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Huge Unaddressed IT Market for Service Providers | Sherpas in Blue Shirts

By | Sherpas in Blue Shirts

In a world where sales for IT services have been decelerating, we believe there is a $400 billion unaddressed market for IT services. A huge, attractive prize for service providers. But it requires a different business model. This blog post describes the situation.

The Market is Shadow IT

The unaddressed market is enterprise shadow IT. By shadow IT, I mean spending on IT that doesn’t go through the enterprise IT shared services function.

Why? Because IT is too slow in responding business users’ demands for new functionalities and capabilities and is not aligned with the business needs.

Shadow IT exists not only because business users are taking the matter into their own hands but also because there are companies that are successfully serving business users’ need for quick access to functionality and capability. Who is successfully serving shadow IT? AWS is one of them, and it’s a $17.5 billion business. Rackspace also serves the shadow IT market. So do Google and Microsoft Azure along with all SaaS companies. And many small local contractors are brought in to run quick app development or maintenance projects and PC support. These are just a few examples to illustrate that there’s a big, alternative shadow ecosystem operating in parallel to enterprise IT.

What is the basis for my assessment of the market size? Let’s do the math:

  • The overall IT services market it about $1 trillion
  • Gartner studies size shadow IT as 40 percent of total IT spend

This results in a $400 billion shadow IT marketplace that is currently largely unaddressed by service providers. The market may be even larger, as our Everest Group research finds shadow IT is at least 50 percent of enterprise total IT spend.

How Can Service Providers Address the Shadow IT Market?

Currently, providers sell infrastructure or apps services into the enterprise IT group. That model won’t work in addressing shadow IT. Can it be done? Yes. AWS is doing it. SaaS companies are doing it. Service providers can do it, but they must deploy a different business model than they currently use. In service providers’ current model, value is associated with IT functions and delivering the lowest cost per unit for those functions. It’s the same problem enterprise IT has, as value for business users is now speed in acquiring functionalities and capabilities that meet business needs.

My advice is to deploy a DevOps model and create an integrated pod with a cloud stack and cross-functional teams that are placed into the various business departments to address their needs. Third-party service providers leveraging the DevOps model and cross-functional teams in business departments will be well positioned to capture a significant share of the huge shadow IT market.

How a CIO Shifted IT’s Role to Enable Growth through Digital Innovation | Sherpas in Blue Shirts

By | Sherpas in Blue Shirts

Imagine you’re the new CIO at a global vehicle manufacturing company (with industry-leading products) that now faces stiff competition from new players in its market. The CEO brought you in to lead the company transformation to enable dramatic growth quickly. The management committee had already developed a vision of its future state and developed broad, ambitious goals including doubling top-line revenues by 2020 while reducing working-capital requirements.

But the true level of commitment to the vision was not certain, and there was no clarity on what it would take to achieve the goals. The only known factors were (a) growth opportunities would be in digital innovation, especially in the Internet of Things (IoT) and (b) the IT group would need to change from being “order takers” and missing service-level targets to becoming a business enabler and driving the pace of change. How would you go about leading this challenging transformation?

Read more at Peter’s CIO.com blog

Life Sciences Startups: Catalyzing the Innovation Ecosystem | Sherpas in Blue Shirts

By | Sherpas in Blue Shirts

Did you know that global funding for startups dipped more than 20 percent in 2015-16? But that life sciences startups were a rare breed that continued to find favor with those who hold the purse strings? Do you want to know who these startups are? Read on.

First, the context: while life sciences firms make extremely fat margins and sit on huge piles of investment dollars that focus on research, increasing regulatory interventions, slowing growth rates, and growing consumerism have become their new normal. To chart out a new growth path in the face of these challenges, life sciences firms are increasingly looking at tapping the innovation ecosystem that exists outside their legacy environments.

Startups are playing an important role in this transformation journey. By introducing technology solutions that address CXOs’ key imperatives, startups are bringing innovation right to life sciences firms’ doorsteps.

Life Sciences Startups Innovation 1

To understand the dynamics of this trend, Everest Group analyzed over 150 start-ups in the life sciences industry. The results of our analysis are encapsulated in our recently published report, “Hot Life Sciences Startups: Friends, Foes, and Frenemies in the Innovation Ecosystem.”

