Author: MarvinNewell

Next Generation IT Governance: Hold On Loosely, But Don’t Let Go | Gaining Altitude in the Cloud

In mid-February, I have the opportunity to join a great group of executives to debate how cloud computing will – nay IS – changing the way we need to think about IT governance. As you may know, Everest Group is chairing a track at CloudConnect in Santa Clara, CA, on Organizational Readiness. One of the sessions is slated to include Neal Sample of eBay, Bates Turpen of IHG, Thomas Barton of Novartis, and me discussing governance issues of today and tomorrow. We conducted a prep session last week, and I thought I’d share some of the topics we anticipate debating at CloudConnect.

  • Standards. One of the key pillars of capturing the value of cloud computing is the use of standard services to meet your needs. This raises the stakes for making the “right” choices early in your solution design and requires strong governance to ensure erosion of adherence to the standards is stopped in its tracks. Whether our discussion will start or end with a battle over the right approach to standards is unclear! What is the “half life” of standards decisions and how should you manage the balance of business and technical considerations that you will need to live with for some time?
  • Hybrid IT environments. Most agree that large enterprises will evolve to IT environments that include non-cloud and cloud components. The cloud landscape will also likely include internal (private) cloud environments and external cloud environments (virtual private clouds, public clouds, and Software-as-a-Service solutions). Controversy will be apparent on how big an enterprise should bet on cloud as THE focus of its go-forward plan. How should you balance the governance needs of these diverse environments?
  • Governance intensity. Cloud environments create the opportunity (nightmare?) for independent initiatives to be executed quickly and out-of-sight of centralized governance processes.  Some think these pockets of innovation and initiative are central to leveraging the full power of the cloud; others suggest this is a step onto the slippery slope toward anarchy in terms of IT governance.  What is the right approach?
  • Leadership. Who should take the lead in IT governance. There is a camp that suggests detailed technical decisions are shaped by governance decisions, so architects need to be in the middle of governance. Others argue that the business must set the vision and follow through to allocate resources consistent with those broad objectives or you’ll end up with disconnects that erode value from the outset. Sorting out these issues will be more than a sidebar skirmish! While most enterprises are likely to end up somewhere in the middle, how should you decide what decisions lean which way?
  • Management paradigm shift. Many governance processes have been established for IT approaches that are driven by capital budget management; i.e., large, lengthy projects are the centerpiece of how resources are allocated and policy is set and administered. Cloud computing services turn that paradigm on its end as easy-on/easy-off solutions that require little/modest capital come to the forefront. This fight will extend far beyond IT, encompassing the CFO and BU leaders. How does this fundamental shift in the underlying economics and what needs to be managed change the governance requirements?
  • Pace of change. The IT landscape has always been characterized by rapid change and short innovation cycles. However, cloud computing is accelerating this pace even more. With lower switching costs and innovation that presents opportunities to unlock ever-increasing value, the likelihood of opportunities to change directions increases with each service innovation. Risk takes on a whole new meaning in ways that will reveal fundamental differences of opinion that will light up the stage. How should an enterprise assess these opportunities? What must change in IT governance to accommodate the breathless pace of change inherent in the cloud?

With these topics in mind, the governance panel discussion at CloudConnect is certain to be lively and cover an array of challenging, if not controversial, issues.

If you have a particular area on which you’d like the panelists to share views, post a note to this blog and we’ll consider adding it to the list.

Going Mobile… | Gaining Altitude in the Cloud

A few weeks ago I committed to exploring the mobile world. And while I’m not a neophyte – my Blackberry is strapped to my belt and, according to my wife, my addiction to constant email connections is worse than a two pack a day habit – I’m still not a truly mobile convert. Yet, my conversion to date is inconsistent as I aspire to engage in intensive web surfing (remember, I have a Blackberry), triple digit smart phone apps, and alas, a connected tablet in lieu of my laptop.

So, how is it going?

[Feel free to insert your favorite “you can’t teach an old dog new tricks” joke here.]

I’m typically a relatively early adopter, but not necessarily a gadget freak. However, I accused Apple of just enlarging the iPhone – nay, an iPod Touch – when it introduced the iPad. Thus, my pilot in a completely wireless connected world is somewhat of a stretch.

The biggest change (read, challenge) I’ve encountered so far is doing without a keyboard and mouse, and surviving as much as possible with a touch screen tablet. However, pecking this out on my iPad suggests that I’m making some progress.

