At Everest Group we’ve noticed a growing trend in our client base. As I’ve blogged before, business stakeholders have become increasingly independent and make independent decisions. Mostly they have adopted point solutions, standing up functionalities and making decisions to use SaaS products and developing their own skunk works, agile teams to develop fast functionality. The implications for the services industry are interesting.
We’re now seeing that, as these point solutions embed themselves, they flourish and become more ubiquitous. They then need to stretch and integrate into legacy systems as well as affect multiple stakeholder groups.
At the same time, we see the CIOs upping their game. They no longer resist these new technologies and are willing to embrace them.
Here’s the growing trend: increasingly organizations make decisions in a collaborative group with business stakeholders and CIO groups working together to initiate, plan and execute these activities.
Using a skiing analogy, as point solutions grow beyond the capability of business stakeholders to appropriately manage, they get in over their skis, which opens the door for partnering with IT. We see IT eager to take advantage of this opening and forging effective partnerships going forward.
This is an encouraging trend, but it presents a more complicated selling picture for service providers. They can be easily confused as to buyers’ decision-making rights, which necessitates reaching out to each stakeholder to make sure they leave no one out. That’s the downside – increased selling costs and complexity.
But there’s also an upside: as these collaborative partnering opportunities grow, we observe they are well worth a provider’s sales effort.
In these times of “everything digital” mass hysteria, if we believe the first portion of the above headline, the second is almost certainly true. While I discussed businesses’ obsession with digital marketing and customer facing processes and their digital disruption in an earlier post, I am not surprised that the hysteria about marketing being everything in digital transformation has not abated. And unfortunately, it may not in the considerable future.
Multiple discussions with new and old age businesses such as ecommerce, banks, manufacturing, and retail reemphasize that digital transformation is a big boon for the marketers. With multiple channels and technologies enhancing the customer experience, digital transformation certainly hold great promise for CMOs. Given that it’s easier to get funding for “customer-centric” initiatives, organizations are defaulting to this choice. But they are over-focused on launching newer products/services and extending the reach of their organization. By believing the power of digital transformation resides just in marketing, we are doing it a great injustice.
To effectively adopt digital transformation, organizations need to rethink their business model. Many processes that dearly need digital disruption are internal to the organization, rather than external customer facing. What digital transformation should do is keep the end-user (the user who consumes the service, irrespective whether it’s a customer or not) at the forefront and re-imagine these processes. A clear role of digital initiatives needs to be defined across service center, support functions, legal and risk, HR processes, supply chain, and IT operations. Leveraging collaborative platforms, mobility, analytics, and cloud services should help all these functions to add value to the business rather than remain docile cost centers.
Moreover, various businesses are missing out on significant cost savings potentials that digital transformation can provide. In their single-minded obsession to drive customer engagement, and therefore over-emphasis on the top line, they are unable to fully realize the value of these initiatives to streamline and simplify internal processes and operations to save costs. If a business provides a wonderful mechanism to serve customers without really understanding how this should change its view regarding how it conducts the business, it won’t ever leverage digital transformation meaningfully.
Digital transformation is not only about spending a fortune in leveraging cool technologies to make marketing “next generation.” It’s something way beyond. It encompasses how much the business understands, values, appreciates, and respects people, processes, technology, and all the relevant stakeholders with which it directly or indirectly engages. It should not be viewed as just one more strategy for earning money from customers. Digital transformation should instead be seen as something that empowers stakeholders and the business. Something more than pure technology that helps in meeting and shaping people’s aspirations.
Excessive focus on sales and marketing may provide near term returns and easier funding. But it will not be sufficient to sustain digital initiatives. Digital transformation is a philosophy of conducting and doing business with simplicity, operational efficiency, and customer centricity. It is not just technology-enabled cool marketing. It’s fine to make engaging customer interaction platforms, perform all the analytics on customer behavior, and leverage virtual reality. But businesses that deploy digital strategies to fundamentally understand their role in serving all stakeholders, in turn impacting the related processes, will be truly leveraging the power of digital transformation. It’s a tremendous opportunity, and it will be pity if we do not exploit its full potential.
Companies’ end-user compute budgets are flat to down. Yet they’re challenged by much more complexity in terms of many more devices. This is a surprising fact. There is an explosion of devices that need to be secured and managed and that are often paid for by the corporate enterprise. Why has the explosion of mobile devices not resulted in corresponding growth in companies’ budgets for servicing end-user computing?
There are several reasons for new offers not coming into play despite the hope generated by the increase in devices. But the main reason is that the way support is provided has shifted.
