Managing cloud migration
Contract restructuring
and retained IT
2
We continually see companies restructure their IT outsourcing contracts with traditional IT providers as part of their business transformation programs to create a global delivery model and drive cost optimization. Though such projects have created value for some companies, for others they have failed to meet expectations. Despite the initial investment and intent, too many projects have resulted in narrow tactical gains, substantial overruns, and even outright failure. Today’s IT customers are increasingly leveraging the cloud to transform their capabilities, and they are planning to move more than half of their workload to the cloud by 2014. This migration will likely continue, and the cloud will coexist with traditional IT for the foreseeable future. To meet this new demand, IT service providers have been transforming their service portfolio and delivery approach. As a result, we expect significant growth in IT contract restructuring efforts, as well as increased activity in deal renewals over the next 24 months.
Successful contract restructuring requires careful consideration of capabilities, roles, structure, and sizing, well before a contract is signed. As customer focus turns from day-to-day delivery to the creation of business value and improved operational effectiveness, there will also be an increased emphasis on transforming service delivery and investment in retained IT. Having a well thought out strategy for contract restructuring and a clear plan for retained IT is essential for companies wishing to avoid the typical failure patterns that accompany a lack of strategic alignment,
inadequate governance, and myopic IT service provider management. This paper addresses these issues.
Abstract
3
PwC’s study, The Future of IT Outsourcing and Cloud Computing, indicates that today’s IT customers are planning to have a majority of their workload “cloud-ready” by 2014, as illustrated below in Figure 1. These customers are making the move to a cloud-ready workload because they believe it offers many of the same benefits as traditional IT service providers, but at a lower cost and with greater flexibility.
Introduction
Q: What percentage of your computer workloads
are ready for cloud migration now and by 2014?
50% 40% 30% 20% 10% 0% Computing workload (%) <5% 5% to 25% 26% to50% 51% to90% 91% to100% Don’t know 14% 4% 33% 33% 24% 12% 12% 42% 5% 16% 2% 3% R espond ent s (%) Now 2014 n=261
Figure 1: Cloud migration readiness
(The Future of IT Outsourcing and Cloud Computing, PwC)
New generation cloud service providers are viewed as more effective than traditional IT service providers for private cloud migrations, as shown in Figure 2. Traditional providers aren’t being perceived as actively engaging both the business and IT when decisions about cloud migrations are being made. It indicates a missed opportunity for traditional IT service providers around business engagement and clarifying performance expectations explicitly in the contract.
Q: What percentage of your computer workloads are ready for cloud migration now and by 2014?
4
Figure 2: Effectiveness of traditional providers vs. new generation providers (The Future of IT Outsourcing and Cloud Computing, PwC)
Rationalizing investment decisions for IT should be treated as important as corporate strategy. This is particularly important when service providers are involved, as leadership of two separate companies and often in different locales, needs to be aligned on project priorities. To address the common failure patterns of IT projects, companies should proactively engage the service providers with a strategic framework for driving business alignment, and develop robust governance and change management processes. Well defined governance structure with clear roles and responsibilities that provide traceability and accountability for the project outcomes and a structured framework for decision making and escalation are crucial for evolving the relationships with service providers.
Rank for public
Rank for private
Traditional onshore IT outsourcers 5 2
New system integrators who specialize in
private cloud provisioning and management 2 1
Offshore IT outsourcing vendors 3 4
Traditional systems integrators without
major IT outsourcing services 4 5
Internal IT Staff 5 3
Q: Which vendor do you consider the most effective at helping companies migrate to cloud computing infrastructures today?
5
We are seeing a significant uptick in service provider contract restructuring and deal renewals. This can be
attributed to three factors:
• Contract restructuring offers quicker returns and lower risk, which has been attractive
• Economic conditions have caused many companies to be tentative about entering into new IT service contract agreements
• Longer term contracts from the early 2000s and newer, short term contracts are coming up for renewal simultaneously
Having a well thought out strategy around contract restructuring and a clear plan for retained-IT is essential to avoid the typical failure patterns and enable successful migration of the work-load to the cloud.
