Experts in the global services terrain

The innovation dance floor is getting awfully crowded with a lot of eager participants. CIOs want to re-establish their traditional role of custodian of technology driving innovation. CMOs wants to be at the forefront of using innovation to change the customer experience and outreach. Data scientists are using the new analytics tools and want to participate in innovation strategy. And as I blogged recently, an IBM study found even chief purchasing officers are making a bid to join the innovation party. Unfortunately, they’re all joining the product managers, who are historically in a slow dance; so not only is the dance floor getting more crowded, but there are also a lot of different beats that they’re dancing to.

Each of these positions has its own point of view, its own agenda, and sees innovation differently. On the plus side, this provides for a rich mix of opportunity. But on the downside, few innovative ideas have come out of committees.

The IBM study indicates that CPOs are attempting to become more strategic and influential and they believe they are more critical to the enterprise. So by necessity, they have to better align with the corporate strategy and therefore want to participate in developing strategy.

I think it opens up even bigger questions:

  • In what areas will they seek to set strategy?
  • Do CPOs have the right background and perspective to do this?

Particularly in the area of services, which are an important ingredient to a change strategy and require deep understanding of the business and how to shape or manipulate the components to create a differentiated position as an advantage, CPOs may struggle as the champions of change.

Enterprises need to protect the innovation strategy

My view is that CPOs are not the right people to influence innovation. Their idea of innovation is do it at half the price rather than doing something different. A data scientist, for example, can get at a certain kind of innovation because they bring a fresh, different capability to the table. I don’t see purchasing bringing something fresh and different.

So this poses some very significant questions to the enterprise:

  • How do you allow for innovation?
  • Who do you want driving it?
  • How do you protect innovation from amateurs who may not be helpful?

Problems for service providers

With purchasing and other departments trying to crowd onto the innovation dance floor, service providers wanting to bring new innovative ideas or capabilities will have to navigate a gauntlet of powerful stakeholder groups. It certainly makes for an intriguing tango.


Photo credit: Piotr Pazola

A recent IBM study indicates that purchasing is attempting to become more strategic. It’s a very intriguing study. It shows that purchasing is not only trying to extend its influence but also recognizes some of its shortcomings – notably that it historically has been a tactical vehicle that deals with the simple execution of attempts at driving price down and is less adept at supporting transformational agendas that require fitting into a strategic plan.

As procurement garnered more and more influence across the services space, they often failed to understand the quality and strategic implications of the behavior that they drove. Their influence in driving down cost assumes that all solutions are equal and buyers can discriminate against them only based on cost. This results in sometimes optimizing for lower unit cost but higher total cost and at other times developing solutions that don’t meet business requirements as well as they could.

For example, they give less weight to a provider’s ability to drive transformation and more weight to the pricing. This sets up a situation where often the opposite happens. The buyer selects a lower-priced vendor that is less capable of driving transformation, which results in higher total cost and a less-effective implementation. Look at any ERP implementation if you want to see an example of this.

In attempting to step up to a more moderate strategy and even shaping and designing strategy in some instances, as the study points out, chief purchasing officers attempt to deal with one of their most vocal criticisms – that all they focus on is price and they often don’t align well with business needs.

When the context of driving down the cost of a supply chain is important to strategy, it’s natural that CPOs become more influential. But in the area of services, where services are an important ingredient to a change strategy and require deep understanding of the business and how to shape or manipulate the components to create a differentiated position as an advantage, CPOs are likely to struggle as the champions of change.

In the work we’re doing at Everest Group, we’re seeing business executives outside of purchasing starting to push back on purchasing to get them to stay in their swim lanes. They have become a very powerful entity in many organizations, but they’ve started to dictate in areas that are necessarily the provenance of those who drive strategy.

This new study indicates that CPOs are starting to recognize that as their influence has grown, their activities cast a much longer shadow and are more critical to the organization. By necessity, they must better align themselves with corporate strategy. The better aligned with the strategy they are, the more impactful they can be. This naturally guides them to want to be an active participant at the table where the business develops the strategy so that they can better align with it.

There is question about whether or not they will be allowed full access to those discussions or whether, like their companion the CIO, their influence will be turned back to be more and more tactical.

