledge about the domain and/or system they’re working on and cling onto it. This can impede a continuous learning mindset and make it difficult to shift these resources to where most customer value can be gained.
In the FP model, a detailed outcome (scope of services) is defined upfront, and potential suppliers are requested to deliver this outcome at the lowest price. Some penalties might be applicable if the outcome is not delivered on time, or below certain quality (service) levels. The FP model avoids some of the T&M downsides because the scope of services can be expressed as the customer value that needs to be delivered.
However, the FP model also has its limits in an agile context. Fixing the scope upfront is difficult to get right. Suppliers often have an incentive to regard any scope changes as new contracts, to be negotiated separately. This impedes one of the key benefits of an agile operating model: the ease and speed with which changes of scope, within reasonable boundaries, can be made even after a project has started, based on new insights on what customers value most.
A new value-based model: change for free, money for nothing
The more recent value-based (VB) sourcing model is inspired by lean-agile procurement and addresses this shortcoming: business objectives are expressed as the desired customer value (e.g. through Epics, Features or even User Stories). The objectives are prioritized and placed on a backlog, which is the scope of work for the supplier. The supplier commits to deliver this scope of work for a fixed price. The supplier is empowered to bring onboard the people necessary to deliver the work, provided that this team applies the agile operating model of the client.
Items on the backlog can be changed if work on those items did not start yet and both parties agree that the total value of the backlog remains stable. Changes to the backlog are made through agile ceremonies, in the same way as changes would be made if no supplier was involved. This is sometimes referred to as “change for free”. To emphasize the end-to-end ownership of the joint team, the timely delivery and quality levels are a shared and measured objective. This might even be linked to pain or gain-sharing by the enterprise and the supplier.
If the enterprise suddenly decides to change its priorities due to external events, or a better understanding of what customers value, this could result in the remaining business objectives a supplier is contracted to deliver no longer being considered value adding. In this scenario, the contract can be terminated if the enterprise pays a percentage (20% for example) of the remaining contract value. The enterprise can then allocate funds to its new priorities, while the supplier gets time to re-orient towards other opportunities. Some call this the “money for nothing” clause.
The VB model has the strengths of FP while providing scope flexibility: it accepts there will be scope changes, and it empowers agile teams to make changes to their backlog if business priorities require it, without having to negotiate a new contract each time. The enterprise can terminate the contract if it decides to change direction without the supplier needing to factor in the full cost of that risk in their business model.
While the VB sourcing model overcomes the shortcomings of T&M and FP, it also has downsides. It requires the supplier’s resources to understand and apply the agile operating model of the enterprise. Sourcing & procurement employees might need to be reskilled, as they will need to focus more on outcomes rather than on process compliance. Companies also need to find suppliers they can trust, with the right scale and a shared agility ambition. And most importantly: both the enterprise and the partner need to embrace an agile mindset.
Captain’s table: a partnership of trust, moving beyond costs and scope only
One important enabler of a powerful VB sourcing model is the “captain’s table”. This is a partnership at strategic level, bringing together enterprise executives (e.g. CEO, CIO & Transformation C-level) and supplier executives. This multi-skilled team performs retrospectives on the value created in the past such as customer impact, new skills, new supplier credentials, ecosystem exposure, access to innovation and continuous improvements. It looks ahead to soundboard the enterprise’s strategy and test some of its assumptions. It allows partners to align their mid & long-term planning to the evolution of the enterprise, for example planning new skills, testing a new technology or decommissioning assets gracefully. This forum can enhance trust between partners because it creates transparency on the strategy. It eliminates the noise that often leads to suppliers having a different understanding of the strategy due to multiple hand-overs that often sit between the different executives.
In conclusion, enterprise agility can be a strategic advantage and many financial services providers are pursuing this agility by re-organizing the way they work. However, they should also consider evolving the way they source business and IT services and complement the classic T&M or FP sourcing models with a more value-based model. This would boost their overall agility and strengthen their strategic advantage.
Want to know more about how Accenture can help your enterprise adopt an agile sourcing model? Don’t hesitate to contact us for a chat!