The level of robustness of the support has shifted spend away from the central groups that used to provide support. Increasingly the manufacturers of the devices are taking on far more of the support responsibilities. They do this through extended warranties and service agreements attached to the devices.
The end-user compute services landscape is shifting in unanticipated ways.
What will be the big stories in 2014 in global services? We believe the main themes of 2013 will continue this year but will take on bigger significance. Whether you’re a buyer or a provider, you need the following issues on your radar screen and need to be prepared for change over the next 12 months.
An expanding upswing
From an economic perspective, it appears that both North America and Europe will continue their slow climb out of the depths of the recession. We expect that to continue to beneficially affect the services sector, specifically in discretionary spend.
Quite frankly, we see the strongest growth coming in the traditional arbitrage labor market. As economies expand, the Indian firms with their talent factories are well positioned to capture a significant portion of discretionary spend as more funding becomes available for IT and projects.
We believe the expanding economy will also influence transformation projects. The large organizations that drive the transformation market are extraordinarily well capitalized at this point, and it makes sense that the improving economy would motivate them to spend some of their cash on transformation. We would always expect cost reduction to drive a portion of the transformation market, but we believe that some of the transformation focus in 2014 may well shift to drive growth and differentiation.
A big push
We continue to see the rise in the influence of business stakeholders, a phenomenon that we commented on fairly regularly last year in our blogs. We believe this trend will continue and the result a push for services more focused on outcomes and functionality and less focus on price per unit. We don’t see the entire market shifting to this, but we believe this shift will be an important part of the market.
The as-a-service models are best positioned to service the shift to outcomes and functionality. Hence, we believe the ongoing rush to cloud and as-a-service will continue and will increasingly reach into the CIO/CTO funding budget to garner more of their share of spend. It’s clear that business stakeholders will continue to drive the cloud surge.
A looming threat
We believe the immigration and H-1B visa reform issue will continue to hang over the industry, swaying ponderously like the mythological Sword of Damocles. Unlike Damocles, who managed to depart the peril and anxiety of the sword above his head in Greek mythology, we think the immigration/visa issue will have an ongoing effect.
Specifically, we believe that there will be no let-up in the difficulty in getting B-1 and H-1B visas, and particularly firms that are viewed with caution will struggle along those lines. We think that the bureaucrats will continue to monitor visa issues and create friction in the visa approval process. This has happened in the United States, and we also see this happening in Canada and across Europe. The increasing friction in the approval process won’t stop the industry’s use of the visas, but it will create irritation.
The unanswered question is whether or not immigration reform will happen. We don’t believe there is strong support for the India-based model or the model of using H-1B or temporary workers on shore.
As we’ve blogged before, we believe that if reform does happen, on balance it will have negative consequences for the industry, particularly for the Indian heritage firms, which aggressively use H-1B and L-1 visas in their onshore mix. It will raise their cost of doing business and bring them closer to the cost base of their MNC and Global In-house Center (GIC) competitors.
A dose of rebalancing
We believe 2014 will bring a move in the banking sector to more aggressively shift work from third parties into GICs or captives. A number of issues are driving this strategy change. The banks want to increase productivity in services and also desire to gain control over key aspects. In addition, there is a regulatory tailwind from the Fed’s recent pronouncements around its concern that the banks have used third parties too aggressively for some delivery functions.
We believe these factors will drive a shift from third parties in the banking sector to GICs. We don’t believe that this will materially drive work from offshore to onshore but more into the type of vehicle from delivering services. The overall proportion probably will not change, but we do see some rebalancing going on with a realization that there are segments of the workload that are better delivered for productivity closer to the customer. However, we believe the ongoing desire to lower costs will somewhat offset the shift.
What will be interesting to watch is whether other industries follow the banking lead. Historically, the banking sector leads market shifts and other industries following after a 9-18-month gap.
Any of this movement in a significant way will have a material effect on the services industry.
A move up
Partly driven by the previous issue of banking leading the shift, our opinion is that the GICs and captives will continue to increase their influence over spend. Those firms with captives or GICs will continue to grow in influence and potentially in size. In addition to their potential to increase the amount of work they do, we also believe they increasingly will be asked to manage some vendor or provider relationships from a low-cost location such as India. We think this, in turn, will drive more focus on price.
Typically an increased volume of work increases provider’s pricing power. But we think this will be largely offset going forward. In some select areas where there is more and more inclination to view offshored work as less sticky and therefore bid it out on return, we think that mindset will drive down overall prices. But we don’t see that there will be a precipitous drop in pricing in 2014; pricing will be stable to slightly down.