Successful contract restructuring entails careful consideration of capabilities, roles, structure and sizing for the retained-IT organization. Particularly, the definition of new capabilities and future size is critical for the IT service provider business case. The future state operating model should clearly describe the interfaces between business and internal IT, business and service provider, and internal IT and service provider. The challenge for the CIO often is around realigning the retained organization and re-engineering the interfaces. Investment and change effort is often underestimated and therefore requires a bottom-up plan for the staff in the retained-IT organization. To develop the strategy and plan, several questions need to be answered:
Contract
restructuring
and retained IT
Capabilities What are the required critical capabilities to be retained and newly set up in the future (retained) organization?
Which skills do these capabilities require? Are these skills available within the organization?
To what extent do they have to be strengthened or acquired? Which roles derive from the required critical capabilities? Processes &
Roles
Which processes clearly describe the interfaces and accountabilities on IT demand and IT supply?
Which processes and activities will the future organization perform? Which processes are critical for decision making?
What governance model would best fit the future organization? Structure &
Sizing
What is the optimal degree of (de)centralization for the future organization? Which structure would best fit the future organization?
How should the overall operating model represent interactions between the future IT organization/ businesses/ service provider?
6
Defining the future state operating model starts with a clear articulation of the strategy, long before the contract is signed, as shown in Figure 3 below.
Figure 3: PwC’s Methodology for Contract restructuring and retained IT
Change management Strategy Structure Process People Technology Program Management Delivering change Driving change
Assess Design Construct Implement Operate &
Review Understand current and future business models Screen potential vendors Construct Implementation plan Initiate service transitions Manage service and demand Complete data room/due diligence Develop high level retained IT organization Finalize business case Initiate contract negotiation Assess current state IT Complete organization, process & cost analysis Finalize “Make vs. Buy” analysis Develop plan for initial transitions and performance metrics for vendor Secure buy-in for service transitions and complete vendor negotiations Finalize contract terms and conditions (incl. Statement of Work) Develop benefit tracking mechanisms Obtain feedback from pilot users on new operating model Refine performance metrics for IT service provider Realize value and track benefits Continuously Improve service IT Contract Signature
Figure 3: PwC’s Methodology for Contract restructuring and retained IT
Our view is that the retained IT organization should take responsibility for driving the company’s strategic direction while working alongside the IT service provider to ensure that value for money is achieved while the organization remains closely aligned to the business objectives. The retained IT organization will be a fluid entity as the business undergoes the significant change brought about by either a traditional or a cloud service provider. To that end, it is important to assess current processes and complete a ‘make or buy’ assessment before screening potential providers and finalizing the business case. CIOs should work closely with their business leaders and IT providers to develop a plan for service transitions and to gain consensus from the selected service provider before finalizing the agreement.
Careful planning is required to ensure the right team is in place during the implementation, operation, and review phases. As the organization moves from one steady state to another, the focus on key (and other) skills will change. By gaining a deeper understanding of the experience and skill set that exists within the current organization, the team will be in a better position to shape, size, and re-tool the retained IT organization. Value realization, benefit tracking, and vendor performance management are needed to enable the realization of the business case and ongoing management of the retained IT.
7
The positioning of the retained IT organization and the service provider can make a significant difference within any business. Our experience indicates that creating and managing an effective and efficient retained IT organization, including the restructuring of contracts, is often challenging for many companies and, as such, requires careful planning and due diligence.
PwC, as an independent and trusted advisor, has assisted many clients, both corporate and governmental, with contract restructuring and retained IT organizations. Our capabilities include consulting, forensics, risk assurance and tax practices to help our clients articulate their needs and work toward an appropriate solution.
To have a deeper conversation about how this subject
may affect your business, please contact:
Michael Pearl Principal
US Cloud Computing Leader San Jose
408 817 3801
[email protected] David Marston
Partner
Global Licensing and Contract Compliance Leader San Jose 408 817 3803 [email protected] Venkat Tummalapalli Director
IT Strategy and Transformation San Jose
408 817 7441
www.pwc.com
© 2013 PricewaterhouseCoopers LLP, a Delaware limited liability partnership. All rights reserved.
PwC refers to the US member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. LA-13-0254