The cloud revolution is breaking down walls surrounding existing outsourcing arrangements. In fact, the business case for some outsourced workloads crumbles in light of opportunities in the cloud. In a traditional data center or IT outsourced infrastructure model, you pay for the capacity 24/7; but in a cloud environment, you pay only for what you use.
By moving workloads to a cloud environment, we estimate that an organization would end up paying approximately 25-50 percent of the cost for the current 24/7 model.
Those economics are stunning.
Our analysis suggests that about 50 percent of current outsourced workloads have the capability to move to the cloud easily. That doesn’t mean that they will be moved. But they are intermittent workloads, so they can be turned off and on and thus easily moved to a variable pricing model such as the cloud. They also don’t have the same security and compliance cloud constraints as production workloads.
That doesn’t mean they will be moved. It just means they have the capability to be moved without significant disruption or a large investment to replatform them.
The diagram below shows the workloads that we think will migrate to the cloud.
We believe the first to head for the cloud environment will be the application development and testing environments as this work is intermittent and ideal for the pay-per-use model. Considering that application development and testing comprise 20-25 percent of most outsourced IT infrastructure workloads, we believe the compelling underlying economics of the cloud model will drive these workloads out of their current environments quite quickly.
An enterprise with an IT infrastructure outsourcing contract very likely will want to migrate some workloads out of that environment into a next-generation model such as the cloud. It just makes sense to capture the savings. And in most outsourcing contracts, the customer has the freedom to reduce the outsourced workload by 30 percent before incurring penalties.
We see this as a big opportunity.
It’s also a potential threat.
On January 15, rival IT service providers CSC and HCL made an announcement that they were joining hands to deliver application modernization services. The partnership entails modernizing legacy applications (the HCL angle) and hosting them on cloud platforms (the CSC slant). CSC and HCL will open delivery centers in Bangalore and Chennai as part of this alliance, with a CoE for banking, and will share equally all revenues and costs of these operations.
The announcement sounds a lot like the one from Accenture and Dell a month ago where the two companies teamed up along similar lines. Read the release here. So what makes the CSC and HCL announcement more interesting? For starters, the simple fact that it is not the announcement we were anticipating (or were made to believe). The anticipation was for a broader alliance for infrastructure services, which would have had far significant implications on the supply landscape.
In reality, the announcement is not that big of a deal.
In our opinion this is more of a sales and marketing alliance versus a strategic re-alignment. But since it did catch our attention, here’s a brief analysis:
So why is this important?
Our research on cloud services shows that buyers place a high value on application modernization. While clients acknowledge the value of cloud adoption in order to transform their operating models and save costs, cloud-incompatible legacy applications limit the ability to harness this value. But oftentimes they are reluctant to make significant monetary investments for this pursuit and are looking for self-funding mechanisms. CSC and HCL, exploring mutual synergies, will theoretically be able to lower the risks and costs for clients transitioning to the cloud.
How does it benefit CSC and HCL?
CSC will get an additional channel for its cloud platform (BizCloud, a private cloud offering for the enterprise) and gain access to HCL’s offshore delivery capabilities in applications services. Also, this alliance will enable CSC to offer Proof of Concept (PoC) for its cloud platform to its clients at a lower price, something not feasible earlier with its U.S.-centric workforce.
For HCL, the alliance promises to:
- Strengthen its presence in the financial services sector to match up with peers (HCL currently gets only 26% of revenues from BFSI, which is lower than that of its larger peers)
- Boost its applications services business, which has been struggling for a while (infra business is driving growth) and position it well for potential downstream maintenance work
- Allow it to offer a complete modernization solution across the application and infrastructure stack
Interestingly, CSC and HCL have been rivals traditionally with HCL being highly vocal about being a “replacement” for the likes of CSC. Like shrewd warring factions, CSC may have just married its enemy, turning it into an ally. The alliance likely enables CSC to not only protect its market share but also offer a compelling alternate proposition, to existing and new clients.