This life sciences startup research helped us answer the following questions:

 

What is the big deal?

While funds are drying up globally for start-ups, life sciences start-ups continue to find favor with venture capitalists. Niche therapeutics within life sciences such as cancer therapies and medical devices are attracting investments like never before.

Life Sciences Startups Innovation 2

Where are these dollars headed?

The majority of the focus is on biopharmaceutical start-ups that are aligned to three value chain functions: drug discovery/product development, clinical and pre-clinical trials, and sales and marketing. The start-ups leverage analytics, cloud computing, social media, mobility, and automation to create significant impact in the three life sciences segments.

Life Sciences Innovation Startups 3

Who are these investment magnets and innovation leaders?

Everest Group assessed the startups against three key criteria – level of business disruption, level of technology disruption, and market buzz. Our scoring methodology led us to select the following as the top 20 “Hot Life Sciences Startups” for 2017.

Life Sciences Startups Innovation 5

What are the implications for the global services industry?

These start-ups provide enterprises with enhanced access to bleeding edge innovation. This is evident with various life sciences firms investing actively in start-ups through corporate venture arms. For service providers, the startups provide an attractive channel to catalyze their innovation journey with a view towards partnership or acquisition. They also help providers move away from their cost-sensitive business model to focus on growth and capability development.

What’s your take on the life sciences innovation ecosystem and seminal role of start-ups? Do you have direct experience with any of them? We’d love to hear your story!

Six Common Mistakes Enterprises Make when Developing Service Delivery Location Business Cases | Sherpas in Blue Shirts

By | Sherpas in Blue Shirts

Everest Group regularly supports clients in developing fact-based business case models to assess all relevant costs and benefits associated with their service delivery portfolio and delivery location decisions.

Not surprisingly, we’ve seen an increase in this type of activity in the last several years due to technology disruptions, potential immigration reform laws, intensifying competition for talent, and macroeconomic and geopolitical uncertainties. We’ve also seen an increase in the number of faulty/incomplete business cases that, if unresolved, can result in unnecessarily high costs and less than expected benefits.

Six common mistakes enterprises make when creating their global service delivery location business cases.

#1 Clarity on the primary objective of the business case:

Establishing clarity on the key objectives of the business case for service delivery location selection is of utmost importance. Companies often include benefits of other initiatives (e.g., transformation) which may impact their overall locations footprint, but fail to include costs associated with these initiatives, resulting in a faulty business case. As business case assessment is typically done for long-term strategic decisions, it is critical to ensure clarity on the locations strategy and implementation roadmap under consideration.

#2 Underestimating the costs of “what it takes to get there”:

Companies often underestimate the costs associated with exiting their current location (e.g., lease termination and severance costs); disruption in their existing locations (e.g., loss of knowledge due to higher than expected attrition); migrations (e.g., employee relocation, technology migration, parallel/shadow run); and set-up of new centers (e.g., capex, cost of hiring and ramp-up, training costs, etc.)

Example: A global Financial Services company had a 12-month long shadow/parallel run to effectively complete knowledge transfer for high complexity processes. This negated most of the arbitrage-related benefits for the initial 12-18 months. In fact, the company incurred relatively higher total cost of operations (TCO) until steady state operations was achieved.

Example: In a recent engagement, the location selection for a Latin American client’s shared services center was greatly influenced by applicable withholding taxes (i.e., the Argentinean government levies a ~31.5% withholding tax on import of global services from certain locations such as Mexico). These factors significantly impacted the relative cost attractiveness of locations under consideration.

#3 Overestimating benefits:

Companies often plan multiple transformation and optimization initiatives in parallel with changes to their services delivery portfolio. In such cases, things seldom pan out as planned, and the savings achieved are significantly lower than expected in areas including:

  1. Headcount reduction from process improvements
  2. Delivery pyramid optimization
  3. Implementation of automation/technology solutions
  4. Economies of scale (in cases of location consolidation)
  5. Optimization of management and administrative overheads

Example: A BFSI firm changed its planned strategy midstream, as its initial plans to fund the business case for large scale service delivery location consolidation by reducing FTE headcount by ~ 6,000 could not be realistically achieved.

