CIOs looking to apply an IT outsourcing strategy for emerging technology face an interesting dilemma: If they wait until the technology is mature enough to spec the deal easily, they risk losing the very advantage they are seeking -- getting a jump on their competitors.
"It forces you to violate what I consider to be the most basic principle of a well-structured strategic IT outsourcing initiative, that is, knowing what you want," said Andy Sealock, partner at outsourcing advisory firm Pace Harmon LLC.
In deals done where the traditional rules of an IT outsourcing strategy are followed, getting "your ask" correct up front -- requirements, service levels, and the scope of services and how they will be paid for, for example -- is the surest guarantor of a good outcome, Sealock said. Nonstandard technology by definition cannot be evaluated by the same metrics CIOs have developed over time for evaluating commoditized IT services and products. Emerging tech providers often are small operators with limited resources, eager for partners but protective of their intellectual property and still tuning the product you're buying.
"With a developing technology, there might be a field trial if you are lucky," said Sealock, whose clients range from telecom vendors on the hunt for advances in wireless technology to enterprises pushing the envelope on virtualization, green technology and cloud computing. "Some of this stuff is more like slideware." That doesn't mean CIOs who have decided to procure emerging technology should "throw up their hands and hope for the best," Sealock said.
Here Sealock shares seven pointers that Pace Harmon clients use to mitigate risk when they're contracting for the next big (or little) thing that will put them ahead of the pack.
IT outsourcing strategy tip sheet for emerging tech
1. Put in financial backstops. Getting detailed pricing is difficult with emerging technology services and products. A one-to-one correlation between the exact spec and the unit price might not be possible. What you can do, particularly with a startup company, is to negotiate "not to exceed" prices, Sealock advised. These price caps typically are based on ratios derived from your business case: in other words, what you can spend and still make a profit.
To mitigate risk, your contract, for example, could stipulate the price the provider cannot exceed, no matter how much the individual pieces of hardware, software or services cost it. Or you could put a cap on non-recurring engineering, or NRE, fees, stipulating that they cannot exceed a dollar amount per subscriber on your network or per user accessing an app.
2. Reinforce that intellectual property is a two-way street. Intellectual property is the golden egg of emerging technology. The provider is determined to protect it -- "almost paranoid about it," in Sealock's experience. As a buyer of a developing technology, however, you have to have intellectual property rights, he said.
In the process of taking an emerging technology and making it usable for a marketplace, his clients typically have contributed their own intellectual property. "Those [intellectual property] rights are valuable too, and can provide leverage if the tech provider starts misbehaving down the road," Sealock said. Structure your contract to reflect the dual nature of contributions, "down to who documents an idea first."
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3. Insist on a multivendor supply base. In addition to producing the patent for the new technology, some developing technology companies also like to manufacture the innovation themselves. That puts you into a sole-source provider situation, which is not competitive over time. "You can actually force them to license their technology to other manufacturers, with terms and conditions," Sealock said. Instead of being caught in a "monopoly situation," you should call for a portfolio of manufacturers.
4. Motivate the provider to follow your technology roadmap. Developing technology companies like to do things their way. You, however, want to use their technology to gain an advantage in the marketplace. That means that the provider will need to deliver certain features at certain times to allow you to stick to your roadmap for rolling out a product or service to your target customers.
"Up front, you can put into the contract that the vendor will develop this functionality at this date or bad things will happen to you," Sealock said. If a vendor is a month late, court action probably doesn't make sense, "but it does make sense to threaten, so their people work the nights and weekends to make sure it is one month and not two months late," he said.
5. Underline the importance of operational support, documentation and training. Small companies are "notoriously weak" in all three areas, Sealock said. With emerging technology, you need to be able to call morning, noon and night for help, "if their gear starts crapping out and you don't know how to fix it," he said.
You also need to get training and "knowledge transfer" so you can start fixing problems yourself. Having documentation that you can turn to when problems arise is critical. A sound IT outsourcing strategy for emerging tech addresses these weaknesses head-on. "Bring these points up early in negotiations so that the company can start marshalling its typically scarce resources to fulfill those obligations," Sealock advised.
6. Protect your head start in the marketplace. This is not always easy and in some experts' views, not always desirable, because it can put the brakes on improvements that would benefit everyone, including the original buyer. Sealock, however, is of the mind-set that most deals for emerging technology benefit from exclusivity. "Identify some period of time -- two, three, four years -- when they cannot sell this to your competitors," he said.
7. Establish a minimum threshold of performance on the product or service you are paying for. And so, you have come full circle on your IT outsourcing strategy for emerging tech. As the first of these seven tips states, it is difficult to spec a service level on emerging technology because the products or services are so new. You won't be able to write the service level agreement as aggressively as you'd like to, "but you have to take a stab at it," Sealock said. "Challenge your technical staff to work with the developing technology company to make sure this has a chance of working."
This was first published in September 2011