Author: MarvinNewell

Sometimes Even the Best Laid Plans Are No Match for COVID-19 | Blog

As I shelter-in-place with my family in Dallas, first and foremost I hope all of you are well and taking the steps you need to take to remain so.

Every day, the rapidly evolving COVID-19 pandemic seems to create a new set of issues for enterprises and service providers alike. A recent example from one of our large technology clients is particularly interesting. The challenge arose as they worked closely with their service provider ecosystem to ensure business continuity for operations in hot zones across the globe.

This client has operations in multiple locations subject to COVID-19 shelter-in-place requirements. Among its service provider landscape is a large firm delivering services that involve highly confidential materials. These activities are subject to very strict provisions regarding secure delivery facilities and equipment. In fact, the enterprise’s policies require all delivery activities essentially to be performed in facilities meeting quite specific standards.

When Washington state and California started escalating steps toward a shelter-in-place mandate, the enterprise’s leadership recognized that it needed to modify its policies if its service provider’s team was going to be able to deliver any services in a work-at-home model. Thus, they proceeded to make appropriate modifications that eased the facility-specific policy restrictions to enable the service provider to execute its business continuity plans for a work-at-home solution.

Our client expected that this prompt management action to remove a policy constraint would set the stage for business to proceed with minimal disruption. Unfortunately, this quick action uncovered multiple layers of additional complexity, each of which required similar problem-solving and decisions in real-time.

For example, the service provider quickly came back to our client to confirm that the usual security requirements and associated liability limits in their current agreements would not apply. While there were some concerns on securing the technical environment required to deliver the service, the service provider’s primary concern was more organizational in nature – for example, supervision and provisions to ensure proper behavior of individual workers emerged as a critical gap that the service provider could not address in the highly distributed, uncontrolled work-at-home delivery model. Our client and the service provider came to a reasonable solution so the bulk of work could proceed, but this situation highlights the critical nature of examining all aspects of service delivery in light of business continuity.

In between your kids photo-bombing the meeting with that important customer and your pet making the best contribution in your weekly staff meeting, take a step back to prepare to step forward:

  • Ensure your own policies enable full implementation of the business continuity plan. You certainly don’t want bottlenecks when you need to implement BCP.
  • Be crystal clear in your service provider agreements about your expectations for both normal operations. Relief on SLAs may not extend to removal of obligations for security and other imperatives in extraordinary times.
  • Alert your legal team – they should review force majeure provisions to be ready to answer questions as conditions change.
  • Begin to chart the post-lockdown adjustments in your global delivery strategy to take advantage of the recovery and position your enterprise for global services safety and success over the long run.

Be safe at home.

Visit our COVID-19 resource center to access all our COVD-19 related insights.

How Donald Trump May Save the India-heritage Outsourcing Firms | Sherpas in Blue Shirts

Over the past month or so, many of the India-heritage outsourcing firms have reacted to the current political climate to announce significant hiring goals for onshore (U.S.) hiring while scaling back applications for H-1B visas. There are numerous reports across the country of these announcements creating a frenzy of governors courting the companies to locate delivery centers in their states, with sweet incentives included.

Impact of the digital model

Notwithstanding the irony of taxpayers underwriting job growth for the same companies that are simultaneously being raked across the coals for stealing American jobs and moving them to India and other offshore locations, the shifts coming on the back of political jawboning may be setting the stage for a way to a longer-term turnaround of prosperity. Recent analysis of the organic growth of the top 20 outsourcing services providers by Everest Group and DeepDive shows a dramatic deceleration of these collective firms’ growth. Projections over the next couple of years indicate a continuation of this trend. Deeper in the numbers, however, is the startling fact that the 80 percent block of these firms’ revenue that is labor arbitrage-based is actually shrinking slightly! The remaining 20 percent – that which is generally considered “digital” (cloud, mobile, social, analytics, AI/robotics, etc.) is growing at an annual rate of over 20 percent.