#4 Stakeholder misalignment:

A service delivery location decision must involve multiple stakeholders including onshore business leaders, offshore delivery leads, functional and GIC leaders, migrations and/or transformation teams, corporate real estate, and technology teams. Any lack of coordination among these stakeholders can pose challenges in alignment on data used, key assumptions, the roadmap for service delivery portfolio changes, and the plan for other transformation/optimization initiatives. All stakeholders must be kept in the loop from the beginning of the location evaluation, and they must periodically periodic sign-off on the approach.

#5 Industry benchmarks:

While it is important to leverage industry benchmarks, companies must contextualize information to their own unique situation. The specificity of operations or the role a location plays for the company can be different from the typical value proposition of that location/geography.

Example: A recent engagement for a global Financial Services client demonstrated that, despite industry benchmarks that indicated Location A offered ~20 percent cost savings over Location B for typical BPO processes, the client’s specific processes and talent needs reversed the cost attractiveness of the two locations.

#6 Talent competition in the local market:

Companies often underestimate the true extent of competition in the local talent market, and the impact of attrition on sustainability of their operations. This impacts a company’s ability to scale initially, retain talent, and back-fill lost staff.

Example: A global manufacturing company faced significant challenges in hiring language skills for its newly setup shared services center in the APAC region, resulting in significantly lower arbitrage savings than expected.

While developing business cases models can be a significant challenge, we believe that addressing the above-mentioned points can reduce chances of error significantly. Learn more about Everest Group’s Service Delivery Locations practice.

Reality Check on the Top 5 IT Innovation Myths | Sherpas in Blue Shirts

By | Sherpas in Blue Shirts

How do Amazon, Apple, and Tesla keep innovating? What do they do differently than many others do not, or cannot, do? And how many industry leaders can say their organization is truly innovative?

To get answers to these and other pressing questions, we conducted a focused research study with more than 100 application service executives – approximately 50 percent of whom were CXOs – in North America-based enterprises engaged in IT outsourcing programs. The research revealed startling insights. For example, only 30 percent of study participants felt their companies were somewhat innovative, even though all of them realized the importance of innovation and had made strategic investments in it.

And from defining it and its objectives, to funding it, to defining and institutionalizing the process to drive it, innovation has remained an elusive concept both for enterprises and service providers.

The study also busted innumerable myths associated with IT innovation. Let’s look at the top five.

IT Innovation Myth 1: Innovation is abstract and cannot be measured

But, over 75 percent of the study participants already have a highly effective mechanism to measure the impact of innovation. Linking the investment made to measurable results and desired benefits has enabled them to devise a formal approach for impact assessment.

IT Innovation Myth 2: Innovation should result in a disruptive idea

In reality, this is the last priority for executives of best in class enterprises! A siloed disruptive idea that does not impact the business model or enhance customer experience is the least appreciated outcome, and does little to serve the purpose of innovation. Instead, transformation is the primary lever deployed by enterprises to identify disruptive innovation. Moreover, the overall approach to it and the returns derived from it are considered more significant for driving innovation than the idea itself.

IT Innovation Myth 3: Episodic initiatives such as “idea of the month” and “innovation events” can deliver innovative results

Unfortunately, such sporadic investments have a probability of less than 10 percent to deliver innovative outcomes. Though used by most service providers, these are the least preferred approach to innovation from the enterprise executive’s perspective. Continuous innovation with prototyping and demonstrations/MVPs are far more likely to deliver on customers’ expectations.

IT Innovation Myth 4: Large scale investment is required from the enterprise or service provider to fund innovation

Though investment is required, 65 percent of the study participants with high satisfaction with their innovation program believe in shared responsibility and co-funding. Their belief is that shared responsibility spreads the risk involved, and reduces the investment required, thereby attracting the best-in-class capabilities from both sides.

IT Innovation Myth 5: A dedicated centralized team/CoE should be set up to drive innovation

Rather, best-in-class innovative businesses embed a culture of innovation across their enterprises to encourage the concept of continuous and crowdsourced innovation.

To enable enterprises to adopt a systematized innovation approach and achieve their desired outcome, Everest Group designed a unique framework on which to base their innovation strategy. We also used the framework to identify the 14 most innovative service providers in the industry.

Application Services IT Innovation Maturity

IT-Innovation-Myths-Application-Services-Maturity

For more information and insights on this research, please refer to our reports, “How to innovate – A Comprehensive Guide to Innovation in Application Services,” and “Cracking the IT Innovation Code.”