In the plus column, consuming or reviewing content is extraordinary. The instant on, always connected convenience is great. In fact, if I had to summarize in a single word the impact of mobility today, CONVENIENCE represents the best synthesis of value add. Even the wiz bang new capabilities such as iCloud have their greatest utility along this dimension.

However, the mobile experience is not devoid of frustration:

  • Creating content is painful, especially for business communications. Today’s mobile devices and apps are consumption-oriented, not creation-oriented.
  • Finding an app that does what you need is difficult. The popularity of mobile apps and the apparent ease with which they can be developed is both a boon and a curse. Word of mouth seems to be the most effective way to find really useful apps, but even then personal preferences and specific needs have often sent me down a path of frustration and further hunts for something to get the job done. (I’m open for suggestions on “app managers” that facilitate this search – I’m sure they are out there…)
  • Getting help is elusive. Although many apps and interaction models are extremely intuitive, trying to do something slightly nonstandard is decidedly nontrivial. Finding relevant help is not easy – even Apple’s websites for help are beautiful to look at, but quite thin on useful content.
  • None of the devices have really cracked the code. The iPad’s handling of multi-tasking is clunky. RIM’s Playbook shines on the multi-tasking front…would that it had more than a couple useful apps! And I’m still TBD on my Android experience, as I eagerly await shipment of a KindleFire in a few weeks.

Going mobile hasn’t yet changed my life, yet. I still relapse to my laptop to create rich content (of course some of my colleagues will undoubtedly quibble with its richness, regardless of the device on which it was created). But I do see the potential for game-changing opportunities around global services:

  • Data collection. I sense that the ability of mobile devices to collect relevant, context-sensitive data has the potential to have astonishing impact. Those who harness the ability to leverage mobility to collect the right data, and avoid being overwhelmed with huge volumes of inconsequential data, are likely to unlock great value.
  • Interactivity. The convenience factor will drive (actually, is driving) greater use across an ever-widening breadth of activities. This intensity of use creates a heretofore unknown opportunity for interaction, real-time feedback, and truly personalized response. The opportunities are unbounded.
  • Ease of use. Comparing the ease of use of most mobile solutions with their non-mobile counterparts isn’t a fair fight. The selection and ease of purchase, installation, and use (generally conforming to expectations) of the mobile experience is – again – convenient on a different scale than alternatives. This will compel consumers (individual or corporate) to use the solutions, and the marketplace to continue to innovate with broader and deeper capabilities.
  • Innovation model. Fast. Responsive. Cheap. Most mobile apps subscribe to these design and development principles, fueling innovation based on rapid feedback on actual use. Lots of minor changes to reflect real usage, rather than perceived needs, results in enormous benefits for developers and users alike (although, as noted above, finding the right fit is often more frustrating than productive).

What do you think the impacts will be on global services?

IaaS: A Wolf in Sheep’s Clothing, or Just Evolution in Progress? | Gaining Altitude in the Cloud

Our discussions with CIOs of large enterprises have made it clear they are seeking cloud-based infrastructure services (Infrastructure-as-a-Service, or IaaS). However, recent interactions we have had with a variety of service providers – name brand firms and cloud upstarts alike – revealed that the answers enterprise buyers receive from providers about their offerings are all over the map. Indeed, the answers sometimes even differ across proposed solutions from different solutioning teams from the same provider. The alignment of service offerings fit with cloud principles is often quite mixed; for example:

  • Term. Proposals ranged from multi-year contracts with take-or-pay minimums to selling IaaS on an hourly basis with no volume commitments whatsoever.
  • Service levels. Proposals ranged from “what-you-see-is-what-you-get” to traditional “let’s negotiate” SLAs.
  • Pricing models. Proposals ranged from pure consumption-based pricing to approaches with very substantial fixed base load requirements and little ability to scale downward to hybrid models with fixed and variable components.

Two other observations left us puzzled by service providers’ go-to-market positioning. First, (although not a definitive pattern) is what could be interpreted as some “traditional” service providers trying to overlay a cloud veneer on their offerings (contractual camouflage?) to play in a rapidly growing space. And second, some of the cloud pioneers that possess robust cloud services delivery capabilities are fogging the picture by building decidedly non-cloud features into their solutions, apparently in an attempt to look more like traditional outsourcing players.

