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Swan

Are We Hearing the Swan Song for RIM Services? | Sherpas in Blue Shirts

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Remote infrastructure management (RIM) services were the disrupter for asset-heavy infrastructure services over the past several years and, in all likelihood, will continue to be for the next few years. However, as we look down the road it appears that RIM will hit the speed bump of automation and cloud, which will impact RIM in much the same way that RIM currently disrupts the asset-heavy infrastructure market. At Everest we believe that about 50 percent of all current RIM workloads are viable and cheaper in the cloud and likely will migrate to the cloud over the next three years. So what’s the prognosis for the RIM model?

As shown in the charts below, RIM grew at an average of 27 percent per year while the asset-heavy space lost share at 1.6 percent a year.

RIM Growth

But the cost of operating in a pay-for-usage cloud world is about 50 percent lower than the take-or-pay world of the existing data center. Although the cloud is currently a small part of the global services marketplace, the cloud providers are operating a lot more profitably and thus disrupting the RIM providers. Automation and cloud are the areas of action and investment for growth. We need look no further than the recent acquisitions of IBM and Dell to understand how this market is evolving.

IBM’s Strategic Moves. IBM’s latest acquisitions include Cloudant, for delivering NoSQL on-demand database-as-a-service (DBaas), and SoftLayer Technologies, a global cloud infrastructure provider. And Big Blue plans to spend more than $1 billion over the next two years to bolster SoftLayer’s platform. IBM also scooped up several other strategic cloud companies over the past couple of years including UrbanCode, for software delivery automation; Green Hat, delivering software quality testing for the cloud environment; and Big Fix, providing management and automation for security and compliance software updates.

Dell’s Strategic Moves. Acquisitions adding to Dell’s capabilities include Enstratius, enabling consolidated management across multiple cloud platforms; Credant Software, providing data protection; Gale Technologies, enabling infrastructure automation; Quest Software, for value-added software solutions and virtualization; and Boomi, for SaaS integration.

RIM’s Pulse

To date the power of the cloud disruption has not yet felled the infrastructure services space. But over the next three years, we expect 30-50 percent of the infrastructure services work to migrate to a cloud model. What impact will it have on the RIM market?

First of all, RIM’s impact on the existing IT infrastructure market is not finished. We think RIM service providers have at least three more years of significant share gain shifting from IT asset-heavy infrastructure to a RIM model. After that? Not so much. And towards the third year, we expect to see cloud disintermediate the RIM market.

It will be interesting to see whether RIM providers can make the accommodations for the new cloud world. Yes, there will be a role for RIM in cloud, but we believe it will be less than in its current IT infrastructure space. And managing the the automated cloud world will require fewer people, which means lower revenue for RIM vendors.

For vendors and service providers, the non-cloud IT infrastructure space is becoming a very bad place to be.

Mobile

Enterprise Mobile Apps – Are We Done? | Sherpas in Blue Shirts

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The state of today’s enterprise mobile apps industry is akin to the dark side of a jungle: a dense forest and tangled vegetation, inhabited by hundreds of largely unfamiliar animals and plants that rely on its delicate ecosystem to survive, perhaps to thrive. This is creating frustration among stakeholders including the CIO, CFO, CMO, and CEO, who believe they might have over-invested in mobility initiatives.

However, this is far from the truth. Mobile apps have a long way to go in enterprise. Yet, to avoid the earlier pitfalls, enterprises and technology providers need to be fully aware of the following dangers in the mobile apps jungle:

  1. Business process transformation: Few enterprises or technology providers even consider that enforcing mobile access to an existing business process may be a poor idea. Making the end-user consume the same business process albeit through a different, perhaps “cooler,” app is not true mobility. User interest will not last if the business process is itself unsuitable for mobile. At the same time, not all business processes require this change. Enterprises must be selective in changing business processes while undertaking the mobility journey. Consultants, vendors, and others with vested interests will always extol the virtue of business process transformation for mobility, but enterprises should be very wary of this aggressive spiel.