Becoming Credible as a Digital Service Provider | Sherpas in Blue Shirts

By | Sherpas in Blue Shirts

Digital technologies adoption is riding the crest of a powerful wave. I think one of the most interesting aspects is an emerging trend of service providers successfully using digital capabilities as a springboard for positioning themselves beyond the services industry.

A case in point: Leading successful service providers including Accenture, Deloitte, KPMG, IBM, McKinsey and PwC are acquiring advertising agencies. Think about that for a minute. This is not a trend of advertising agencies acquiring other marketing-related agencies to bolster their growth. Traditional consulting and IT service providers are spreading out and starting to disrupt the advertising industry.

The relation to digital transformation trends

This trend evidences a key factor in the way digital transformation is “crossing the chasm.” The same phenomenon is evident in findings in Everest Group’s January 2017 Enterprise Pulse Study on digital and IT services, “Customer (Dis)Satisfaction: Why are Enterprises Unhappy with their Service Providers?

In the study, we interviewed 130 “reference clients” of leading service providers. We uncovered a significant differentiation. When ranking services firms according to providing the best overall client experience, three rise to the top: TCS, Cognizant and HCL. But when we look at how the clients ranked digitalization, the providers that shoot to the top are IBM, Accenture and Deloitte (three of the six I mentioned earlier as service providers acquiring advertising agencies).

The impact on traditional vs digital service providers

Simply put, clients look to a different set of providers for their digital needs. Why? Because the traditional, arbitrage-first service providers aren’t well positioned or credible as digital providers. The magnitude of the problem for traditional service providers trying to convince clients of their digital credibility is a bit like trying to spread thick, dry peanut butter on a soft slice of bread – it gets bogged down and doesn’t go far.

But consider this: IBM, Accenture and Deloitte faced the same problem that the traditional and Indian providers faced. Two years ago, when the rotation into digital became apparent, they were no more credible than the other players. How did they manage to become more credible in digital services?

They gained credibility largely by acquiring digital companies instead of attempting to build digital skill sets themselves. This strategy has been far more effective in shifting market perceptions of their ability to drive digital transformation.

Digital platforms are driving a sea change in ecosystem support. Advertising is just one example, but it’s starting to happen in all industries. The winning players will be those that quickly gain credibility in digitalization and deep expertise in industries.

How To Accelerate Value Creation Through Artificial Intelligence | Sherpas in Blue Shirts

By | Sherpas in Blue Shirts

Major advances in Artificial Intelligence (AI) technology are happening rapidly, and many organizations are excited about the possibilities AI presents. However, some successful companies fail in their innovation efforts to create new value by leveraging disruptive technologies. Others haven’t yet embarked on this innovation journey because they lack use cases. My advice: First define the strategy you’ll use to create value through AI. And Facebook is good role model when it comes to AI strategy.

Your strategy for value creation needs to include how to maximize and expedite the development process. This is the foundational core of Facebook’s strategy. I recently attended a dinner focused on AI at the United Nations. Hosted by UNOPS, attendees included distinguished academics, software companies, government entities and AI leaders in companies successfully using AI.

Read more at Peter’s Forbes blog

Digital Transformation: The Rise of New CEO, the Chief Everything Officer | Sherpas in Blue Shirts

By | Sherpas in Blue Shirts

There’s a mind-numbing alphabet soup of C-level titles in today’s enterprises. Beyond the standards, there’s also Chief Digital Officer, Chief Robotics Officer, Chief Automation Officer, Chief Cognitive Officer, Chief Customer Officer, Chief Experience Officer, and so on.

The Chief Executive Officer (CEO), of course, is the one on whom the organization most depends, as “the buck stops there.” Historically, the CEO typically engaged with the Chief Finance Officer, Chief Strategy Officer, and Chief Operating Officer. The CEO set the long term strategy, and the organization executed it. And the CEO was considered great if he or she could be the face of the organization to drive broader strategy, business development, and market leadership.

Digital transformation and disruption is evolving the role of CEO

But digital disruption is driving massive transformation in the shape and flavor of the CEO’s role. While expected outcomes continue to be largely the same, today’s CEO must be technologically savvy, and must possess a techno-centric business view, not only to be the champion of digital transformation but also to take along the other C-level executives.

