In the 1990s, Jack Welch’s GE recognized it could hire well educated individuals from high-quality universities in India at salaries that were only a quarter of those in the United States or Western Europe. GE committed to building organizations to perform important business support activities in low-cost regions of the globe, and Gecis, now Genpact, was born. In a similar timeframe, entrepreneurs and government policy makers also recognized the promise of leveraging a low-cost, high-quality talent pool and creating attractive, high-paying (relatively) jobs.
Applying the 4:1 cost advantage began slowly as it was applied to only a small sliver of business support activities. But the offshoring industry very quickly took off on a trajectory matched by few industries. And offshoring itself has become a disruptive force, continuing to expand across a wide range of activities and industries, enabling the creation of companies with enormous growth potential and market valuations equal to historic incumbents five times their size in terms of revenue, shaping enterprises of all shapes and sizes, and influencing political and social agendas for both mature and developing parts of the world.
Is cloud computing the next iteration of disruption to hit the services delivery industry? While few have yet grasped the transformational impact it may have on enterprise IT, from a market space standpoint we see a number of analogous characteristics:
- Emerging analysis and case studies of the economic impact of cloud computing suggest 4:1 or better cost advantage for users. And this is enterprise solutions for public clouds, private clouds, virtual private clouds, and hybrid solutions with select workloads dynamically moving between private and public cloud options.
- While cloud solutions are in their infancy, the toe testing of workloads driven by what appears to be cheap processing power that can be self-provisioned in minutes is spreading rapidly to other workloads much closer to the core.
- Leading service providers are achieving VERY attractive financial margins on the core cloud services, much like the Tier 1 offshore IT services players drive superior margins, growth, and market valuations. For example, India-based TCS last quarter put up 31 percent year-over-year growth at NET margins over 24 percent, numbers most firms would kill for. But it appears that the cloud units of Amazon, Rackspace, and others are growing twice as fast, with margins also likely to be substantially higher.
- The leading providers in cloud sectors – Amazon, Google, Rackspace, Microsoft, and Terramark (Verizon) – are non-traditional services players, similar to the national champions in major low-cost offshoring destinations that built offshoring companies from scratch or entered from non-traditional, only loosely related spaces.
With all these similarities, my predictions are:
- Cloud computing will drive massive disruption in the IT services marketplace; large market share shifts will occur, and many legacy providers will be forced to change their business models or suffer extended decline.
- The leading service providers five to 10 years from now will most likely be those that were NOT incumbents or players in closely related sectors. Incumbents who embrace the required changes and aggressively attack their legacy book of business with new solutions may contend for leadership; hardware providers such as IBM, HP, Dell, and major Japanese players have unique ingredients that could spice up the mix, but they need to learn from their late entry into offshoring that marketing speak alone will not make a difference.
- Leading performers, once to sustainable scale, will outperform followers from legacy environments on growth and profitability dimensions by a factor of two or more (although they may remain smaller for some time). The value creation opportunity for investors will represent a next wave of stars.
- IT services customers will be the big winners, capturing up to 2/3 to 3/4 of the “surplus” value. CIOs will ignore the economics of cloud initiatives at their peril, but those who embrace the cloud will find themselves very valuable when the talent war begins.
- Benefits will not be limited to economic value – the new leaders will fulfill higher expectations for responsiveness and innovation. Economics will drive adoption, but the early adopters will find speed and flexibility benefits to be the primary value creation levers. These early adopters will experience real business leverage from their cloud IT initiatives, elevating these efforts to a strategic level.
Buckle up! It’s going to be a wild ride up in the clouds…