  2. Line of business collaboration: In their desire to be the first movers, many line of business managers are creating all kinds of mobile apps with little collaboration with other business units. Given the increasing influence of non-CIO budget centers to approve technology funding, the tried and tested processes of application development are being compromised under a convenient, self-pleasing argument that mobile apps do not require a structured or “traditional” approach.

    Will this ad-hoc development blow up in our faces? I think it will. Can we prevent this? Unfortunately not. Business users are happy getting the needed application functionality on mobile devices, yet no one is thinking about the mobile application lifecycle. A long-term technology adoption framework is an unthinkable thought for these budget owners. They do not believe collaboration is their mandate or their responsibility. Their KPIs are linked to business outcomes, not to channelizing or seamlessly introducing mobile technology, and thus they will rarely ever have an incentive to create the needed structure.

  3. Cost of mobility: Enterprises and technology providers need to understand that while business agility, flexibility, and access is all good, the cost of these should not outweigh the rewards. Therefore, enterprise mobility should be viewed in its entirety to understand whether the incremental business has come at a greater cost of management and complexity. Yet the existing mechanisms across enterprises, where different unconnected lines of businesses are creating their noodly soups of mobile apps, does not engender great confidence that they will take a view of the broader picture any time soon.

  4. Mobility governance: It is fashionable these days to ignore any advice from someone who wants to instill structure or a governance model on enterprise mobility. Governance is perceived as “anti-growth” and “uncool.” Given this perception, few technology managers, despite their strong opinions, express any sentiments against the ad-hoc enterprise mobile strategy. This is a recipe for disaster.

So what can enterprises do to quash the mobile apps jungle’s beastly flora and fauna?

  1. Be selective about changing/transforming the underlying business process while mapping to mobile apps
  2. Create an environment that incentivizes lines of businesses to collaborate rather than compete in creating the next “cool” mobile app
  3. Adopt a lifecycle management approach to mobile apps
  4. Balance the growth objectives with the cost implications of enterprise mobility
  5. Incorporate an “eagle eye” to govern mobility projects

If you are undertaking an enterprise mobile application initiative and want to share your experiences and perspectives, please comment below or reach out to me directly at yugal.joshi@everestgrp.com.

Mousetrap

Avoiding a Big “Gotcha” in the RFP Process | Sherpas in Blue Shirts

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Here’s a blatant truth: Any company looking to procure outsourced services can get into a similar situation as the government faced with its healthcare.gov website before it switched the work to Accenture to fix the debacle. That’s because the RFP process is a breeding ground for “gotchas” that eventually can evaporate a deal’s ROI or, at best, result in a deal that yields just so-so outcomes. I’ve studied the RFP process in my 30 years in this business and observed insanity — that is, companies doing the same thing again and again but expecting different results. I think it’s time to resequence the RFP process.

The foundational error in the RFP process 

Typically in a services procurement process the buyer first defines its objectives and then goes to the market to understand which providers are well positioned to meet those objectives. After some consultation, the buyer codifies those requirements into a request for proposal and works the RFP scope through a series of design workshops to truly understand the providers’ responses and help them better shape their proposals to address the buyer’s needs. The result is a number of very similar offers, competing on little more than price as well as terms and conditions.

So it’s no surprise that this RFP process sequence means the provider-selection decision is actually based on price. Despite best intentions, and even documents that say price isn’t the buyer’s biggest driver and it’s positioned at #4 or #5 on the selection-criteria list, the RFP process makes price the most powerful determinant.

A proposal for resequencing the RFP process

Perhaps what we need to do is to change the process to first define the problem and allow providers to build different, not the same, solutions around their strengths. This switches the process from an apples-to-apples perspective to an apples-to-oranges view with evaluation based on total cost and total effectiveness rather than price.

At this point the buyer would thoroughly examine and weigh the capability of the best-and-final two providers to deliver the offered service. This is different from getting client references, which often are manipulated.