Many of these “digital” activities require service delivery resources that are intimate with the consumers of the service. This is driving a push for a greater onsite (onshore) delivery mix to unlock the value inherent in these digital initiatives.

Now you see the punch line – Trump-driven reactions to increase the onshore presence aligns with what is required for success in the digital marketplace.

The digital transformation challenge

However, it is not a forgone conclusion that all the firms that shift their mix slightly will succeed in this fast-growing digital space. Digital success often requires a different business model that demands changes far beyond the location of service delivery staff. We see all elements of the business model shifting – locations, talent approach, innovation cycle, sales motions, organization models, funding processes, etc. – a transformation that is challenging for companies large and small (enterprises seeking to adopt digital solutions also have major transformational change requirements).

That said, actions in response to the U.S. administration’s stricter posture toward immigration, commitments to “hire American” and “buy American,” and rhetoric about trade reform (i.e., border taxes could position, if not encourage, service providers to increase their digital mix. The market revenue numbers suggest that customers want it, so those offshore-centric players who can navigate the business model changes required to do it at scale could end up thanking President Trump for the push into the digital pool.

Outsourcing firms thrown into digital model

Thinking about Robotic Process Automation (RPA) – What Can You Learn from Your Cloud Journey? | Sherpas in Blue Shirts

Everyone is talking about the emerging disruptive technology that is the next transformational solution…

Tales of massive cost reductions and time-to-market improvements that will leave your competitors in the dust abound…

You are getting pressure from the C-Suite about what you’re doing about it…

The vendors have lots of slideware, but precious few production examples at scale…

Everyone is launching pilots or proofs of concept…

Hmmm…is this recounting the cloud services situation of 5 to 7 years ago, or today’s RPA situation?  Well, I think it is both. Our discussions in the market – encompassing both enterprises that are commencing their RPA journey and services and technology providers jockeying to deliver solution to those enterprises – suggest a picture that is eerily similar to a number of patterns we saw as the “last” disruptive trend was gaining its footing a few years ago. It got us thinking about what those wishing to capitalize on the emergence of RPA might learn from the trials and tribulations many firms went through as cloud services emerged.

 RPA
today
Cloud Services during emerging phaseFast forward: what happens next for RPA
Market maturity
  • Every conversation begins with “here is what we mean by RPA…”
  • Every conversation began with “here is how we define cloud…”
  • As enterprise-wide usage patterns emerge, nomenclature will converge to drive clarity on the value levers
Adoption patterns
  • Lots of pilots; slow to scale across processes/ enterprise
  • Focus on “no brainer” use cases
  • Lots of pilots; slow to scale to enterprise workloads
  • Early focus on “spiky” workloads where cloud yielded extraordinary benefit
  • Many “red herring” barriers (“cloud can’t be secure”)
  • Business users will continue to drive siloed initiatives until market reconciles buyer needs with provider business models (see below)
Solutions
  • Targeted at specific use cases with value enabling providers to extract maximum profit surplus
  • Not oriented toward enterprise value
  • Targeted at “low hanging fruit” use cases where benefits were unassailable
  • Broad enterprise-wide solutions limited to niche players (private cloud-led for most larger enterprises)
  • Solutions evolve from “bolt-on’s” to serving as a foundation/primary dimension of the environment
  • ROI driven by impact across processes and internal organizational boundaries
  • Enterprise software vendors build automation capabilities into their products
Market leading solution providers
  • Bifurcated market structure with leading software providers and business process services providers
  • Software firms struggling to align a software business model with market needs
  • BPO players conflicted with cannibalizing installed base
  • Tradeoffs embedded in software and BPO business models hinder adoption
  • “New entrants” exploited unique cloud business model
  • “Incumbents” that attempted to leverage their historical business model made compromises and fell behind
  • New RPA business model must emerge to fully align with market needs and drive enterprise-wide value
  • Solution providers will emerge with approaches that align interests (rather than create conflicts)
Value levers
  • Cost reduction with the ability to replace human capital with robots