Neither of these approaches appear to be particularly appealing to enterprise buyers, and understandably so. The enterprises are often implementing near-term roadmaps that address their organizations’ need for a mix of environments –dedicated, private, and private/public hybrid cloud that fit their distinctive workload characteristics and business needs. But providers are presenting little clarity on how their IaaS solutions support the buyers’ end state models or contractual requirements.

Service providers must tune their offerings to the situation and offer real cloud-based solutions when that is the “ask,” and traditional solutions when such are indicated. Enterprises need to ensure they clearly define their roadmaps to discern when a solution fits and when it doesn’t. When either the providers or the enterprises try to blend what they are trying to accomplish, they are likely to end up with a cocktail that could leave those on the other side of the transaction with a hangover.

INDIA (IT) INC. – An Oligopoly? | Sherpas in Blue Shirts

Overheard at a Recent CFO Forum

Mr. M., manufacturing company CFO:  “My Procurement group is asleep at the wheel.”

Ms. B, bank holding company CFO: “Why do you say that?”

Mr. M.: “Well, as you know, we use Cognizant and TCS to do a lot of our IT applications development work – and I am getting feedback from their business customers that they’re doing a pretty good job. We’re thinking of expanding what they’re doing for us, so I’ve been tracking their news. A few weeks ago, they reported earnings and I about fell on the floor. Here we are scraping every nook and cranny for savings to eke out a 4 percent profit margin and TCS posts operating margins over 26 percent and 34 percent Y-o-Y growth. I don’t know what’s going on, but I’m sure as heck going to have a chat with procurement.”

Ms. B.: “Wow, those are impressive results and a very good question for the purchasing folks. As you’ve heard, our core business has been very volatile and driving the level of performance that the Street expects is really tough. We do work with some of the competitors of the firms you mentioned, so I’ve been following them for a while and while those results are extraordinary, they’ve actually been at similar levels for some time! I raised the question of pricing with my folks and they assured me that we’ve got competitive rates – yet they still put up those numbers.”

Given the challenges many industry sectors have faced over the past several years, it is surprising that this type of discussion has not been raised more often. How can a provider drive profit levels that are sometimes an order of magnitude greater than their customers’ – and do so while also setting growth records? How can these service providers sustain very high levels of financial performance when they deliver services that procurement claims are commodity-like purchases (such as software development capacity that includes FTEs with certain levels of skills and experience)? Moreover, why are we are seeing ongoing improvements in performance by some of the India-based IT services providers of these supposed “commodities?” Is the India-based offshore IT services industry acting as an oligopoly?

What is an Oligopoly?

The World English Dictionary defines oligopoly as “a market situation in which control over the supply of a commodity is held by a small number of producers, each of whom is able to influence prices and thus directly affect the position of competitors.” Economists cite numerous examples of oligopolistic markets; for example:

  • Australia banking has only a few key players (ANZ, Westpac, NAB, Commonwealth Bank)
  • Procter & Gamble and Unilever rule the detergent market in the United Kingdom
  • The U.S. wireless telecommunications market is overwhelmingly comprised of AT&T, Sprint Nextel, T-Mobile and Verizon Wireless – explaining much of the angst over AT&T’s bid to acquire T-Mobile
  • The global accountancy market is dominated by The Big Four (Deloitte Touche Tomatsu, Ernst & Young, KPMG, PriceWaterhouseCoopers).

Levers for Sustaining Outstanding Performance

Examination of how India-based service providers are going to market suggests that many are pulling a variety of levers to drive superlative results on an ongoing basis. For example:

  • Some providers are aggressively managing their staffing pyramids to optimize revenue and profitability (for example, in their recent earnings announcement, TCS’ CFO cited efforts to focus and optimize operations by driving utilization and productivity)
  • A few providers have substantially shifted their services portfolio to a more profitable mix, leveraging more standard work, a richer mix of offshore delivery, and optimized pyramid – sharing few of the benefits with customers
  • There are also a number of actions that service providers occasionally employ to drive improved performance (however, it is not clear if these are systematic approaches or deal-specific responses)
    • Use apparently high turnover rates and wage inflation in core delivery centers to argue for modest price increases (or at least thwart customer initiatives to get price reductions)
    • Pursue strategies to bypass traditional procurement processes to acquire sole source business with business unit managers with potentially less scrutiny on pricing negotiation
    • Take advantage of customer initiatives to move time and materials-type work to fixed price projects, adding a modest risk premium to what is essentially nearly risk-free work (based on contract reviews that Everest Group teams have conducted)
    • Continue to push the offshore delivery mix with customers, feigning reluctance when the customer pushes back and “requires” more onshore, premium-priced staff for key projects
    • Redirect the attention to discussions of pricing relative to their competitors (each of which is doing the same), away for their company’s stellar profit and growth performance

An Oligopoly at Work?