Industry angst

Will the industry seize the chance to operate from this new level of thinking in the RFP process, or will it display angst? I perceive substantial pushback from both the procurement community as well as the provider/vendor community. The procurement community is happy to compete on price, and the provider/vendor community doesn’t want to unnecessarily spend scarce resources on bidding and legal fees before assurance of a high probability of a win.

Notwithstanding initial angst and pushback to my proposal, I certainly believe the RFP process needs to change.


Photo credit: Ahmillar

Businessman Scratching His Head

Genpact’s Q4 Performance: A Cautionary Tale for All Service Providers | Sherpas in Blue Shirts

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The past year was not kind to Genpact. Q4 results show it underperformed the S&P by 25 percent over the last six months and by 7 percent year to date. This is surprising given that Genpact is a great organization with a record of superb delivery and a history of great performance. Unfortunately Genpact is a victim of the changing market and its sweet spot has lost its sweetness. We expect other providers will become victims as this story plays out again and again across the services industry. It’s a cautionary tale about growth engines.

Genpact does many things well, but its finance and accounting BPO practice has been the heart of its growth engine. Its F&A sweet spot was the $50-$100 million transaction size, and historically it expanded those contracts to even greater value. The sad fact is the number of new F&A deals of that size coming into the marketplace dropped precipitously as the market matured.

Today’s F&A transactions are different. Organizations often bundle F&A into larger transformation deals — where Genpact has a disadvantage against players like Accenture and IBM. They are better positioned to win broad transformation contracts, and they’re also the masters of the sole-sourced deals that now hit the F&A space.

The maturing market left Genpact with a string-of-pearls strategy, requiring stringing together a lot of small transactions to make up the difference. But there aren’t enough of them to make up for the volume of growth Genpact enjoyed in its sweet spot for the past five years.

To Genpact’s credit, it seems to be doing everything right to offset the shifting market: headquarters shifted to the United States, a world-class sales and marketing executive took over as CEO. Genpact saw the market shift coming and worked very hard to set up new lines of business. But its core F&A market matured faster than Genpact could put the new growth engines in place.

Even the best firms struggle to keep their growth engine up. We believe this story will be repeated again and again across the services industry as the labor arbitrage market matures and growth engines slow.

Digital Transformation for agile and UX

Taming Your IT Transformation Terror | Sherpas in Blue Shirts

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Originally posted on Fierce CIO


Transformation is a journey that, done correctly, requires a significant amount of change in an organization to achieve success.

IT transformation is the overhaul of an organization’s IT operations, where the goal is more than just cost savings. Instead, IT transformation is about increased capacity to use technology to drive new competitive advantages. IT transformation is about unlocking value through improved business agility, faster speed to market and using big data to inform smarter decisions that can lead to improved margins, sales growth and happier customers.

Transformation is always disruptive on some level. It requires changes in people, skill sets, training, headcount, career management and more.

“Big T” transformation demands that an organization attack both technology and process changes simultaneously, two variables that can add enough complexity and risk to sabotage the effort before it gets beyond the planning stage.

“Big T” transformation demands that an organization’s senior leadership be ready to make it a strategic priority, assign champions and hold people accountable for specific metrics along agreed-upon timeframes. Time must be invested to create a clear vision for what success looks like at the end of the transformation process. That includes a clear articulation of the business value desired, one that your bankers and shareholders would easily understand.

Read more on Fierce CIO

Cognizant

Cognizant Shows New Signs of a Market Maturing | Sherpas in Blue Shirts

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In its latest quarterly earnings report, Cognizant recently guided to slower growth than they achieved last year. Although it is usual for Cognizant to be conservative in its guidance, it is still notable that it is sanguine about repeating last year’s strong performance in what most regard as an improving economy. Cognizant has been the bellwether in terms of fast market growth and the envy of every service provider in the marketplace in its ability to consistently growth faster than the market. So why is Cognizant guiding down on this year’s growth?

Hard Truths

To be clear, Cognizant still expects to grow substantially faster than the rest of the industry and raised its guidance relative to past year. But with an economy expected to improve and discretionary spending on the rise why the recent indication of slower growth ahead?

