As companies try to derive more business value from their IT services suppliers, they’re starting to realize that niche, deep domain capability and flexibility can be tough to find in top service providers.
In fact, around a dozen companies ask Forrester for help in selecting their tier two vendors every month, and some clients state that small providers deliver better focus and domain expertise and are stronger at connecting with business buyers than tier one vendors. But, identifying a true specialist in the crowded offshore market is difficult. And in order to leverage these specialists in tandem with top offshore generalists—who offer high-volume services at lower rates—sourcing and vendor management professionals need to learn new ways to engage and encourage specialists.
The Top Tier’s Deficiency
It’s important to recognize that not all tier two firms are performing well and are able to deliver high value service. For instance, few of the more than 300 midsize firms are growing in double digits and are profitable like their tier one counterparts. This means the biggest challenge that clients face is identifying the right work for their midsize providers and validating that the supplier can deliver the work. Given this difficulty, it’s no surprise that a common question clients ask is how to select a quality tier two provider?
To mitigate vendor risk, Forrester recommends looking for high levels of specialization and deep focus in niche areas—whether it’s service lines, technologies, or industry verticals. Due to their domain expertise, investments, long-standing client relationships, and thought leaders, specialists can deliver high-end business solutions that neither the undifferentiated tier two providers nor even the top vendors can provide effectively and quickly.
Clients should make a business solutions road map for the coming three to five years and identify providers who have, or are building, high-end business issues capability in those areas.
Finding True Specialists
But the question still remains—how do sourcing and vendor management professionals identify true specialists? Every provider claims to be a specialist today, even when they’re working across six or even eight service lines, and have clients across a broad range of industries. In addition to the standard vendor evaluation criteria that we recommend sourcing professionals follow, Forrester devised a set of guidelines to help properly identify a supplier as a specialist: it needs to have sizable business coming from a specific domain; it must demonstrate long-term commitment to that domain; the firm should have strong reference clients; and it should possess high-value intellectual property assets created in its centers of excellence and partner networks.
In addition to these criteria, the specialist firm needs to be laser-focused and clients must verify that the provider accurately depicts its business or traction in a vertical. Maintaining applications or managing a data center for multiple banks doesn’t translate into banking industry knowledge. To qualify as an industry specialist, providers need to work in specific business processes.
The importance of specialists in the IT service market will only continue to increase as the role of business buyers grows in services decision-making. As buyers focus more on aligning IT and the business, expect technology initiatives to drive more business value. So, in order to derive maximum value from specialists, sourcing professionals should:
- Clearly identify the specialization needed by the business in the coming three to five years. When working with business buyers, sourcing professionals should start by linking executives’ top business pains and area for P&L improvement with the providers that specialize in those areas. Clients should make a business solutions road map for the coming three to five years and identify providers who have, or are building, high-end business issues capability in those areas. Consider piloting with those providers and start building relationships between providers and business process owners so that deploying solutions later becomes easy.
- Encourage short-listed specialists to invest in needed solutions. Finding commonality in specialist needs is very difficult, and providers walk a tightrope as they select white spaces and make investment decisions. As sourcing professionals build mutual trust and comfort into supplier relationships, it will be important to ask for visibility into future R&D and investment plans of short-listed specialists. This will guarantee clients can achieve a superior match between problem/pain areas and the provider’s niche focus area.
- Ensure good working relationships between midsize firms and your top provider. Most clients will be forced to work with top players for large volume, globally distributed, and low to medium complexity work. Specialists will be reserved for high-end domain expertise, but that doesn’t mean they don’t need to interface smoothly for overall IT delivery. Investments should be made to align these divergently sized vendors—make them realize they need to work together to ensure smooth delivery. Focus on deciding engagement rules and escalation processes for the different providers, handshake protocols and formats, and penalties for sabotaging each other’s projects or violating disciplines.
- Push the specialist to constantly raise the bar on value. Specialization isn’t static—it keeps evolving as underlying technologies or business demands change. In order to continuously deliver higher value and to keep specialists relevant, sourcing professionals should push their specialists to constantly raise the bar. Ask for a center of excellence road map, investment plans for the initiative, client success stories, and an overall plan to deliver the next level of benefit every 18 months.
Christine Ferrusi Ross is Vice President and Research Director at Forrester Research, serving sourcing & vendor management professionals. She will be speaking at Forrester’s Sourcing & Vendor Management Forum on November 9-10 in Chicago.