Many buyers of IT services see some of these levers occurring in their dealings with IT services providers, regardless of where the provider is based. Despite the fact that most users of these offshore services continue to secure high quality services for a price that is substantially lower than many alternatives, it raises a question of to what extent are IT services providers that are competing in the applications space competing like an oligopoly.

Some debate the underlying differentiation of IT applications services provided by India-based providers. Many examples exist in other industries, particularly in manufacturing where companies’ purchasing groups have been explicitly tasked with attacking the margin “surplus” of their suppliers of commodity items.

Thus, the quest for true and sustainable differentiation that (ironically) all India-based IT services providers are pursuing is clearly the right priority for their senior leaders – as long as they sharply focus their attention on areas that really are meaningful and, therefore, valuable) to their enterprise customers. And discussions with these players and many of their customers suggest a very competitive market exists. Nevertheless, the pricing and performance results indicate the impacts of this competition are not fully represented in the market.

What reference point for pricing these IT services should the industry be using? Is procurement actually “asleep at the wheel” or are we witnessing the free market at work? Who should capture and/or share the “surplus?” To what extent are these commodities really commodities – and, if they are not, what does that imply for the balance of roles across business decision makers and procurement in the purchase of these services?

IT Services: A Market that Works | Gaining Altitude in the Cloud

Large company competition is a high stakes game. In many industries, major investments change the course of company fortunes – perhaps for decades at a time. Last week’s announcement of a landmark deal by American Airlines (AA) to modernize its fleet with a record-setting order of 460 aircraft from Airbus and Boeing typifies the game. AA is the only U.S. airline that lost money last year (US$470 million) and is expected to lose money this year (AA announced a US$286 million loss for the second quarter of this year at the same time announcing their aircraft order). Saddled with a relatively ancient fleet (an aircraft average age of 15 years), AA’s less efficient planes burn fuel at rates surpassing every one of its competitors, making profitability a distant goal as gas prices continue to rise. These “stranded assets” of sort created an anchor from which AA had to seek relief. In boldly moving to modernize its fleet, AA structured a deal that could hobble their key competitors. Some reports suggest that AA’s order will tie up much of the aircraft manufacturers’ capacity, making it very difficult for other carriers to match AA’s new young fleet of fuel efficient and passenger-friendly aircraft. (After all, turnabout is fair play!)

Flying in one of AA’s relics as I write this, I am reflecting on how different today’s emerging IT Services market is. Everest Group’s recent discussions with executives about cloud services suggest that the questions that C-level executives are contemplating are shifting rapidly from “if” to “how”. They are recognizing that these Next Generation IT services provide unprecedented levels of flexibility and efficiency for many types of applications while placing the “stranded asset” ownership with parties who are much better positioned to manage investment decisions than individual enterprise users. It is like buying an option for future and current benefit at a price that is less than your traditional option for just the current services.

The CXOs that are farthest along the cloud services path recognize that capturing the compelling flexibility and efficiency benefits do not come without hard work. Crafting the organization approach to actively manage these Next Generation solutions, which nearly always encompass a hybrid of classic and new services, requires vision, dedication to building different skills and processes, and discipline to enforce principles that guide a strategic roadmap to value realization.

Early returns, however, suggest that the “juice is worth the squeeze.”  Those who have taken the first steps are already reaping benefits of advanced capabilities at very attractive economics. These capabilities and economics are on a trajectory that will deliver even greater returns for the enterprises taking advantage of them. Amazon Web Services, for example, continues to drive pricing down:

Other cloud services providers, including many Software-as-a-Service providers, continue to advance their offerings to add more features and capability at the same or lower prices. Unlike those in the airline industry who are hobbled by investments that must last for decades and potentially yield subpar results, the IT Services industry appears to be a market that works with service providers driving innovation and value that buyers of all sizes and types can select to fit their requirements.


