Author: ChirajeetSengupta

Why the Traditional Infrastructure Outsourcing Market Is about to Shrink Dramatically | Gaining Altitude in the Cloud

For those of us who are industry observers, it is not a secret that the traditional Infrastructure Outsourcing (IO) market has stopped growing and is currently contracting at a rate of 2 percent a year.

Market Size for Traditional Infrastructure Outsourcing Players

The secular trends driving this contraction are numerous and include client frustration with the contracting model, lack of flexibility, poor customer/provider alignment, and alternative sourcing options such as in-house, co-location and remote infrastructure management outsourcing (RIMO).  All of these alternative options present increased flexibility and often more attractive economics.

However, the reason that this market deceleration and consequent contraction has been so slow is that once a client has entered into a significant IO contract it is very hard to move away from the model. It is possible to switch service providers but very difficult to rebuild in-house managed capacity.  As a result, we note that the traditional IO market place is dominated by re-competes with few new logos entering the market.

Nevertheless, this stable market may be about to change in a big way. To understand why, we only need to look at the nature of the workloads that are running in these IO environments. Over the course of the last year, we have taken a close look at these workloads and have determined that between 40-50 percent of the workloads currently hosted via these contracts do not have the security requirements or the mission criticality that prevents them from being migrated to less expensive cloud environments. We estimate that savings can approach 20-40 percent, depending on the workload distribution and the volumes involved, particularly when these workloads are migrated to a pay-as-you-go environment such as those available from public cloud platforms such as Amazon or Rackspace.

To better understand the viability of this happening, let’s look at the use case of Application Test and Development.  Test and Development environments are not subject to the same performance, security or compliance requirements of production workloads. They are, in fact, excellent candidates to be operated in less expensive but more flexible environments. There is little reason for customers to look at these workloads in the same light as production workloads or for the same cost and delivery constructs to be applied.

When you dig further into existing IO contracts you find that many of these customers are operating well above their contracted minimum volumes thus allowing them to shift these workloads without fear of having to renegotiate contracts or pay early termination fees. When you consider that test and development alone often take up 25-35 percent of the capacity in the traditional IO environment it becomes clear that it is only a matter of time before customers move to shift these workloads and move from these low-hanging fruit to other workloads that exhibit similar favorable characteristics.

We have researched what conditions are necessary to allow a traditional IO client to move down this path. It appears that three key conditions need to be met.

  1. A vision or understanding by the customer that savings are possible, large and attainable.
  2. Orchestration tools that allow the client to organize, manage and coordinate. These tools have recently come on the market with several strong case studies to demonstrate their success.  What makes the business case compelling is that it is entirely possible for customers to “test” the cloud model by moving incremental workloads without investing in such tools though a larger scale of transformation would require such investments.
  3.  The willingness to invest the time and money to implement the program.

Given the strong ROI resulting from these initiatives it is likely that many if not all ITO customers will explore this option.  Already, more than half of enterprise customers are actively migrating or considering migration of development and testing environments to the cloud, next only to email/collaboration and disaster recovery/archiving.

Cloud Adoption for Application Dev Test Environments

With significant portions of IO workloads vulnerable to this emerging threat it’s only logical to conclude that we will see this market contract sharply in the next few years.

Can Outcome-based Pricing Replace “Till SLAs Do Us Part?” | Sherpas in Blue Shirts

ITO deals in which service providers’ compensation is linked directly to the business outcomes they achieve for the clients have started gaining prominence. While the idea has been around for some time, and indeed should be part of a gradual evolution process from pure FTE or T&M models through to gainsharing arrangements, we’ve observed with interest both parties’ strategic interests (see image below) converging through shared business outcomes on several mega deals.

