Contracting for Technology Enabled Services

In the dynamic realm of IT services, transitioning from traditional managed services to Technology Enabled Services is a strategic necessity for organizations striving to maintain a competitive edge. As IT services continue to evolve due to disruptive technologies, organizations are increasingly required to adopt flexible and forward-looking approaches for their service contracts.

A prominent recent example of contractual changes delivered through technology enablement was of a leading North American airport that embarked on this transformative journey toward a future-proof IT Managed Services operating model and contract, driven by the airport’s 10-year strategic vision and the limitations of its previous services agreement. Since the inception of its services agreement in 2016, even though the incumbent service provider had outperformed in operational performance across the IT services portfolio, the fixed contract structure led to incremental operational expenditure of nearly $153 million due to constantly evolving business needs. The non-flexible nature of the contract necessitated moving from traditional managed services to a Technology Enabled Services model, considering the technology-driven advancements in the IT services landscape since 2016.

Strategic Sourcing Evolution: From Operations Stabilization to Business Excellence

The current-state evaluation of the airport’s IT services contract suggested that, while the airport had adopted a transformational managed services model in some areas, further optimization was needed. A Technology Enabled Services model, leveraging technology adoption and contract flexibility, was essential for delivering strategic business value. The existing contract had delivered transformational services through improved risk assessment and delivery excellence, but there were several challenges, including limited value capture of transformation initiatives, limitation of performance management to operational KPIs, and low technology adoption. Additionally, the rigid contract structure and transactional pricing hindered innovation and efficiency.

Current State Challenges in the Airport’s IT Landscape

During the sourcing strategy development phase, several challenges were identified. The existing IT operating model offered low incentive for innovation, leading to limited adoption of enabling technologies. For example, the airport’s cloud infrastructure spend was only 2% of the IT outsourcing budget, far below the industry median of 45%. The service provider’s role as the global integrator created over-reliance on them for IT strategy execution, muting engagement with the broader technology ecosystem. Performance measurement focused solely on operational service levels, disconnected from broader business impact and customer experience, resulting in stagnant operational issue resolution. Further, the fixed scope and fee structure led to numerous change orders in response to evolving business needs, significantly increasing OPEX.

These challenges, coupled with a lack of measures that optimized contractual scope and terms post implementation of transformation initiatives, impeded efforts toward improving services and stagnated the IT services landscape.

Recommendations To Enable Technology Enabled Services

Strategic recommendations for transitioning to a Technology Enabled Services contract included five key objectives designed to address current challenges and drive innovation, efficiency, and business alignment.

1. Strategic Objective #1: Transformation to Technology-Enabled Services Operating Model: Recommendations in this area aimed to create an environment where technology drives innovation, efficiency, and sustained value creation. The future contract mandated continuous improvement using next-generation technology and reduced the number of full-time employees through automation and AI/ML throughout the contract duration. This approach was intended to facilitate rapid technology introduction through an agile contract structure, while enhancing governance and building internal technical capabilities. Additional Transformation Governance was introduced to ensure capture of project impacts and improvements into ongoing services. These changes are expected to yield cost savings of 15%-25% over the contract duration of five years, accelerate the transition to a digital business model, and ensure a constantly refreshed, technology-driven approach.
2. Strategic Objective #2: Strategic Ownership of Key Technology Roadmaps and Niche Execution: By re-scoping the contract to align with the airport’s IT objectives, recommendations were made to internalize critical decision-making for core technologies. Through these efforts, the airport’s IT organization assumed decision authority on key technology domains while closing technical skills gaps by reinvesting savings from the Technology Enabled Services model. This enabled direct engagement with the broader technology ecosystem and strategic partnerships with third-party vendors. The expected impacts included enhanced technology decision autonomy, improved alignment with enterprise strategy, reduced knowledge leakage, and higher vendor accountability, resulting in faster decision-making and accelerated Technology Enabled Services adoption.
3. Strategic Objective #3: Performance Aligned to Business Impact and Customer Experience: Alignment of IT vendor performance with business outcomes ensured vendor activities directly contributed to strategic goals, optimizing efficiency, and driving continuous improvement. The new contract implemented a performance methodology focused on business impact and quality performance KPIs. This included mapping business metrics with operational KPIs, mandating periodic SLA reviews, vendor obligations to revise SLA targets based on transformation impacts and tying of project performance to business outcomes through gain-share and risk-reward models. This alignment incentivized the vendor to enhance execution speed, realize annual continuous improvement, and foster a culture of continual business objectives alignment and focus on ongoing enhancements and efficiencies.
4. Strategic Objective #4: Dynamic Pricing and Built-in Contract Scope Flexibility: The future vendor pricing model was designed to adapt to changing environments, fostering transparency and agility in service delivery. The future contract included ongoing services pricing on renegotiated terms, incorporating nearly $37 million in annual operational change orders. Dynamic pricing linked to technology enhancements ensured continual evolution of services pricing. More flexibility was factored into the contract to manage service environment changes without impacting pricing. The anticipated impacts include enhanced staffing transparency, a transparent pricing structure mapped to an agreed upon IT services environment, flexibility associated with changing environment needs, better cost predictability, reduced transactional costs and elimination of management overhead for change orders.
5. Strategic Objective #5: Targeting a Strategic Contract Extension with the Service Provider: Targeting a strategic contract extension with the current service provider was recommended over pursuing a competitive RFP. An extension with a reworked model unlocked new performance levels while retaining the long-standing relationship. This extension mitigated risks associated with onboarding a new vendor and avoided non-value-added sourcing activities. This strategic extension capitalized on established ways of working, mitigated operational disruption risks, and created a foundation for longer-term transformation.

The transition from traditional managed services to Technology Enabled Services represented a strategic shift for the airport for adapting to today’s rapidly evolving IT landscape. By addressing the limitations of the previous services agreement and adopting a flexible, technology-driven approach, the airport is now positioned to achieve significant cost savings, enhance operational efficiency, and drive innovation. This transformation aligns IT services with broader business objectives and ensures sustained growth and adaptability.

By Abhishek Lekhi, Associate Director