Related Content:

What if… Breakthroughs That Could Reshape the Global Services Landscape | Sherpas in Blue Shirts

A response to my recent blog – Innovation Junkies – One for your ‘Bucket List’ – posed a question that warrants more than a one-liner follow-up. Thus, I hope that readers will dive in and share their ideas to help answer the question, “What is a breakthrough invention you’d like to see in global services?”

To get things started, I polled a number of my colleagues and it was abundantly clear there are several lenses through which to view this question. Some immediately proceeded down an efficiency path, discussing ideas that would either drive productivity through the roof, or eliminate labor altogether. Others took the fork in the road that might lead to step function improvements in effectiveness, i.e., innovations that would make the service experience more satisfying. Interestingly, these thoughts raised a number of intense discussions about experiences that were graded high due to a satisfying interaction but that actually had less than complete solutions resolved during the service “event.”

Inventions that could/would have a profound impact may even be hard to describe until they have happened. However, some of the ideas that emerged are worth noting – as much as thought-starters as candidates for the kind of breakthrough innovations in global services that reshape the landscape:

  • IT services
    • Real-time, dynamic hybrid cloud IT infrastructure. What if CIOs could manage their server environments at mainframe-type utilization levels, dynamically shifting peak loads to low-cost cloud infrastructure services?
    • Error-free automatic conversion of old code into modern languages. What if automated tools could instantly translate old code bases into the most advanced modern languages that provide superior performance and flexibility advantages with 100 percent accuracy?
  • Document-based BPO
    • Zero defect OCR. What if optical character recognition could decipher any written document in any format (unstructured data) and prepare the data for use by relevant applications?
    • Device independent self-service data input. What if services recipients could enter all needed data on any device, from anywhere, for any process?
    • Ultra-low cost exception handling. What if exceptions that currently require costly human intervention could be resolved by solutions that cost several orders of magnitude less?
  • Voice-based BPO
    • Real-time, 100 percent accurate voice translation. What if language barriers were eliminated due to an ability to translate both inbound and outbound communications into a universally understandable form?
    • Real-time, dynamic matching to customer preference. What if customers could be matched to service providers that align perfectly with their unique preferences?
  • Knowledge-based BPO
    • Crowdsourcing-based knowledge transfer/training. What if the comprehensive experience of those familiar with an activity could be harnessed to train users/service providers in a fraction of the time and cost?
    • Predictive solutioning for customer interactions. What if services shifted from being based on reactions to historical artifacts to being able to craft services in advance of a recipient’s needs based on highly accurate predicted outcomes?

Now that we’ve got you thinking…what are your visionary what ifs?


See related article on Global Delivery Report, Global Services Breakthroughs Wanted: Providers Take Note

Innovation Junkies – One for Your “Bucket List” | Sherpas in Blue Shirts

I have yet to talk with an executive in charge of maximizing value of an enterprise’s global services portfolio (whether largely in-house/shared services, outsourced, or an amalgamation of approaches) who did not have innovation among their top challenges or disappointments. Fostering innovation starts with creative processes aimed at articulating a problem and then defining different ways to solve that problem.  Cracking the code on innovation takes both hard work and the “spark.” I recently visited MIT Media Lab‘s new home and witnessed showers of “sparks” across a wide ranging variety of issues. For example:

What if a computer could predict how you will behave better than you can communicate your own feelings? What if you could marry biology, technology, physics, and engineering to take the “dis” out of disabled?

Believe it or not, these questions aren’t pie-in-the-sky dreams. My visit to the MIT Media Lab left me absolutely invigorated. My time there was punctuated by discussions with some of the professors and students doing big brain research. And I came away thinking that it was all about technology, yet nothing about technology; it was inspiring and sobering – all at the same time.

One professor shared the work in his lab that is essentially advancing the frontier of making the “bionic man” a reality. Applying technology and (really) advanced mathematical modeling, projects are enabling amputees to achieve functional performance essentially equal to the sacrificed biological limbs. They have mind-blowing working prototypes that actually enable thoughts to drive mechanical tasks, e.g., sensors carefully positioned in a person’s brain that result in an artificial hand opening and closing when the person thinks “open my hand” and “close my hand.”

Another project demonstrated results in which sophisticated real-time image processing of facial expressions predicted what people were thinking more accurately than individuals’ own responses. Analysis of facial expression changes better predicted whether someone really liked a product better than focus groups, responses, interviews, etc. Imagine the power of such feedback from the market in a business setting (or about a discussion you just had with your children!).