 

  • Cost control by tying  cost structure to usage patterns
  • Value levers emerge that supplant cost reduction such as accuracy, flexibility, agility and compliance 

That’s not to say there aren’t some key differences in how these two disruptive trends are playing out. For example, while both sets of key early players created their business models from a blank sheet of paper, the cloud leaders (Amazon Web Services, Google, Microsoft Azure, etc.) clearly had deeper pockets than emerging RPA leaders and they leveraged that ability to invest ahead of demand to drive a market share-driven pricing strategy that secured and continues to protect distinct advantages.

Notwithstanding the differences, it sure feels like many enterprises (and service providers) have been down this path of pursuing the next disruptive technology before.

As you contemplate your RPA strategy, it probably makes sense to step back and gauge how your organization responded to the emergence of cloud services. The steps you took that worked for your cloud initiatives – and those that didn’t work so well – will provide a good path forward.


Photo credit: Flickr

Hewlett and Packard – Will a Split Make 1 + 1 = 3? | Sherpas in Blue Shirts

The Wall Street Journal broke the news over the weekend that HP was contemplating splitting the company into two – PCs and Printers in one company and enterprise hardware and services in another. HP confirmed the news this morning. Many on Wall Street are applauding the move, and I suspect from a financial market view, the move may unlock “untapped value” in the stock price. However, will it really make a difference in the market, particularly the global services market, which is where Everest Group’s clients live; in other words, what’s in it for the customers of HP’s enterprise services?

Each of the new companies will be over $50 billion in revenue, so there’s really no concern to be had about either of the resulting entities lacking scale. Certainly the PC/printer sector and the enterprise sector have very different growth profiles and different overall market drivers – increased focus is probably good news and discussions arising from internal competition for capital and resources should be streamlined and more reflective of each market group’s needs. It appears that each of the “new” companies will continue to leverage the strong HP brand.

HP blog tweet

Aside from those elements cited above, it doesn’t feel like a move structured to unlock value on Wall Street will result in fundamental changes in the new HP Enterprise entity’s competitiveness in the market. The struggle to compete successfully on a consistent basis with the more nimble offshore-centric players in the enterprise services marketplace doesn’t really change under a split company:

  • Challenges of delivering on the promise of integrated hardware and services synergies will remain. Major changes in strategy are unlikely, and there will be temptation to pull through equipment and software on services deals.
  • Underlying differences in many processes central to market success – including recognizing that products and services are indeed very different – will continue to plague both bidding competitiveness and an ability to generate attractive margins.
  • Cumbersome decision-making compared to more nimble competitors will be unlikely to improve noticeably to impact customer performance.
  • While the smaller HP Enterprise might be less inclined to be acquisitive on next generation assets (which are quite expensive), one wonders if they will/should enter the CSC acquisition sweepstakes (a mix of select next generation assets discounted by an overhang of less attractive traditional business)

Don’t get me wrong – I support the logic of pushing to create an entity that is more focused on serving the enterprise’s needs, especially when a boost on Wall Street will help support positive momentum and improved morale. The HP Enterprise leadership, however, needs to recognize that the split is a facilitator for determined actions, not a turnaround strategy in and of itself. They need to ensure an environment exists that unleashes both the hardware business and the services business to focus on the distinctive buying behaviors and competition in each (and not get so wrapped up in the potential integrated hardware/services that they lose sight of the forest for the trees).

Current HP Enterprise Services customers should think about how the more focused company can add more value in their services. It is unclear if the split will trigger “change of control” clauses that exist in many enterprise services agreements, but if so, customers should use the opportunity to open a dialogue about a new era for service delivery. We would not suggest using these discussions as an opportunity to squeeze HP Enterprise for price concessions, but as a way to get your account team focused on value and truly listening to your needs. Customers must ensure that plans are in place with HP to ensure distractions are minimized as the details of the split are sorted out and operationalized.