Key questions that this alliance raises
- CSC has been aggressively investing in augmenting its cloud and big data capabilities. The company, already a leading provider of cloud services will now be able to offer these services at a much reduced cost. Is there a possibility of market disruption?
- Will HCL Technologies continue to be platform-agnostic with respect to its cloud offerings? Can there be a clause for an exclusive CSC-HCL partnership? We think there is little likelihood of this scenario, but it will be interesting to see how HCL manages demand for competing cloud platforms including IBM, Force.com, Rackspace
- Will HCL be demanding a premium price from some of its traditional buyers as it gains access to CSC’s strong technological competency and knowledge of transformational solutions?
- The alliance will enable HCL to augment its capabilities for application-related services, bringing it in head-on competition with the likes of TCS and Cognizant. So far HCL’s USP was its infrastructure management capabilities. Will the combination create a formidable competitor among the offshore majors?
- Will the two rivals be successful in scaling up this alliance? How will the enterprise buyers react to this changed dynamic?
It is still too early to answer any of these questions. But one thing is clear – cloud and next-gen IT certainly create some strange bedfellows.
Bestselling author Nassim Taleb talks in one of his books about the anti-fragile, things that enjoy extreme conditions and thrive in disorder. Enterprise mobility appears to be a creature that loves disruptions in the technology market. With Microsoft’s recent reorganization, Amazon’s enhanced focus on Kindle, the never-ending rivalry between Apple, Google, and Samsung, and the queue of other players vying for this market, (Canonical, Dell, HP, and Lenovo), this disruption phenomenon is not going to fade anytime soon. In fact, when combined with the aspirations of organizations to allow enterprise application mobile avatars, and technology companies developing mobile enterprise application platforms, we have a perfect storm in the making.
However, many organizations still believe that allowing “toys in the workplace” is a good enough IT response to the CEO’s clarion call for employee appeasement and productivity. They are under a strange assumption that Bring Your Own Device (BYOD) = Enterprise Mobility. Fortunately, it is NOT; rather, it’s time to move BYonD it.
While mobile device/application management providers such as AirWatch, BoxTone, Citrix, Kony, SAP, and Sophos are witnessing good traction, they have not even touched the tip of the proverbial iceberg due to the limited availability of enterprise applications on mobile devices. However, despite business users’ clamouring for more enterprise applications on mobile, it is not surprising that organizations are slow to adopt.
Smartphones (e.g., from Apple, Blackberry, Google, HTC, Nokia, and Samsung), tablets (e.g., from Amazon, Apple, Dell, Microsoft, and Samsung), and their brethren indeed improve user productivity, but are largely focused on consuming information, rather than enabling performance of complex tasks beyond emailing and web surfing. Combined with the rapid pace of evolving technologies, form factors, and software, buyer organizations are unwilling to invest upfront and, therefore, continue to be fence sitters. In response, device makers show little interest in offering broader capabilities that can help enterprises move beyond BYOD (e.g., partnering with enterprise application platform providers).
However, the inflexion point has arrived. We will witness device makers, enterprise application providers, and mobile app developers coming together to offer factory-fitted popular enterprise mobile apps much like instant messengers (e.g., HR management, inventory management, CRM, social commerce). Moreover, this trinity will make various enterprise applications available on mobile devices, which we cannot even imagine today. Enterprise application providers will also enable easy access to their/partner’s application marketplace via collaboration with the device and network providers. This will enable end-users to seamlessly use their personal devices to access enterprise-class mobile applications.
Enterprises may also experiment with private app stores, as they increasingly require custom-built applications and are not entirely satisfied with a public distribution model. The challenge for them will be creating a platform-agnostic, “no lock-down,” mobility store. They can also develop innovative funding models in which users are incentivized to deploy mobile enterprise applications in return for funding for their personal device. Yet, these efforts will require significant investment and management commitment. Moreover, unlike other technology initiatives, these should be led by both IT and the business users.
Without a meaningful mobile enterprise application strategy, mobility will indeed become an undesirable “anti-fragile” that thrives in disorder.