The advantages of service delivery automation add up to significant value realization. Unfortunately, it’s not a one-time step change. Automating is a continuous shift, and it’s never over. You first assess where it should happen. Then you get comfortable with the tools, get data on the process, get comfortable with the organizational implications of automation, then you learn from automating the functions. And then you do it again. And then you get comfortable with an even higher degree of automation. And then you do it again. And again.

Moving into an increasingly automated world is an ongoing journey – which poses a number of challenges for service providers.

Perhaps the most significant challenge is customers’ interests often are not aligned with their service provider. This quickly becomes obvious when the services are priced in FTEs. Automation reduces the quantity of FTEs, which means revenue loss for the provider. But if services are in a transaction-based model, automation dramatically reduces the cost of processing the transaction, and the customer wants a share of that cost reduction.

I think this is a startling challenge to the BPO industry. At a time when revenue growth is already slowing, if revenue drops proportionately with the level of automation (and it makes sense that it would), service providers not only won’t be able to grow revenues but will have to run very fast to stay even with their revenues.

Certainly automation won’t remove all people from a process; but more and more will be removed over time as the tools expand and become more mature and as companies become more comfortable in using the tools and as their learnings and the data from the tools allow them to continue to drive deeper levels of automation. So we can expect the effect of service delivery automation to increase over time.

Thus I believe we’re looking at substantial change and disruption coming to the services industry. And it’s not a one-time impact. It will be an ongoing impact.

One of the great struggles in today’s enterprises is the ongoing shift of influence from the CIO community into other stakeholder groups. I’ve blogged about this before. An important aspect of this influence shift is the fact that IT has increasingly become unaligned with business goals. But the pendulum is now swinging back. The mechanism the pendulum is using is the as-a-service offer set.

During the recession, companies focused on cost reduction and operational excellence, and IT increasingly lost touch with the business. Purchasing departments focused relentlessly on driving up unit costs and countless operational process improvement vehicles to further lean out organizations. As a result, IT organizations became more efficient — but also less aligned with business needs.

Business users reacted by demanding greater focus on business outcomes and began taking things into their own hands and purchasing as-a-service offerings.

The as-a-service path is a reorganization

One of the benefits of the as-a-service model is that it creates a seamless linkage between business functionality and delivery. And it cuts through layered IT organizations, reorganizing according to business functionality.

As a service

The benefits that an organization extracts once it goes down this path is tight alignment by business functionality — close to functionality on demand — and far more flexibility. It enables focusing on the business impact of technology. Businesses can move more quickly and flexibly to adopt the functionality and also scale their consumption to usage.

The implications for IT are enormous in that it requires a rethinking of the classic IT functional organization, which has been in place for the last 15 years. It requires a reconceptualization of the following aspects:

  • How IT is organized
  • How assets, services and software are procured
  • How IT is measured and managed

The benefits of the functionality and scaled consumption to usage are extremely powerful and can only continue to reshape how IT is delivered. But the reconceptualization of IT is far from trivial. It is not just a new pose for IT. The as-a-service model fundamentally reshapes the IT philosophy on how it’s organized, procured, measured and managed.

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Too much. That’s an accurate assessment of IT environments in most, if not all, enterprises. They have more data center space than they need and more servers than they can use at any point in time. They have more software operating systems, middleware, and enterprise licenses than necessary. They also have more of the wrong resources and never enough of the right resources in application development and maintenance. The as-a-service movement seeks to address this, but the journey to get there isn’t as simple as it appears.

So how much overcapacity is present in enterprises? At every level there seems to be a 25-50 percent overcapacity in IT. Since IT varies from 1-7 percent of revenues, the 25-50 percent overcapacity is in the range of 40 percent overcapacity overall.

As we at Everest Group look at applying as-a-service principles into IT environments, we see an opportunity to remove 40 percent of the IT cost by eliminating the wastage in service capacity. But the journey to achieve this as-a-service cost benefit is neither quick nor easy.

Renegotiating enterprise licenses takes time and often requires waiting until they expire. Reconceptualizing the infrastructure and application support is also complicated and requires a resolute effort and substantial patience.

It can take a year to three years to complete the journey. But the benefits are very substantial, starting with a 40 percent cost reduction in IT — a heady prize for the journey. In a future blog I’ll discuss other benefits.

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