As digital transformation shrinks “front-to-back” processes, the CEO needs to understand the newer, shorter value chain, and how it makes the enterprise more competitive and relevant. Understanding this new world will also assist the CEO to be the best judge of digital transformation in the organization, rather than completely relying on business consultants.

Unfortunately, a lot of businesses are doing the opposite of what is needed. They are creating layers between the business and CEO by creating titles that serve as the “channel” to the CEO or the ear of the CEO. While this worked before digital disruption started creating havoc, innovation can now come from any part of the organization, and the CEO needs to be connected to that part.

Indeed, the CEO should ideally be the driver of digital transformation. Therefore, if the CEO does not understand Twitter, he/she can’t proactively suggest that as a channel to the HR team. If the CEO does not understand mobility, he/she can never outthink disruption or reimagine the business model. Of course, the CEO would have business leaders driving such change, (e.g., the HR head or CTO), but without the CEO’s proactive involvement and understanding of these fundamentally disruptive models, the enterprise won’t be able to derive business value.

The new kind of CEO needed in the age of digital transformation

What enterprises really need is a new CEO – a Chief Everything Officer. This is a C-level executive who understands everything in the digital landscape…the market, competition, customer, and, of course, technology. This CEO directly understands how digital disruption can impact different parts of the organization in order to create a vision for the enterprise that cannot be obtained from reliance on other C-level executives. Sure, the CEO would have a lot more bandwidth if other C-level executives were driving digital adoption. But that bandwidth would be valueless as the organization would be set up to fail. The reality is that digital transformation is not a project, but rather a business in and of itself. And the CEO must drive it in order to create meaningful value.

Is your company’s CEO the “Everything” he or she needs to be to enable the enterprise to compete and thrive in the midst of digital disruption?

How to Eliminate Enterprise Shadow IT | Sherpas in Blue Shirts

By | Sherpas in Blue Shirts

Gartner studies have found that shadow IT is 30 to 40 percent of IT spending in large enterprises, and our research at Everest Group finds it comprises 50 percent or more. Either way, I believe these statistics are an understatement of the shadow IT ecosystem — spending on IT that doesn’t go through the sanctioned enterprise IT shared service function. It’s a big issue, and increasingly complicated. Historically, the increase in complexities, the need for greater security or the need to operate at enterprise-wide scale drove shadow IT out of departments and into the administration of the IT group. That’s no longer the case; thanks to SaaS and cloud products/services, shadow IT can now operate securely at scale. So how can a CIO address the risks and expense of shadow IT?

Users subscribe to many IT services that don’t go through the enterprise IT shared services budget, and enterprise IT doesn’t make the decisions for administering it. Shadow IT includes purchases of SaaS (like Salesforce), AWS cloud and colocation, or Rackspace. It’s also the teams of people hired by the business (but not put into corporate IT) who do development and application support or PC support.

Read more at Peter’s blog on CIO online

Trump Dump | Sherpas in Blue Shirts

By | Sherpas in Blue Shirts

In our Everest Group forecast for the services industry earlier this year, we predicted deceleration from 3.2 to 2.8 percent in the broader services market and deceleration from 7.1 to 6.8 in in the Indian market. We see no reason to change that prediction of deceleration now. But something notable has happened since we made the prediction: a deceleration in Accenture’s earnings in the consulting and systems integration areas. This is puzzling at first glance but highly significant of a major trend.

We would have expected that we would increase our earlier industry forecast, given two factors:

  • Powerful new digital technologies now coming of age that are ready for adoption and should drive a wave of adoption and new spending
  • A buoyant US and global economy that has increased consumer spending, further driving discretionary services spend

However, we see negative trends due to the insecurity caused by what I refer to as the “Trump Dump” in America and by Brexit in the UK. The Trump Dump is the politically difficult environment causing companies’ reticence or unwillingness to commit to large projects with offshore labor. We’re consistently seeing projects delayed, postponed or cancelled. This puts companies in a bind because there simply isn’t sufficient domestic talent to drive large initiatives.

The US represents almost 50 percent of the global services market. We believe the Trump Dump will have a negative effect on the broader services industry, creating impacts beyond just the Indian segment of the market. Therefore, we believe there are significant reasons for caution in forecasting market growth.