Tag: IT Infrastructure

Service Providers Face the End of Enterprise Infrastructure Function | Sherpas in Blue Shirts

In the new world we’re moving into, where we have a high degree of automation and hyper-scale data centers, cloud, SaaS and re-usage, why do companies even have an IT infrastructure function or department? As companies integrate their software-defined ops function with their software development function, creating DevOps, they no longer need an IT infrastructure department as we know it. Even legacy applications are highly automated and moving into co-located environments. It’s easy to imagine the service providers’ lament: “OMG – no infrastructure departments!”

In Silicon Valley and in any of the born-in-the-cloud environments, there already is no infrastructure layer. We’re definitely seeing an acceleration of cloud adoption in individual companies. And the cloud’s impact is evident in the services industry in terms of the slowdown of the infrastructure services deals, providers’ struggle for share, and explosive growth among the automation and cloud providers.

Implications for enterprises and service providers

In a world where software eats everything, cloud, SaaS and DevOps are accelerating; and the implications are quite profound.

For enterprises: Within five years, most enterprises won’t have an IT infrastructure department. As speed becomes the new currency, it’s just a matter of when, not if. Enterprises will need to replace the IT infrastructure function with a small, reconfigured standards-and-compliance group. That sounds radical, but leading companies and agile companies are doing it.

For service providers: There is a huge book of business that is now starting to run off, although the run-off is currently disguised by late outsourcing adopters. How do you replace a book of business running off? Or can you replace it? And if you replace it with hyper-scale cloud and automation tools, doesn’t that suggest that a different provider/vendor mix will likely be the new winners?

The services industry shivers as it contemplates its future.

Demand Management Is Made Possible through as-a-Service Model | Sherpas in Blue Shirts

Demand management has been the unicorn of enterprise IT – something frequently talked about but rarely seen and never captured. Every centralized IT organization would love the ability to accurately manage user demand. It would provide tremendous return if it were possible; but to date it has been largely or completely thwarted in large enterprise IT organizations. But there’s good news, thanks to the as-a-service model.

The reason demand management has been thwarted is that IT is organized on a functional basis; the data center, servers, network, purchasing, and security app development and maintenance are all defined functionally. IT leaders are held responsible for driving out cost and building capability that is shared by multiple departments. The problem is there is no relationship between demand and supply capability because business users don’t understand how to measure their usage/demand.

When IT asks business users how many servers they you use, their response is often “How many did we use last time?” Or when IT asks how many programmers will you use and why, business user typically respond with “We need 10 percent more than we had last time.” There is no relationship between actual demand and the actual demand drivers and the estimates they must provide to IT. This is a hopeless and fruitless exercise. It’s like a broken clock that is right only twice a day. This demand estimate is doomed to be wrong every day.

So what’s the answer? We need a service construct where IT is organized into service models. This construct gives business users a way to understand their usage or demand. For example, a healthcare payer understands how many people it expects to enroll. This is a metric the business can use to predict usage and the time frame in which they will need the service. IT can then manage the demand for the service it provides to the payer based on the number of enrollments.

When companies organize IT along service lines, they can translate business activities into technical consumption. The as-a-service construct attempts to make as much of its service chain or supply chain as elastic as possible. It adjusts each part of the supply chain to the usage demand. So unlike the traditional functional IT structure, business users only pay for what they use.

There are three mechanisms to make a technology or service elastic:

  • Share it (such as AWS); when you’re not using it, someone else is
  • Automate it; spin it up, do the work, and shut it down
  • Buy it on a consumption basis

Typically, as-a-service providers use all three of these techniques to allow them to use their full service stack with the business metrics that the technique serves.

The as-a-service model achieves one of the Holy Grails of centralized IT – it provides a realistic demand management vehicle where the business can make accurate estimates. It also provides paying for the services only when they are used; this is the consumption-based model that the services industry is moving to.