HP Enterprise competitors should recognize that this split may create a more focused, more competitive services company. While short-term opportunities may arise if HP gets distracted on select accounts. If the newly svelte HP Enterprise deals with the challenges noted above successfully, the player that arises from the split should have formidable capabilities and greater focus to take to market. Complacency will not serve any competitors well.

With the core HP Enterprise business under constant pressure from next generation disruption, the status quo is not an attractive path. Kudos to HP leaders for taking action – now the shape and sustainability of the follow-through will prove whether the arithmetic really works for the customer. 


Photo credit: Jeremy Fulton

Changing the Rules | Gaining Altitude in the Cloud

In Assessing the Cloud’s Clout to Disrupt the Outsourcing World, Peter Bendor-Samuel suggests that cloud-based IT services will be highly disruptive to the IT infrastructure space. I agree – and assert that the impact will occur faster and be more game-changing than we might imagine at this time when its $10-20 billion of projected annual revenue seems quite modest compared to estimates of “traditional” IT services of $200+ billion.

To support my point, I would encourage you to consider an analogous industry-changer – the “invention” of the low-cost airline by Freddy Laker in the late 1970s. Laker Airlines pioneered low-cost airfares, offering pricing at one-third to one-half of the cost of traditional carriers flying across the Atlantic. With only a handful or two of long-range aircraft, Laker broke the industry’s rules, securing permission to compete head-to-head with the likes of British Caledonian, TWA, and Pan Am, among others. Applying innovative operating practices, implementing sacrilegious pricing models, adopting unique sales, and marketing techniques, Laker opened new markets and changed customer buying habits forever. While the early 1980s recession across the U.S. and Europe forced Laker into bankruptcy, the airline industry was changed forever.

The parallels in today’s IT services market to Laker’s world are quite striking:

  • Upstarts coming from outside the traditional industry drive innovation
  • Standardized offerings providing different kinds of value to customers both open new market segments and change buying behavior and decision centers for traditional market segments
  • Different operating practices and business models deliver fundamentally different value to customers
  • Traditional players struggle to respond, pulling levers that put their long-term health at risk (note how many of the traditional transatlantic airlines Laker went after are still flying!)
  • Very small market share shifts can change the playing field for the entire industry (remember, Laker deployed relatively few planes filled to near capacity – low single-digit market share from an industry perspective – but was able to force the leaders to play by his rules)

Some will challenge whether the Laker analogy is a fair comparison, but can today’s large IT services firms afford to risk not taking heed of lessons from Freddy Laker?

Dell Going Private | Sherpas in Blue Shirts

Last Tuesday, Dell Inc. announced that it will go private, with Michael Dell, Silver Lake Partners, and Microsoft combining in a $24.4 billion offer that represents a 25% premium over Dell’s value prior to word of the discussions emerged. While there are some strings attached to the deal, it now seems inevitable that Dell will soon be a private company.

Out of the public spotlight, will things be different?

Will the absence of quarterly earnings pressure energize a set of business initiatives that will remake the storied PC maker? 

Companies that go private no longer face quarterly earnings imperatives, instead have the opportunity to exercise more flexibility to take decisive actions that might affect near term reported earnings, but have attractive medium and long term returns. For example, some companies that have gone private after long tenures as public entities make bold moves such as:

  • Accelerating and broadening offshoring initiatives, which had material upfront costs, but promise very attractive longer term economics. This longer term view unshackles key improvements, lubricated by fewer concerns in this case of exposure to public relations rhetoric that might move the market.
  • Launching heretofore delayed M&A activity that had short term adverse earnings implications. This includes moving forward to jettison laggard units that would have triggered write-downs of under-performing assets.

What happens when cash really becomes KING? 