Although I could go on and on about the pioneering scientists and artists (another project has created an opera in which machines are the performers and vice versa – I can’t even describe it right!) brought together in this creative crucible for innovation, here I’ll just whet your taste buds a bit. But I will say that prior to my visit, when I learned that the Media Lab is actually part of MIT’s School of Architecture and Planning, I hoped that the innovation spark produced by integrating multiple disciplines would live up to its promise – and I was not disappointed. Since my undergraduate degree and early career were in the design profession, I have a special appreciation for different problem-solving approaches with a special dose of creativity driving for breakthrough outcomes. If you care about innovation, put the MIT Media Lab on your bucket list – you won’t regret it.

Leaders Discussing Market (R)evolution | Gaining Altitude in the Cloud

I attended Mahindra Satyam’s customer conference last week, and after a very difficult couple of years, the company seems to be getting its act together. Most impressive was the group of interesting, forward-thinking people it attracted to fill out its program, which was centered on the emerging “Generation C” and the implications it may have for the enterprise. The thought leaders included:

  • CEOs from leading provider and user companies such as Akamai, Pega Systems, and VCE
  • CIOs and other IT leaders from Abercrombie & Fitch, Apple, Applied Materials, BlueCross Blue Shield, Chevron, Citrix, EMC, Nissan, and OC Tanner
  • A variety of professors from the local tech school, doing what is arguably the deepest thinking globally about some of the most promising innovations of the next decade
  • Leading industry advisors, who helped facilitate discussions on key trends and market changes

I had the pleasure of moderating a lively panel discussion on cloud computing infrastructure opportunities and challenges with Michael Capellas (Chairman and CEO of VCE), Sanjay Mirchandani (CIO of EMC), Michael McKiernan (Head of Global Applications Delivery for Citrix), and George Fischer (EVP of Global Sales and Operations for CA). The vision outlined by these panelists clearly articulated that it is not a question of “if” enterprises will move as much as possible of their infrastructure to cloud architectures, but rather a question of how fast once they recognize it is the only way they will be able to meet the demands of their business users.

The questions they raised related mostly to finding creative solutions to deal with the legacy “sludge” that consumes a disproportionate amount of resources while seldom really advancing the enterprise’s growth aspirations. And they flirted with the audience about what the technology and service provider of the future might entail – think “real time,” “predictive vs. reactive,” and core “ecosystem member” rather than vendor – but stopped short of predicting how the leaderboard for the IT products and services marketplace might change over the next decade.

Who do you think will rise to the top (or stay there) as this market rapidly evolves?

Dancing with the Outsourcing Stars | Sherpas in Blue Shirts

Who would have thought that professional athletes would consistently emerge as the favorites to win the crown in the popular reality (?) ABC television program Dancing with the Stars? Are football players really the best dancers – or is the process intentionally stacked to become a popularity contest only tangentially tied to the show’s namesake activity?

Come to think about it – what’s the difference between the outcomes we expect on Dancing and those we often see from large outsourcing RFPs?

A cynic can clearly make the case that our large outsourcing RFPs have many parallels with Dancing with the Stars:

  • We invite the most recognizable service providers (stars) because an enterprise can’t go wrong with their appeal…
  • We run a rigid RFP process guided by capable process gurus
  • We craft meticulous specifications for solutions that leave the stakeholders in awe of the promise (some might prefer the sequined instructors to the grizzled TPA), but what really happens (or is needed) may have little resemblance to the complex needs (were they supposed to deliver a fox trot or a samba? Does the audience have any realization of the difference?)
  • We administer a programmed selection approach designed to elicit precision from stakeholders who are asked to evaluate elements of which they are not deeply informed, too often resulting in a vote on the presentation form rather than substance (text your vote in for your favorite dance pair – even if it means the best dancers who followed the rules are eliminated in round 2!)

Many football players do perform adequately on the dance floor just like our name brand service providers deliver against their contractual obligations.  Are outsourcing buyers, however, capturing the full value that they could?  What do we need to do to make our sourcing decision-making processes ensure the best emerge from the crowd?  …and for those of you who have gone down this path – is your partner in step?

Disruption, Offshoring and Predictions About the Cloud Computing Marketplace | Gaining Altitude in the Cloud

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:

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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…

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