Seemingly out of nowhere, users hit enterprise IT spend on its blind side. Like a blitzing 265-pound football linebacker that the quarterback doesn’t see running up behind him to tackle him, business units and end users blitzed past the IT group and rapidly adopted cloud, mobile and other next-generation IT solutions wherever and whenever they could. Like the quarterback, enterprise management had a blind side and didn’t see or block the sudden force of the “consumerization of IT” coming to barrel through the sanctioned processes of purchasing IT. This blind side play changed the IT game in a profound way and has massive implications for all players.
In football, unblocked linebackers coming up on the blind side don’t just happen; several factors are necessary to create the right conditions for this disrupting phenomenon. The same is true for the recent blitz impacting enterprise IT spend.
Over the last few years, enterprises reacted to adverse and unpredictable economic conditions by reducing overhead wherever possible. This significantly constrained CIO budgets, forcing many IT departments to decrease their expenses year on year. The tactic reduced the IT group’s ability to drive change in the business and slowed the ability to respond to business needs.
Finally balance sheets improved and companies emerged from the belt-tightening period. Eager for growth, they now look favorably on business projects with strong ROI. However, IT is still slow to address new business needs, including the IT components of these initiatives. At the same time, business leaders and end users are exposed to, indeed inundated with, a new range of easy-to-access affordable, offerings that are readily available through channels other than their enterprise IT department. Voila — the right conditions for the blitz.
Let’s first consider the implications for the business stakeholders leading the blitz. Their new buying freedom combined with the easily accessible IT components creates refreshing and sorely needed agility and flexibility. Projects that, in the past, would have advanced slowly now race ahead at an ever-increasing pace.
Instead of detailed requirement documents and unending interdisciplinary team meetings, they can conceive, launch and evaluate pilots with minimal capital and time, allowing the business to experience the technology before making significant commitments. Business stakeholders’ perspective is that management’s forgiveness is easier than gaining up-front buying permission, and IT can work after deployment to address compliance issues.
Enterprise IT groups can’t deny the new reality and must lead, follow or get out of the way of the momentum and power of user-based IT buying. They cannot stand against the strong business cases for these business-driven initiatives. Many CIOs look the other way or add a team member to the program and claim victory.
Nevertheless, CIOs and top management eventually must address the complexity these solutions will add to the enterprise. We can only hope they start preparing for it more quickly than happened with the massive disruption caused by distributed computing, which took enterprise IT a decade to untangle.
The business users’ IT spending blitz also hit the blind side of IT providers, and the implications for providers are as significant as they are for consuming enterprises. Many traditional providers of IT and IT services are troubled by the fact that they are not reaping the significant growth opportunities resulting from the new spending on cloud, mobile and other next-gen IT products that other vendors are enjoying. Why not?
New game plan for IT providers
The enterprise IT market is obviously alive and well. But there are now two distinctly different markets for next-generation IT, so IT providers must change their marketing and sales tactics.
The first market segment accounts for 75 percent of the total spend and has all the traditional ROI buying characteristics. Value is tied to objectives such as as reducing enterprise cost.
To increase their share of the second segment (currently 25 percent of next-gen IT spend), enterprise IT providers must understand that the buyers’ perception of value has changed.
Although value is still wrapped in ROI, an important new criterion is whether the solution will meet the ROI objectives in a timely manner. In addition, the business stakeholder’s confidence in the solution’s success is more important than competitive pricing. These two characteristics drive business buyers to opt for pilots to learn more about the solution before they extend their commitment.
Clearly the ROI drivers differ for buyers in these two market segments. Therefore, IT providers seeking high growth must develop different marketing messages, pricing and delivery models for each segment.
Furthermore, as both segments often exist within an enterprise, it is unlikely that the same sales personnel can successfully sell to both markets.
IT providers that want to quickly move to capture the new opportunities in next-generation IT spend will be more successful if they fully understand buyers’ changed perception of value and approach the market in this fashion.
The conventional thinking about business-led adoption of cloud services in the enterprise goes something like this:
Frustrated by a non-responsive IT organization, business users become attracted to the innovation, speed, and flexibility offered by cloud vendors and solutions
Fearing loss of control, corporate IT puts the brakes on deployments and projects of which they become aware
Undaunted, business users “swipe the credit card and go” to the cloud anyway, around and outside of normal IT procurement processes
CIOs and IT executives are shocked to learn that cloud adoption is going on behind their backs
And while many enterprise IT departments frequently spew the terms “rogue IT,” “shadow IT,” and “end-running IT” at this phenomenon, progressive CIOs are actually encouraging this behavior as a way to gain leverage and scale with a limited IT budget.