ITO Deal Demand and Supply Forces

A number of clients have recently asked for our advice and insights on the upsides and downsides of outcome-based pricing models. Following are the factors we told them they must carefully consider before asking their providers to make the change:

  1. Trust:  Ask yourself, “Do I really trust my partner?” Use your common-sense. Outcome-based models are often used in combination with a base T&M model in situations involving complicated deployment of new technology, where both parties share the risk.  However, not everything goes smoothly in such situations, so don’t fall over yourself to shout “Penalty!” You might need to arrive at a negotiated outcome once your partner admits to an honest, unforeseen mistake. In other words, incentivise your provider to make it right, rather than masking the flaw and investing in a sub-optimal environment for the duration of the contract. The latter is the road to poor relationship health, contract disputes, and a frustrating end-user experience.
  2. Corollary to the Trust Principle, be prepared to Cede control: If the implementation partner is responsible for improved business outcomes, the team needs to have control over the business process and the underlying stack, including platforms, management, and reporting tools, and quite simply…the way you do business. You can play the powerful investor, but let your partner be the empowered CEO. Share your powers.
  3. Identify scope accurately: Building on the above point, the scope is often beyond the obvious. Mere implementation of an ERP system won’t raise productivity or prevent revenue leakage if the overlying process is inefficient. State the scope in line with your desired outcome. For example, scope is not, “implement ERP”; it’s “raise productivity by XX% by implementing ERP and optimizing the accompanying process.”
  4. Know the price of improved outcomes: Most providers won’t tell you they build a risk premium into their base fees on outcome-based models. In other words, while you are encouraging your partners to take on more risks, they want to cap the downside. Remember that they don’t want to, and sometime can’t, back out of a contract. Thus, if the desired outcome cannot be reached, they would have spent significant time and effort without recompense. So, you must carefully evaluate the business case for an outcome-based model. Is the scope large enough? Are the benefits of transformation deep enough?
  5. Make it stick: Arguably, this is the most challenging part, as it’s  often difficult to establish causality between the provider’s performance and business outcomes, making “Cede control” (point #2 above) even more important. In addition, governance models must be suitably evolved and often supported by sophisticated management tools and chargeback mechanisms. Keep in mind that these come with a cost and, consequently, must be built into your ROI model.

At the end of the day, an outcome-based model is a bit like marriage – it represents the triumph of hope over experience. So be clear about why you are getting into it, choose your partner carefully, share space, and who knows – you could live happily ever after!

Cloud Computing in ITO – Everybody Wins, but Who Gets to Win More? | Gaining Altitude in the Cloud

Less than three years back, there was widespread excitement (and alarm and despondency) in many quarters about the impact of cloud computing on traditional IT outsourcing providers.

Cloud computing was predicted, though not by us, to greatly disadvantage the incumbent players, but as of today, such a prediction is difficult to stand by (just take a look at TCS’s and Accenture’s results since then). Sure, public cloud providers continue to grow rapidly, and the traditional license model is increasingly giving way to the pay-as-you-go paradigm. Yet most leading providers of outsourced IT services seem to be adapting well through a combined strategy of alliances, acquisitions, and in-house cloud solutions. Cloud computing appears to be increasingly well integrated as part of the delivery model for most traditional ITO providers. Consider the following statistics from our recently released report, Enterprise Cloud Adoption: Role of Cloud in Global Services:

  • In the second half of 2011, approximately eight percent of all ITO/BPO deals serviced by traditional outsourcers (excluding SaaS product companies, and public cloud and hosting providers) included cloud delivery models or platforms within their scope. This is up from four percent in the first half of 2011.
  • The average total contract value (TCV) of 2011 global services deals with cloud delivery in scope  was US$168 million, compared to US$95 million for deals without cloud in scope.
  • Cloud deals seem to be more transformational in nature, almost at the cutting edge of ITO capabilities if you will. 53 percent of all ITO deals with cloud delivery in scope involved significant infrastructure transformation of test, development, and production environments. Clearly, traditional ITO providers view cloud computing as an important solution component for large, transformational deals.
  • Cloud computing seems to be helping service providers get access to markets that were previously unprofitable or too complicated to serve. Approximately 38 percent of all global services contracts with cloud in scope were awarded by enterprises with less than US$500 million in revenues. And government and non-profit sectors together account for 20 percent of all global services deals with cloud delivery in scope.

