Digital transformation requires new technology partnerships and agile co-innovation

The demands on IT service providers are changing because companies are embracing digital transformation. Traditionally most IT services were confined to packaged software implementation, system integration, and managed services. Companies grew to rely on traditional outsourcers for these kinds of IT projects. However, the advent of digital transformation has added a new demand for IT companies, in addition to regular IT jobs. Analysis shows that the digital transformation market will grow to 120 Billion in 2020, with 90% of companies saying they are not digital yet. Meeting this new demand cannot be addressed using the vendors, contracts, and sourcing strategies used for traditional IT. These strategies work best with conventional IT projects for which they were initially designed.

Let’s take a second and define what we mean by digital transformation and software innovation. We see these activities as:

• Developing innovative, differentiating experiences and applications that delight customers with modern user experience, responsive web UI, and native mobile apps.
• Building distributed scalable backends on the cloud.
• Recognizing data as one of the most critical assets, building powerful analytical data platforms, and driving insights from data with machine learning and artificial intelligence.
• Embracing Agile methodology, a high-performance engineering culture, DevOps and automation to change and innovate faster and cheaper.

Achieving these milestones of digital transformation before being crushed by more digitally proficient competitors requires engaging a new kind of strategic partner. Agile co-creation partnerships are the preferred way for companies to partner with vendors because they help large companies deliver digital transformation and innovation while controlling their destiny. This form of engagement also enables companies to inject a high-performance engineering culture and automation into their team. This blog post aims to explain the Agile co-innovation engagement model to demonstrate how it is utilized to accelerate digital transformation.

For digital transformation, clients are turning away from traditional vendors in favor of Agile co-creation. Clients seek vendors who focus on:

• Delivering business results
• Building a strategic partnership
• Initiating an Agile knowledge transfer
• Enabling innovation

Below is the high-level breakdown of how Agile co-creation vendors stack up against traditional outsourcing vendors.

*Grid Dynamics hires only the top 5% engineers from top technical universities.

Current industry practices contain negative financial incentive issues because they create zero-sum scenarios that pit the vendor against the client. Contracts like fixed-price projects and open-ended T&M do not focus on delivering business results. Instead, these contracts provide short-term incentives for the client to focus on cost savings that hurt the vendor. Likewise, the vendor focuses on increasing profits from the project that hurt the client. Additionally, request for proposal (RFP) documents that focus on project requirements rather than business results shift the priorities from delivering a successful product to fulfilling RFP requirements. On the other hand, co-innovation engagements focus on defining key performance indicators (KPIs) and building trust-based strategic partnerships. Companies should pursue contract terms that ensure that short-term profits take a back seat to longer-term partnership goals.

One of the most common engagement models is a large fixed-price project. These projects have a set price for set deliverables. In theory, any unforeseen issues impacting the schedule or cost should be absorbed by the vendor. However, unscrupulous vendors are known to game the system by winning a contract by deliberately entering a low-ball bid, only to drive the final cost up by forcing the client to accept numerous change requests. The client ends up absorbing the cost overruns and may not see the results they had anticipated. Alternatively, Agile co-creation uses small fixed-price projects for initial engagements designed to build trust that is replaced with a soft contract when a successful discovery scales into a full project.

Another engagement type is a cost-plus or time and materials(T&M) project. This type of project pays the vendor by the hour for services that place all the cost risks on the client if time and materials charges are unbounded. Traditional outsourcing vendors tend to “abuse” T&M contracts by bidding low rates to win the deal, but use large numbers of lower-quality coders to drive up the cost. Studies show that more substantial teams do not improve project success rates and require more client manpower to manage. Therefore in these scenarios, the vendor has a short-term incentive for supplying many lower-quality engineers. On the other hand, Agile co-innovation companies operate on the principle that small teams of highly trained specialists are more effective and easier to manage than larger, less skilled teams. They provide blueprints, accelerators, training for their engineers, and their delivery managers, so they are not just a staffing company, but an invested technology partner.

The RFP must also be structured to focus on KPI’s over project requirements to be successful. When requirement-based RFP’s do not focus enough on factors that lead to actual business results, there is an unintended consequence where satisfying requirements becomes prioritized over actual business results. Overall, all of these engagement issues prevent mutually productive relationships between customers and service providers and therefore hinder digital transformation efforts.