If you are planning to or already deploying enterprise mobility and want to share your story, please reach out to me at email@example.com.
Organizations are facing a paradigm shift in the way they envision, initiate and fund technology that drives business value. As discussed in my prior blog post, The Curveball Impact on IT Spend Decisions, a shift in influence has created two distinct buying markets within an organization. These two markets behave very differently and thus have different implications for IT vendors and service providers trying to sell into the organization.
The CIO market’s mandate is most often execution, cost reduction, quality, and compliance. The mandate for the business stakeholders market is business impact, time to market, and time to impact.
Further, CIOs typically think in terms of grand strategy — requirements definitions, detailed specifications, and structured PMOs. The new market of business stakeholders think in terms of trying before buying; they want to use a technology first to see how it works, then adjust it. This is a completely different methodology from a requirements methodology. It’s a different kind of buying.they
- It’s not CAPEX; it’s OPEX.
- It’s incremental steps, not the big-bang approach of a CIO.
- It’s making decisions based on what’s best for a business unit instead of the CIO’s approach, which must solve tech needs for the entire organization while also driving out costs.
The two markets’ approaches and mindsets are completely opposite each other. Unfortunately, they’re both happening at the same time in organizations today, and it creates a lot of confusion
Besides the two divergent markets, sales teams must recognize that, although the mandate for today’s CIOs is increasingly tactical, no CIO worth his sale will give up the fight to influence the business constituency and drive innovation and value.
How can sales teams accommodate these two markets and sell tech to the decision makers in both camps?
Selling to the CIO market
When selling to CIOs, remember that they will want to understand the technology, require proof that it’s going to work, and want develop a rigorous implementation plan. They will also want to make sure the solution is compliant and in line with the emerging standards in the industry.
Because their mandate is to reduce costs, CIOs likely will issue an RFP and get competitive bids, so you need to expect that competitive tension.
Selling to the business stakeholders market
Selling to business stakeholders is more of a vision-leading exercise. It’s crucial to understand the stakeholder’s vision so you can share how your technology or services could either implement that visions or shape it into being a more impactful outcome.
You then need to move from vision to experimentation. Business stakeholders won’t wait for your company to build the tech solution they envision. You need to sell a technology that is already developed to the point that users can start experimenting with it, and you’ll be competing against new SaaS and cloud offers that pop up quickly and allow try-it-before-you-buy it models.
The budgeting impact
CIOs are quite happy to go through a budgeting process, and your sales approach and timing needs to fit into the budgeting rhythm.
In contrast, the business stakeholder market often won’t focus on a large budget. They want to take initial baby steps to understand the technology. You won’t need to offer them a complete entrée; you just need to focus on the next couple of steps.
When the two markets converge
Once the business stakeholders believe in the value of the technology, they will need to bring the CIO into the discussions in order to help them roll it out broadly or expand the scope. At this point, you’ll be required to recognize and meet the CIO’s agenda. You won’t meet with the CIO face to face, but as part of the sales framework, you have to be prepared to answer her questions related to cost, scale, compliance, etc.
Selling into the two markets with opposite mindsets and behaviors, and eventually having to deal with both of them at the same time, is a much more complicated sale than in the past. It requires more patience and highly customized communications. But the prize for your successful strategy and efforts can be very large.
There is an interesting new twist these days on how organizations initiate, fund, and make IT spend decisions. It’s sparked by two major trends: Nicholas Carr’s 2003 Harvard Business Review article claiming that “IT doesn’t matter” and the consumerization of IT. As a result, some organizations no longer view their CIOs as responsible for generating business value through IT decisions.
Instead, increasingly the CIO’s mandate today is to take tactical steps to reduce the cost of IT. Make it run anytime, anywhere, available when and where needed. Make sure it’s compliant and highly reliable — and cheap. The cost of IT on the balance sheet or the operating statement has been creeping up past one percent to two or three and sometimes six percent of total corporate revenues. Now the mandate is to take that down by several points, and even below one percent.