It’s an important question. The answer: Cognizant always guides lower than it performs, and it knows that growth is becoming more difficult and more expensive in the maturing marketplace. This is especially true in its Horizon 1 offerings (application development and maintenance), which is core to Cognizant’s business.

Having said that, Cognizant is still well positioned for growth because of its Horizon 2 focus (BPO, IT infrastructure and consulting) and Horizon 3 offers in in cloud, mobile and next-gen solutions. Even so, Cognizant’s latest guidance to slower growth indicates it is guiding the market to a realistic perspective.

The Outlook

I believe this acts as a warning for the overall marketplace and supports Everest Group’s long-stated guidance for the last few years that the outsourcing space, especially the talent-based space, has moved into a more mature phase.

In a maturing marketplace, clients are more discriminating. They pressure service providers on price points. And they ask their providers to know more about the client’s industry and business. Those demands will likely result in slower growth and fiercer competition.


Photo credit: Cognizant Technology Solutions

IBM

IBM Prepares to Deliver Consumption Based, As-a-Service Offerings | Gaining Altitude in the Cloud

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IBM in late February launched BlueMix, a billion-dollar investment in a Platform-as-a-Service (PaaS) cloud based on its recent empire-building acquisition of SoftLayer. A TBR analyst says IBM’s as-a-service moves are changing the company’s DNA. My opinion? It’s a lot more significant than that! If Big Blue can integrate all its services in a true consumption-based model, it could set the standard for the new service model industry wide. The question is: Is this the way of the future?

The dilemma

Here’s the dilemma that faces the market and motivates IBM’s strategy. As I’ve blogged before, customers want consumption-based services. This means:

  • They only want to pay for what they use. They don’t want to pre-commit to volumes because they overpay when they do that. When they use a lot, they’re prepared to pay a lot; when they use a little, they only want to pay a little.
  • They want providers to make it easy to adopt their services. They don’t want big road maps and huge implementation schedules. Easy on, easy off is what they desire.

We see this fundamental desire for consumption-based coming across all service lines. But it leaves traditional service providers hamstrung to meet customer demands.

There are two routes to the change to consumption-based services:

  • Service delivery in a multi-tenant world — one platform and all customers use the same thing
  • Supply chain — completely integrate a consumption-based supply chain

The problem with a remedy for the dilemma

The problem is that the multi-tenant path does everything for providers but nothing for customers. Larger, sophisticated companies have different needs, but the multi-tenant platform forces customers to be the same as everyone else. Salesforce and other providers accommodate this issue with configuration vehicles, but fundamentally they have an unyielding standard. So providers must ask their customers to change their needs to meet the product’s standards rather than the product changing to meet the customer’s desires.

It’s a thing of beauty and a joy forever if a provider can get its customers to do that. But there are a very limited number of areas, and customers, where that can happen.

The alternative remedy

The alternative is to turn a provider’s entire supply chain into a consumption-based supply chain. This is the IBM strategy.

This path eliminates stranded costs. It also eliminates the problem of misaligned provider/customer interests that create a lot of friction in the market today. The traditional service model creates take-or-pay situations in which the provider has to provide the service whether or not the customer uses it — thus the misaligned interests.

That’s why what IBM is doing is so important. I’ve blogged before about how IBM’s recent acquisitions of SoftLayer, UrbanCode, Green Hat and Big Fix were the components of building a complete as-a-service stack from the bare iron up through the platform to the business process services. This fundamentally enables IBM to migrate to an end-to-end consumption-based world.

We have yet to see IBM roll this through in its fundamental pricing, but it’s still early; Big Blue has just now assembled the stack. But if it truly goes to market with the end-to-end consumption model, IBM will be able to address market needs much more completely than competitors, which are faced with the dilemma of having to take the risk on stranded costs and effectively price higher because of inefficient delivery models.

That’s what IBM has been putting in place. Is IBM leading in the way to the future in services? What do you think?