Popular engagement models like outsourcing and outstaffing have some excellent use cases. Still, they are not as effective at promoting knowledge sharing and bringing new ideas like co-innovation. This is because co-innovation engagements involve the client and vendor working together with the vendor bringing skills and experience, not just engineers to the engagement.

Outsourcing or managed services do not work well for large digital transformation projects because, using these types of services, the client does not gain an intimate knowledge of the resulting technology. If the client does not understand the technology, they become dependant on the provider, which is problematic for anyone who wants full control of their technology future. No knowledge transfer occurs because there is a wall between the client and the vendor, creating a technology black box.

Outstaffing is an engagement model that helps a client build a project team on-demand by filling in-house skill gaps with the technology vendor’s skilled personnel until the client can find full-time staff. A strategic partnership does not exist if the vendor supplies only skills of individual people, but not a knowledge of past implementations or use of blueprints. Merely filling a job position with temporary staff gives the client a short-term win but a long-term loss because the outstaffing vendor has less incentive to ensure project success through the services they provide.

Co-creation is a type of outstaffing model with some significant differences. The vendor’s personnel are not merely temps to be replaced by in-house workers as hiring ramps up. The vendor personnel is an integral part of the project, there for the duration or, in many cases, for many years spanning multiple programs. They also bring in engineering expertise and experience developed by the vendor, such as automation, accelerators, and blueprints, that can speed up and improve project results.

The key to a successful co-creation partnership is to find the right partner that can create differentiated digital experiences and optimize operational costs. For digital transformation, traditional outsourcing companies are the wrong type of vendor because they focus on managed services rather than innovation. Engineering firms focused on innovation use only highly trained and specialized experts that can complete challenging greenfield projects and bring new ideas while pushing back on unclear requirements and other issues in the interest of the client. These engineering firms build innovative teams that are continually trained, practice agile development, and high-performance engineering that is hard to create from the inside of client companies. Traditional vendors’ lower-quality coders may nor have these specialized skills and, therefore, may struggle to deliver digital transformation. Clients believe that innovative experiences differentiate them and provide a competitive advantage.

Given the history of issues with traditional vendors, contract structures, and engagement sourcing models, companies planning a digital transformation need to pursue Agile co-innovation vendors. These vendors are the best alternative when looking for strategic partnerships, knowledge transfer, innovation, top engineering talent, and an Agile and product mindset. Five key characteristics make an Agile co-creation vendor more successful than a traditional outsource vendor at accelerating digital transformation:

• A successful vendor builds trust through long term strategic partnerships.
• They enable innovation through Agile practices, a product mindset, and experience with emerging technologies.
• They can help scale projects on demand and provide knowledge sharing.
• They offer the best engineers that practice Agile work according to a high-performance engineering culture.
• And they have a focus on customer success, allowing all participants to win in the long-term.

Agile co-innovation focuses on strategic partnerships and bringing business value to the client. A successful strategic partnership starts small and builds by growing trust over time. The goal is not a one-time fling, but a robust multi-year relationship. However, there is more to a strategic partnership than practicing trust-building. The client does not merely dictate project results. The vendor sits down with the client and discusses short and long-term goals for the team to ensure a mutual understanding and client success.

Client success is more than delivering a software package at the culmination of a project. It is about having the product and the team achieve business and technical KPIs. It includes knowledge sharing and helping the client establish a proper engineering and delivery culture within a team and spread this within the organization. Client success may also involve developing appropriate delivery processes with Agile, continuous delivery, automation, and SREs for long-term benefits.

Strategic partners also need to have the right technology vision for the future. This often comes from having strong visionary leadership that understands emerging technologies and how it will impact the industry. Strategic partners also offer their past technology experience, blueprints, and accelerators to ensure the client’s success. This kind of know-how accelerates and de-risks initiatives. A strategic partnership offers the most natural path to a fast and successful digital transformation journey. Combining the client’s core industry expertise with the vendor’s IT and engineering expertise complement each other perfectly.