CIOs have a finite set of time and resources to accomplish what is asked of their IT organizations. Many enterprises facing significant cost pressures and budget constraints must focus almost exclusively on supporting, maintaining, and enhancing core, mission critical systems. Think trading platforms for capital markets firms, or claims processing for insurance companies. IT can support only so many new projects requested by the business, and every CIO needs to draw the line somewhere on the project list.
For projects that fall below corporate IT’s project cut line, the cloud is a win-win proposition. Business stakeholders can go ahead and acquire from a third party the capabilities they are seeking. IT ends up with a happier internal customer. And the organization overall can effectively attain greater scale from its IT budget and headcount by pushing the business to cloud providers.
As one CIO recently commented to us, “I actually want our business users to go to the cloud. I want them to ask cloud vendors the right questions, and, of course, I want to make sure they’re not doing anything that touches our mission critical apps. But other than that, I’m happy for them to go out to get what they need.” Of course, one of the keys here is the right questions, such as those focused on critical topics including security, data ownership, integration, availability, disaster recovery/business continuity, etc.
There’s no doubt that many CIOs are surprised internal developers are using Amazon Web Services (AWS), or that marketing is building its own custom apps on salesforce.com. The more unanticipated but understandable fact is that many of them are actually relieved to have this extra weight lifted off their heavily-burdened shoulders.
Lauren Cooney, Senior Director, Software Market & Developer Strategy at Cisco, explains the new cloud computing world order. The consumerization of IT is changing the CIO’s perspectives, and user experience is ascending as a top priority. Lauren talks about empowering the developers and create a better product and better user experience.
Lauren was a speaker in the New World Order: Your Dev Team Just Became the CIO session — part of the Organizational Readiness track at Cloud Connect Chicago, which Everest Group’s Scott Bils chaired. For more Organizational Readiness resources, visit www.everestgrp.com/ccevent.
Since the inception of the end user computing (EUC) space in 1982, there have been many exciting moments including the first IBM PCs, the first Macintosh PCs, personal networking, desktop publishing, laser printers, Microsoft Office, and the Internet. More recently, the advance of portable devices and media-centric applications have been of interest, but it’s been some time since I’ve been really excited about using my PC. That’s about to change. The convergence of network capacity/availability, technology, and applications are about to create a whole new EUC experience both personal and professional – the cloud!
How the cloud is integrated into corporate infrastructure planning varies by client, but the implications for optimization, virtualization, flexibility, and management are dramatic. New business models are emerging, and firms are working though security, compliance, and other considerations at a feverish pace. While the cloud is going to be very disruptive to corporate infrastructure, and many articles have been written on that topic, little has been written about how the cloud is going to impact us personally, as end users. So, let’s go there.
A few weeks ago, Apple announced its forth-coming iCloud offering. Think about having anywhere, anytime, any device (Any3) access to all the media you’ve ever purchased (on any device) or ripped (legally) to a PC. Imagine no longer being tethered, memory constrained, or having to sync with your PC in order to have access to your personal media when and where you want, regardless of hardware. That’s exciting. That’s the cloud!
Additionally, little attention has been paid to how the cloud will ultimately change our professional computing experience. The reality is, the line between personal and corporate computing assets (from an end user perspective) is starting to blur. Imagine having the same Any3 access to every file, e-mail, contact, link, note, or application that you need, regardless of where that content originated, where you are physically, which application or version is licensed on your device, or even what device you happen to have available at the moment. Whether it’s your phone, tablet, notebook, office PC, home PC, a public PC, or even your grandma’s…you’ve got access to what you need! Next, think of the collaborative opportunities that will be enabled for document generation, review, and editing, and you get an idea of the future of EUC…it’s the cloud!
The cloud’s impact on EUC will go beyond just functionality and productivity, however. From a commercial perspective, the cloud will fundamentally change the way EUC services are procured, provisioned, licensed, updated, upgraded, and managed. It will also have positive implications on long standing issues like piracy and intellectual property.
From a usage standpoint, let’s think about just one of the commercial impacts in EUC that the cloud will dramatically impact…licensing. The cloud is going to make it truly use/user-centric. In an average 2,000-hour work year, how much do you actually use each of your applications? Maybe Office for 600 hours, PowerPoint for 500, a variety of other apps like Excel, SAP, Oracle, or Salesforce.com for another 400 or so combined, and one or two specialized applications for just a few hours or days? The cloud will usher in an era in which you’ll be able to use applications on demand, on any device, wherever you are, whatever time it is, for as much or as little time as you need them. And you won’t have to worry about licenses, versions, installation, updates, compatibility, etc.
Now that’s cool. That’s the cloud. And it’s coming soon to a device near you!
Learn more about Everest Group’s cloud transformation expertise.