Demand management to date has been completely illusive to centralized IT because of the take-or-pay nature of IT. This method for building capability – and business users sharing the cost to be able to use it – has no connection to business metrics that the business can control and understand how to estimate their technology capacity/demand. But the good news is the as-a-service model puts a rope around the unicorn. It creates the ultimate answer to demand management.

Teva Buys Allergan’s Generics Business to Consolidate Pole Position | Sherpas in Blue Shirts

On July 27, Israel-based Teva Pharmaceutical announced the acquisition of Allergan’s generics business unit for US$40.5 billion in cash and stock, consolidating its position as the leader in off-brand drugs. The deal which becomes the latest in a wave of high-profile consolidation in the pharmaceutical industry, combines Teva, the world’s largest generics drug company with its third largest competitor. The acquisition gives Teva enhanced scale in the intensely competitive generics market (over 20% market share) with cost savings potential due to product overlaps and economies of scale (through operating synergies of nearly US$1.4 billion) as it looks to cope with end of patent expirations. The deals comes at a time when the entire healthcare and life sciences continuum is witnessing rapid consolidation moves including large payers teaming up.

Core Competence – the New Life Sciences M&A Mantra

The deal is another indication in a long line of recent transactions as life sciences firms undergo a realignment of strategic focus and choose to concentrate on business of core competence. Following the big bang “acquire all” days of Big Pharma, pharmaceutical firms have realized that they need to reorient strategic goals and narrow down their focus to specific service lines and markets. This was the principal driving factor in the seminal Novartis-GSK asset swap announced in April 2014, which typified the new normal.

For Teva, this wraps up an increasingly messy four-month long pursuit of another generics rival, Mylan. The company withdrew its latest US$40.1 billion hostile offer to acquire Mylan as the deal prospects became bleak. Mylan itself is busy chasing rival OTC drugs company, Perrigo, which has so far snubbed Mylan’s attempts. The deal also has interesting implications for Allergan. The company has been at the center of major M&A activity in the last two years. This sale allows it to pay off debt from the US$70.5 billion integration with Actavis in 2014. That deal also signaled the end of one of the intense takeover struggles as Actavis beat Valeant Pharmaceuticals for Allergan. The sale to Teva allows Allergan to focus on building its branded drugs business. It could also mount an effort to purchase large peers such as Amgen or AbbVie.

Implications for Service Providers

As with any major consolidation exercise, the primary beneficiaries will be service providers with exposure to both merging entities and account-level relationships as they help with the integration initiatives. A natural consequence of such an exercise is the tendency to go for vendor rationalization as enterprises look to trim the sourcing pie. Demonstrating value across the life sciences value chain will emerge as a crucial differentiator in retaining presence across accounts. Given the diversified operational footprint of pharma firms, global presence becomes an important qualifying criteria for large scale deals, especially when it comes to areas such as infrastructure management. As the spotlight shifts on pockets of core competence, mapping enterprise-specific business outcomes and challenges to technology/process solutions will be key in getting management buy-in for forthcoming sourcing initiatives. The following image illustrates the current exposure of key service providers across major life sciences firms. As you can see, these mergers will lead to overlapping accounts for several services providers.

Account exposure across life sciences firms

The Road Ahead

Life sciences buyers stand at interesting crossroads right now. They seek technological preparedness to tackle multi-faceted challenges arising out of stifling R&D efficiency, dwindling margins, increasing M&A/restructuring, and evolving customer profile. Blockbuster-drugs-led growth has paved way for more pragmatic business models in this new reality. While the digital Kool-Aid continues to sweep the landscape, life sciences firms tend to struggle with digital enablement due to factors such as fragmented service provider landscape and non-standardized internal structures. How they navigate this challenge while digitizing operations will be crucial. Our recent report on IT Outsourcing in the Life Sciences Industry focuses on how global life sciences organizations need to enable their systems for digital enablement through a well-thought out services integration strategy. Pharma is in a continually evolving state of flux and these changes are only going to intensify. Service providers need to up their game to ride this wave.

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