More automation, increased use of private clouds and increased role of labor arbitrage combine to lower the cost. Simplification and standardization also play a prominent role in achieving cost objectives. The mass commoditized world is overwhelming the bespoke world or customized environment, and the focus is on eliminating variations and getting to one kind of server, one kind of data center, one kind of virtualization and operating system. In addition, processes are more ITIL-based, which leads to a cheaper, more reliable, more flexible environment. And it makes it easier to interact with third-party providers.
The power of the purse
This CIO mandate is growing in importance and increasingly is more prominent in CIOs’ agendas. But it comes at the expense of their desire to drive innovation and value into the business. With the consumerization of IT, the business stakeholders are taking over decisions about IT functionality and benefits, as well as how to use IT to drive value in the organization.
They grew up with technology and don’t feel they need to collaborate and partner with IT, certainly not up front. They feel very self-confident and build their own vision of how things could change.
And IT funding has shifted to the business stakeholders along with envisioning and initiating technology decisions that drive innovation and business value. The CIO’s budget is constrained or cut, whereas the business stakeholders’ budgets are now flush; they have the power of the purse.
Traditionally, organizations (through CFOs and CIOs) controlled the introduction and allocation of technology by constraining or managing costs; the point of control was through CAPEX. But in the new world with business stakeholders driving decisions, capital isn’t needed. Business users can leverage ready-made tools that are available in the cloud and through SaaS that don’t require CAPEX and also don’t need as much, or any, IT team participation to launch — making experimentation easy.
Two completely opposite markets
These shifts in influence on delivering value and control over funding create two markets within organizations, and they behave very differently from each other. Their contrasting behaviors and mindsets pose fundamental issues and create a lot of confusion for the enterprise and for the IT vendors and service providers trying to sell into the organization.
This dramatic change from the traditional ways of governing technology and IT spend are like a curveball in baseball. Depending on the grip and hand movement, a pitcher can throw a baseball with a spin so that it swerves downward and deviates to the right or left, surprising the batter and making it difficult to hit the ball. Similarly, the two differing IT markets in today’s organizations throw a curveball at senior leadership and sales/marketing teams, necessitating developing new approaches, concepts and communication about IT initiation, allocation and spend.
For example, a central IT team used to manage through traditional IT governance “gates” such as capital allocations and compliance, which facilitated the ability to look across the organization. But a world where everyone does what’s best in their own eyes poses challenges to managing IT.
There is an upside. To the business stakeholders’ credit, it is more effective to stand up a technology, see how to use it, and then understand how to change it, rather than building an elaborate requirements document up front. It facilitates understanding the nuances, consequences and organizational challenges in a much deeper, more realistic way than can happen by developing a requirements document that is, at best, an abstract vehicle.
It also plays into the idea of agile development but also goes beyond that concept by stringing together fully formed components that already exist in the marketplace. Business stakeholders can see how the components relate and see how to benefit from them; and they can easily add to them or discard them quickly. So it turns the risks of a big planning exercise into a much more measured incremental march that facilitates fully understanding the technology before fully rolling it out.
On the downside, in a world where everyone makes decisions on what is best for their own needs, it can be challenging to scale it across an entire organization at a later point. Potentially it also can create complications for the CIO’s mandated agenda to create a low-cost, highly resilient, highly compliant factory.
It isn’t that the CIO market or the business stakeholder market is right and the other market is wrong. They’re just very different. Borrowing from the claim in the days of the Roman Empire, we’re not here to bury Caesar or to praise him; it’s just a fact that Caesar was very different from Augustus.
So, we must accommodate this new phenomenon of the two markets and celebrate the benefits this brings in terms of a deeper understanding of how to use technology and achieve faster speed to impact. It will necessitate building tools and new management structures that support the inevitability of the new divergent structure. And it will necessitate a new approach and communication strategy for selling IT. In our next blog post, we’ll provide some strategies and tips for how to succeed in hitting a home run despite facing a curveball.
Photo credit: Jason Alley