Private companies, particularly those owned by performance-driven private equity firms, often shift toward maximizing cash generation rather than managing quarterly and annual earnings performance. This shift in the premier objectives can reshape many elements of the business; for example:

  • Arrangements with customers may shift as T&Cs are realigned to prioritize cash over earnings
  • Inorganic growth is viewed through a different lens as the firm no longer can use equity as a currency for acquisitions
  • Strategic moves to fill capability gaps or establish footholds in new market segments are reoriented as private firms think (more than) twice about paying cash to acquire firms with high multiples and are more ready to consider divesting units that might command a high multiple

How does a big debt load change the game? 

Most large buyouts of this nature end up with a debt-heavy capital structure, pushing for cash generation to retire debt and elevate value for equity holders – all within a time horizon for the investors that will generate very attractive returns. While GAAP earnings pressure might decrease, EBITDA pressure will elevate. Thus, priorities shift to emphasize:

  • Driving cash flow up as quickly as possible to provide plenty of interest coverage and to start paying down principal
  • Taking aggressive actions to drive the enterprise value north – the objective, after all is to make the investors rich(er) – growing enterprise value and position the firm to go public again in a few years at a much higher valuation.

Will being private drive a different organization culture? 

Private companies really do act different.  The opportunity – perhaps necessity – emerges to structure different incentives as the equity part of senior leaders (and deeper in the organization) shifts from a nearly day-to-day focus to the quest for a future liquidity event.  This fundamental change in focus presents some heady organization design choices; for example:

  • The balance of compensation schemes need to change. Structuring these most basic of incentives sends powerful signals on the direction and goals of the company
  • This private company environment inevitably attracts a different talent profile that seeks a different kind of reward (more risk-taking?) and creates a distinctive opportunity for culture change

How will “new” owners shape the future? 

When companies go private, a different ownership structure – often smaller and simpler – with a clear vision of success typically takes control. In most cases this new ownership profile has fewer shareholders with much greater influence on the firm’s direction. The newly private company experiences:

  • Clarity of priorities which will define core business direction. For Dell, will this sharp focus lead to revitalization and sharper focus of the hardware business or a next generation firm driving innovation beyond traditional models?
  • Opportunities for new partnerships (what will Microsoft do?) that could modify the shape of products, services and the basis of competition going forward

Private is different than public. Dell the private company will be different than Dell the public company. Customers and competitors will see changes – perhaps at a pace that rivals the Dell of the 1980s when it was last a private entity. Buckle up!


Image credit: Dell

Navigating IaaS Pricing | Gaining Altitude in the Cloud

Last year, I wrote here that cloud services were “differentiated commodities.”  The evolution of the Infrastructure-as-a-Service (IaaS) market over the last 18 months continues to reinforce this view.

A recent analysis of an enterprise’s IaaS options for an IT infrastructure workload that is expected to grow ten-fold during the next few years illustrates this observation quite well – and demonstrates the value that enterprises turning to cloud solutions can contemplate.

The graph below shows five pricing alternatives from three cloud providers (all normalized for similar levels of support, etc.). Amazon Web Services (AWS) EC2 standard on demand offer starts out with the highest cost and holds that premium position throughout the volume range over the three-year period projected. Surprisingly, Microsoft Azure’s solution with a one-year commitment comes in at almost half the cost of AWS on-demand and remains very competitive across the volume range. Only Rackspace’s private cloud alternative beats out the Azure one-year solution at higher volumes. Azure pricing without the one-year commitment starts pretty competitive, but escalates rapidly to finish nearly as high as AWS on-demand at the highest projected volumes. If willing to make a longer term commitment, the AWS solution with a three-year commitment scales to a competitive level at higher volumes. (However, I should highlight that AWS has a consistent history of reducing prices relatively frequently – lowering price for its first generation standard instances by 18 percent just a few weeks ago, which could easily make even its on-demand offering quite compelling as it potentially could take advantage of future price cuts.)