Agile co-innovation enables the creation of differentiated digital experiences by injecting a high-performance engineering culture, Agile process, and product mindset into the client’s team. Agile co-creation companies provide the necessary tools and culture that brings about technology innovation. Developers need several ingredients to achieve a high-performance engineering culture that will enable faster development and a higher quality output:

• Agile processes
• Product mindset
• DevOps and automation
• Small, focused cross-functional service-oriented teams

Each of these factors contributes to an environment that enables innovation. Agile development emphasizes experimentation, constant course corrections, and a more flexible workflow. A product mindset is based on the idea that teams should think about initiatives as being products rather than projects. Product engineering focuses on building a minimum viable product, then using data and experimentation to improve KPIs. DevOps and automation are a means of shortening the development cycle without sacrificing quality. By building automated deployment and testing pipelines, changes can be made faster. This makes experimentation cheaper and more manageable. A high-performance engineering culture usually consists of small, focused cross-functional service-oriented teams. These small teams are 100% focused on delivering results useful for experimentation and innovation. Lastly, service-oriented teams, where each team produces a service (via API or easy to use interface), removes unnecessary interaction, and improves cross-team collaboration.

Through the engineering services vendor, the client gains access to the newest technologies in big data, cloud computing, analytics, artificial intelligence, machine learning, user experience design, and customer experience.

A co-creation engagement provides the client with an opportunity to leverage the digital transformation expertise, blueprints, and technical program management of its engineering services vendor into their resource pool. Vendors who have previously completed digital transformation projects build up expertise through blueprints, accelerators, and practices that add considerable value to the client’s knowledge pool. Unlike the “black box” methods of a traditional outsourcing engagement, the co-creation engagement allows all parties to work side-by-side in technical, project, and program management. The client obtains a knowledge transfer via training from the engineering services vendor, which helps the client bring new skills in-house.

The optimal distribution of client to vendor personnel in co-created projects shift during the life of each project. Typically, the vendor represents the majority of the team members at the project’s inception. As the project progresses and the client gains more expertise, the ratio shifts toward the client. The vendor and client work together to ensure the team always has an optimal distribution ratio. The vendor provides program management, technical skills, and has a significant say in all aspects of the project. The client also has a considerable presence to take advantage of a knowledge transfer of Agile and high-performance engineering concepts.

Engineering services companies recruit top engineers through technical internships and relationships with the top universities around the world. These companies build a culture designed to attract and retain these highly specialized individuals with perks, such as technical internships, internal training, and top-quality technical resources. Highly skilled engineers generally pursue work on innovative projects using the latest technologies and have high retention rates.

Another reason agile co-creation companies have great engineers is that they excel at building high-performance engineering cultures. The client does not have easy access to such specialized markets and environments, so they struggle to quickly staff a team with the skills needed to guarantee project success. They also struggle internally to build a culture of engineering excellence that vendors have already created. Lastly, the cost to access a top-notch engineering talent through the engineering services company is less expensive than attempting to build this talent internally.

Customer success and “winning” are not mutually exclusive concepts. Both sides can, and do, win in a successful partnership arrangement. One way to structure a successful partnership arrangement is the use of soft contracts.

The concept behind a soft contract between two parties is that both parties become incentivized to collaborate for their mutual benefit. The contract is ‘soft’ because it does not specify what is to be delivered by each party but clarifies each side’s relationship and roles in producing mutually beneficial deliverables. A fruitful shared-success engagement model also includes key performance indicators that can deliver extra financial incentives to all for meeting exceptional goals. Agile co-creation vendor’s pursuit of these new types of contracts makes them easier to work with over time and ensure that the focus is on delivering results rather than contract terms.

A successful digital transformation benefits from new technology partnerships with Agile co-innovation companies. These companies bring a fresh perspective of co-creation through strategic partnerships, replacing the old concept of outsourcing or outstaffing. In this post, we have explained that traditional engagements may work fine for conventional projects; they fall short for large, strategic projects like digital transformation. Agile co-innovation requires finding the right engineering service vendor. One that enables innovation, has a global engineering pipeline, and focuses on client success through strategic partnerships. Both the client and vendor bring their strengths to the table, building an optimal team able to enable the innovation required to thrive in today’s business climate.If you are looking to work with an agile co-creation vendor start your vendor selection by downloading a free copy of the Forrester Wave on Midsize agile software development services providers Q2 2019.