Clearly, there’s a big pot of gold somewhere amidst all these clouds, but what’s interesting to note is that few service providers  have all of what it’s going to take to win all of it:

  • Design and Consulting – Service providers, such as Accenture, with a consulting legacy and orientation are going to have an advantage when it comes to advising clients on how to build their cloud solution from scratch.
  • Host and Implement – Players like IBM and HP with  a deep legacy of asset-based infrastructure transformation will have an advantage in providing these services
  • Management and Professional Services – Offshore players such as TCS, with their global delivery models, have an advantage in offering the “cloud management” role

The problem is that these activities are seldom commissioned in isolation. This is not something where a best-of-breed approach always works, despite buyers being wary of lock-in risks. The opportunities are tightly coupled, and service providers need intelligence on the characteristics of relevant opportunities as they are torn between focusing on what they have, and plugging the gaps through alliances and acquisitions.

The fact of the matter is that there will be winners and losers, and the market today is too dynamic to predict who will play which part. It will be interesting to see if there are ground-breaking disruptions (e.g., a major public cloud provider making a headline acquisition of a giant system integrator, thereby making its move in the private cloud market, potentially disintermediating a lot of other system integrators, and at one stroke making a deep thrust in the enterprise market) as the stakes get higher. Or an asset-light provider marking a strategic u-turn by investing in physical infrastructure to build its own cloud solution, complete with consulting, system integration, and management services delivered through a global platform?

To learn more about the nature of cloud-related opportunities for providers of global services, check out Enterprise Cloud Adoption: Role of Cloud in Global Services.

Live from Bangalore – the NASSCOM IMS Summit, September 22 | Gaining Altitude in the Cloud

Hello everybody! I’m back, reporting from day two of the NASCOMM IMS Summit in Bangalore. Today’s conference was focused on discussing alternative models of cloud computing and what works best for who.

First, Adam Spinsky, CMO, Amazon Web Services (AWS), told us his view of what happening out there in the cloudosphere. An interesting factoid to chew on – as of today, AWS is adding as much data center capacity every day as the entire Amazon company had in its fifth year of operation when it was a US$2.7 billion enterprise.

Even more compelling proof of the fact that the cloud revolution is really happening were Spinsky’s examples of the types of workloads AWS supports – SAP, entire e-commerce portals that are the revenue engines of companies, and disaster recovery infrastructure…all are hosted on the cloud. Fairly mission critical stuff, rather than “ohh, it’s only email that’s going to go on the cloud,” you must admit.

Next up, Martin Bishop of Telstra spoke of the customer’s dilemma in choosing the right cloud model. This segued nicely into the panel discussion, “Trigger Points – Driving Traditional Data Center to the Private Cloud,” of which I was a part.

M.S. Rangaraj of Microland chaired the panel and set the context by talking about the key considerations of cloud implementation. According to Rangaraj, the key issues are orchestration and management, as the IT environment morphs into new levels of complexity with multiple providers delivering services across a multitude of devices.

I spoke of the business case for a hybrid cloud model. While private cloud is good, and current levels of public cloud pricing provide slightly better business value, a combination of the two enables clients to reduce the huge wastage of unused data center resources they now have to live with. Today, infrastructure is sized to peak capacity, which is utilized once in a blue moon. The dynamic hybrid model enables companies to downsize capacity to the average baseline. Associated savings in energy, personnel, and maintenance imply dramatic cost advantages over both pure public or private models.

Kothandaraman Karunagaran from CSC took up the thread and spoke of the role of service providers in this new paradigm. While outsourcing may not “die” as a result of the cloud movement, it’s jolly well going to be transformed. Service providers will need to spend far more time in managing, planning, and analyzing usage and consumption data, and less time on monitoring and maintenance. In other words, service providers’ roles will evolve from reactive to proactive management.

Some of my key takeaways from the conference include:

  • Everybody agrees that there is no silver bullet model, meaning that there are no clear winners in a cloud environment, and the hybrid model will keep getting traction as the world becomes increasingly, well, hybrid.
  • Until not long ago, we spoke of the need to simplify IT. Well, the only part of IT that’s going to get simplified is the consumption bit. If you are a CIO reading this, we’ve got bad news for you. Management of IT is going to get more, not less, complicated. Multiple service providers, networks and devices, reduced cycle time, and self-provisioning means that management just got a whole lot tougher.
  • Service providers need to rapidly engage with this new reality and figure out business models can adapt to it. The unit of value is no longer the FTE. It’s what the FTE achieves for the client, or even more complicated, what the consumer actually ends up using. We live in interesting times, and they will only become more interesting as time goes on.