IaaS Cost

Enterprises thinking about cloud IaaS solutions shouldn’t miss the point about how pricing behaves with volume. Each of the solutions shown scale much more slowly than volume growth – AWS grows only 2x with a 10x volume increase and the low price Azure one-year only grows 3x with the 10x volume. Workloads for which rapid growth is likely can secure substantial attractive economics. (One might wonder how frequent workloads might show 10x growth over a relatively short period; we are observing a surprising number of new applications (e.g., big data analytics) that consume resources at many times these rates – some would crash under their own weight without a cloud solution that can scale with their explosive demands.)

Decision makers also need to remember that compute virtual machines (VMs) are only a portion of their IaaS bill – storage, IO, and additional services can add up very quickly and provider strategies and choices differ widely across these areas, too.

Business and technology leaders thinking about decisions about their IT infrastructure options must include cloud solutions in their consideration set. Just like the legacy IT world where capital budgeting ran the show, planners in the next generation IT era need to pay close attention to getting the future outlook right. As illustrated by this IaaS analysis, evaluating options at a snapshot in time may lead to choices that leave a pot of gold on the table. Moreover, crafting the solution design to enable flexibility (i.e., low switching costs) in ways that create future options may enable the enterprise to exert leverage to secure even more favorable economics in the future as pricing models and relative price points shift over time.

Amazon in the Headlines | Gaining Altitude in the Cloud

I’m sure many of you have read the reports of Amazon’s new CEO’s steps to revitalize the company’s growth. News of restructuring that could involve widespread layoffs that cut deeply across Amazon, including some of its key development areas are also driving changes across the company’s management ranks.

Meanwhile, there’s at least one part of Amazon that is taking aggressive steps to fuel growth rather than cutbacks.

Amazon Web Services (AWS) announced today that it is reducing prices for the 19th time in the last six years. And it’s not just a nudge downward:

  • EC2 prices for longer term (3-year) Reserved Instances in some configurations are dropping by 35 to 40 percent
  • EC2 On Demand prices for high memory instances are now 10 percent lower
  • Similar price reductions span services beyond EC2 as well (e.g., RDS, EMR, ElastiCache)

While the reductions are meaningful for its flagship EC2 On Demand services, I interpret the very large reductions for longer term Reserved Instances as yet another salvo that plays to the enterprise market. Moreover, the introduction of volume tiering that enables additional discounts should turn many CIOs heads who are in the midst of pilots that test the value of cloud services in a modest way.  Spend over US$250K on Reserved Instances and get 10 percent off the amounts above that level – more than $2 million steps that up to a 20 percent incremental discount. And finally, in a distinct departure from previous positions, AWS is inviting “one off” deals by asking those spending more than $5 million to “call me!”  Some of AWS’ largest users are ending up with pricing that is over 50 percent lower than before these actions.

The business case for broader adoption across the enterprise continues to get stronger. Enterprises should be including ongoing pricing improvements in their Infrastructure-as-a-Service models; can internally-delivered infrastructure be cost competitive with options that are likely to drop another 20 percent over the next few years?

AWS appears to continue its leadership in cloud infrastructure services with this pricing action, and it continues to add solutions and features that should appeal to enterprise buyers. Recent discussions with enterprise CIOs, however, suggest a gap continues to exist – at Amazon and most of the other cloud service providers – around the ease of enterprise solutioning. The low touch, self-service approach enables attractive price points but still leaves the enterprise with do-it-yourself tasks that impede their widespread adoption of mainstream solutions.  AWS’ strategy appears to rely on the VAR / SI channel do the solutioning, focusing on the horizontal cloud delivery platforms (which we suspect may be higher margin, at least for AWS). This provides an opening for other cloud pioneers – Rackspace, Savvis, Terremark, and others – to step up to fulfill the enterprise market’s needs for true enterprise-class solutions that include the all-important solutioning capabilities. Competing on price is essential – but the value player is likely to seize the enterprise leadership role in the long run.

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