Global Service

How Organizations Often Fail to Measure Their Global Sourcing Maturity | Sherpas in Blue Shirts

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Leading bank – “We have grown our sourcing footprint to over 20,000 FTEs across multiple locations in the last 15 years. We definitely have a mature global sourcing model.”

Leading insurer – “We have evolved in the way we source global services, from transactional work to highly complex and niche services. Ours is a highly mature global sourcing model.”

Leading retailer – “We started our global sourcing journey only five years back by outsourcing our IT work. We are still struggling to define if there is a GIC play needed in our global sourcing model, which most of our peers have adopted. I think our global sourcing strategy is still in its nascent stages.”

Everest Group hears statements similar to the above on a regular basis from many of our enterprise/buyer clients. That’s because most organizations measure the maturity of their global sourcing model in terms of a few simple metrics, like scale, age, type of work, and models adopted.

While FTE scale is often the most commonly used yardstick to measure the global sourcing maturity, in our experience it’s the most misleading one. Why? Most organizations fail to understand global sourcing components beyond scale, scope, and model (GIC vs. third-party.) But we believe global sourcing is a much more complex play of multiple factors, and that an organization’s approach toward each of them helps determine its overall maturity.

The following diagram depicts the factors that are important to assessing the sophistication and maturity of global sourcing model of enterprises.

Global Sourcing Maturity

First, scale. Yes it is an important aspect, and to a large extent indicates the level of investments and commitment to the model. However, on an absolute basis, scale alone can be misleading. When the same number is viewed as a percentage of headcount in back-office/middle-office functions in an enterprise, it represents the true penetration of global sourcing model. For example, two organizations with similar global sourcing FTE scale can have different (%) values for global sourcing penetration.

Other important components of global sourcing that can determine its maturity are:

  • Scope of work: Both breadth and depth of work sourced are important to assessing maturity. However, more important is the approach through which organizations decide the scope of work to be sourced. Mature organizations have defined frameworks/toolkits to achieve this, and make decisions based on assessment of risk and benefits while avoiding any stakeholder biases.

  • Sourcing model strategy: Does using both sourcing models (GIC and third-party), and even their complex avatars such as virtual GIC, make the sourcing model mature? Not really! Irrespective of the model, the measure of sophistication is in the manner it is used to achieve sourcing objectives, the type of engagement with the model (strategic partners versus provider of services), and approach to model selection.

  • Value beyond arbitrage: Mature adopters of global sourcing have moved beyond the cost savings-only play and are looking to create wider business impact through their sourcing strategy.

  • Location portfolio: Leveraging India or the Philippines does not make any organization more or less mature. The hallmark of mature organizations is their ability to build a location portfolio instead of a “collection of locations.” Each location in the portfolio has a designated role, and helps meet one or more global sourcing goals (e.g., savings, access to niche talent, risk diversification, etc.)

  • Demand management approach: This is often the most neglected parameter, or the one in which organizations tend to have a myopic view. Immature enterprises not only lack demand-profiling skills, but also tend to take a short-term view (12-18 months). Mature enterprises take a longer-term view, and align the demand for global sourcing with the organization’s overall business and growth plans.

  • Risk & performance measurement: Successful and mature organizations measure risk as well as performance of the global sourcing strategy, and leverage it to influence/inform their future global sourcing initiatives.

  • Sourcing organization: Last but not the least, the sourcing organization (or lack of it) is also a determinant of sourcing maturity. Successful organizations are able to create a distinct yet well-amalgamated team which can not only bring together sourcing needs of multiple BUs/LOBs in the organization, but also make the sourcing program efficient and effective.

The next time you hear someone make a comment about the maturity of an organization’s global sourcing strategy, point him or her to this blog. Remember that not all organizations have the maturity to measure maturity!

If you would like to know more about our global sourcing maturity assessment methodologies, share your experiences, or have a discussion on this with one of our analysts, please contact us.