That’s it from my end. I enjoyed the conference, look forward to more illuminating discussions next year, and, hopefully, to seeing you there!

If you weren’t able to attend this year’s conference – or even if you were – you can download all speaker presentations at: http://www.nasscom.in/nasscom/templates/flagshipEvents.aspx?id=61241

 

Live from Bangalore – the NASSCOM IMS Summit, September 21 | Gaining Altitude in the Cloud

CIOs, service providers, analysts, and the business media rubbed shoulders on the power-packed first day of the NASSCOM Infrastructure Management Summit (IMS) in Bangalore. This year’s conference has the twin themes of Enterprise Mobility and Cloud Computing, with one day dedicated to each, which seems to lead to a more focused set of discussions than a super broad-based event that leaves you struggling to absorb all of what you just heard.

After the welcome address and keynote speech from Som Mittal, President of NASSCOM, and Pradeep Kar, Chairman of the NASSCOM RIM Forum, we settled in for a series of insightful presentations and panel discussions with global technology leaders.

BMC CEO Robert E. Beauchamp spoke about how the parallel paradigms of cloud, consumerization, and communication (yes, I am in alliteration mode today) require CIOs to think of a unified approach to service management. Of particular interest were Beauchamp’s insights on how different service providers are trying to interpret the cloud differently in an attempt to a) disintermediate the competition; b)  avoid being disintermediated; or c) both a and b.

IBM’s interpretation of the cloud: The cloud is all the bundled hardware, software, and middleware we have always sold to you, but now you can buy the whole stack yourself instead of us having to sell it to you.

Google’s counter: Who cares about the hardware anyway? We will buy the boxes from Taiwan – cheaper and better. It’s about what you do with it, and that’s where we come in…again.

VMWare chips in: You already own the hardware – and we will tell you how best to make use of it.

Beauchamp sees more than one way of “belling the cloud cat,” and CIOs need to figure out which direction to take based on their legacy environments, security requirements, and cost imperatives. (“Belling the cloud cat” is my take-off on a fable titled Belling the Cat. It means attempting, or agreeing to perform, an impossibly difficult task.)

As for service providers, he also foresees successful survivors and spectacular failures as the cloud conundrum disrupts traditional business models.

Mark Egan, VMWare CIO spoke about how consumerization and cloud computing are nullifying the efficacy of traditional IT management tools. According to Egan, IT needs to move from a “we’ll place an agent on the device” mode to a “heuristics” mode of analyzing data in order to prevent every CIO’s security nightmare from coming true in a consumerized enterprise.

Next up, Brian Pereira, Editor, InformationWeek, and Chandra Gnanasambandam, Partner, McKinsey, inspired us with real stories about how mobility is transforming the lives of unbanked villagers, saving billions of dollars worth of healthcare expenditure, and improving and optimizing the enterprise supply chain.

Here’s a gem of an insight: Do you know what most urban workers in the Philippines, Vietnam, or India do if they need to transfer money to parents living in rural areas? They buy a train ticket. Then they call Mum and Dad, share the ticket number, and ask them to go to the local railway station, cancel the ticket and collect the refund (minus a small cancellation fee). Wow – that’s what I call consumer-led innovation!

To summarize today’s sessions:

  • While many discussions highlighted the correctness of what Everest Group analysts are already predicting, it was invaluable to get validation on what we suspected, complete with more live examples.
  • Cloud and enterprise mobility are here to stay. With the momentum behind them – unlike other hyped up technologies – these are being demanded by the consumer, not dumped on them. And that is always going to mean something.
  • Service providers and CIOs need to evolve. In themselves, cloud and mobility do not represent a threat. But it’s a lot of change. And the threat lies in how CIOs, and their service providers, gauge the pace of the change, and react to it.

That’s it for now. Tomorrow, I share a panel with CSC and Microland to discuss “Trigger points – Driving traditional datacenter to private cloud.” Right now I’m heading off the gym in an attempt to burn all the calories I’ve put on during the day, thanks to the excellent food. Stay tuned!

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