IBM

IBM Remakes Itself | Sherpas in Blue Shirts

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You can bet IBM Global Services doesn’t want any more earnings announcements like its Q4 2013 report.  Big Blue posted year-over-year revenue growth of only 4 percent instead of the 7 percent it indicated just three months ago and its 5 percent Q3 growth. Its margins are good, but clearly IBM has a growth issue. However, IBM is unfolding its strategic readjustment to drive global services growth in the future. It’s a three-pronged plan.

1. The exit path

Step one is to jettison the low-margin, commoditized and mature parts of the business, and I’ve blogged before about the crucial timing aspect of this strategy.

2. What is IBM doing with two acquisitions per month?

In the plan’s second prong IBM replaces its jettisoned revenue and direction by acquiring both software and services businesses. At the moment its acquisition pace is torrid — a little over two companies a month!

Rather than building products to move into more profitable business areas, Big Blue is buying companies so it can quickly shift high-growth platforms and embracing automation and the cloud. Four acquisitions show us where IBM is doubling down on acquiring capabilities:

  • Softlayer (2013) — global cloud infrastructure
  • UrbanCode (2013) — software delivery automation
  • Green Hat (2012) — software quality and testing for cloud
  • Big Fix (2010) — management and automation for security and compliance software updates

Two particular focus areas in automation platform and services stand out:

  • Analytics (automation of high-end analysis)
  • BPaaS (Business Process as a Service), which is an automated version of IBM’s infrastructure business.

Years ago IBM put hard caps on scaling the company by adding headcount, and this is a driver in chasing automation as IBM exits low-margin, labor-arbitrage offerings.

3. Battle-tested advantage

Unlike many of its peers building and piloting solutions and products, the third prong in IBM’s growth plan ensures the companies it acquires have fully formed battle-tested models. Instead of creating a baby that has to crawl before it walks, IBM acquires “teenagers” that can run — companies that already conducted pilots and ensured there is a market for the offerings. And then IBM super-charges the model with Big Blue’s awesome brand and sales and marketing strategies. This is a time-tested formula that has worked for IBM in the past.

As we watch IBM remake itself in this three-part plan to drive services growth, we expect the strategy will be successful.


Photo credit: Irish Typepad

NASSCOM ILF 2014

What I Found Out at NASSCOM India Leadership Forum 2014 | Sherpas in Blue Shirts

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Conversations at the recent NASSCOM India Leadership Forum 2014 in Mumbai were injected with a dose of confidence and optimism — but were also guarded in their outlook for India’s growth in the global services market this year.

Central to the message is that the industry is on an upswing. I noted that the services players showed more confidence this year than in 2013. NASSCOM projects a range of 13-15 percent overall growth for the services work coming into India this year. (The number includes work sent to Global In-House Centers/captives, BPO and ITO.) That number is slightly up from last year’s guidance of 12-13 percent, so they’re guiding up for the industry in 2014.

What’s Changing?

From an IT perspective, I think the providers’ hope is that discretionary spend will return to the marketplace, driven mostly out of the United States, Canada and the UK. They also believe that there is a strong secular shift in the Nordics and Germany not dependent on discretionary spend, as those economies reach for arbitrage partners to manage their structural talent challenges.

Shaping their Future

I also noted a lot of focus on cloud functions. At last year’s forum, there was a lot of exuberant talk about the cloud. This year cloud talk was backed up by more use cases and growing confidence that the cloud/automation trends can be turned to the Indian players’ advantage.

Specifically they belief that this will result in significant additional systems integration and project work and that the low-cost Indian players are well positioned to capture a disproportionate share of that work.

Most memorable to me is that, for all the enthusiasm evident at this year’s forum because of the Indian players’ capabilities, the topic that captured a significant amount of attention was differentiated growth strategies. There is much interest in how to grow faster. My sense is that the driver for this focus is a trend I’ve blogged about before — the increasing cost of growth efforts in a maturing marketplace.

That said, NASSCOM leaders and India’s services players projected guarded optimism about growth opportunities in 2014.


Photo credit: NASSCOM