Tag: IT Infrastructure

How Cloud Computing Is Reshaping The Role Of The CIO | Gaining Altitude in the Cloud

This blog was originally posted in Forbes’ CIO Central on August 3 as a contributed piece. Read the original post.


 

Four disruptive forces are causing executive teams to reconsider how the CIO function will add strategic value in a world where cloud computing, distributed architectures and mobile ubiquity are givens for future competitiveness.

Rising Server-to-Admin Ratios

When 25 physical servers for each IT admin was the norm, CIOs built organizational structures suited to that reality. Hiring, training, reporting lines, compensation, key success factors, annual reviews, career advancement and social norms were all built around that 25:1 ratio. Now, enterprise IT is facing the near-term reality of ratios that are 100:1, 500:1 or even 1,000:1. Google is rumored to be aiming for a 10,000:1 goal.

This massive increase in administrative density signals wholesale changes in the enterprise IT org chart. It changes who is hired, what skills they must have, how they will be trained and managed, evaluated and compensated, how they interact with and support business units, and what their long-term career paths will look like.

IT Becomes a Variable Cost

In the early 90s, when the CIO title was gaining popularity, the chief driver for bringing IT into the executive suite was the massive capital allocations required to give organizations a competitive advantage through rapidly changing technologies. These technologies demanded larger and larger percentages of the corporate budget, so a direct line to the president or CEO was paramount in justifying these spends.

Cloud and next-generation IT strategies dramatically change this. What was once CAPEX increasingly becomes OPEX, and long-term risk falls accordingly. So, where’s the strategic value in having IT in the executive suite? Arguably, it’s more important than ever.

The increase in business agility and responsiveness that cloud computing makes possible shifts the strategic value of the CIO from a technical role to a business role. CIOs must understand the functions they support, so they can help these functions quickly put the infrastructure and applications in place to support quickly moving new ideas to market, testing them, and iterating them to general release. Competitors will be doing this (and already are, in several industries).

End-User Auto Provisioning

End users are gaining a level of power that makes past demands for integration of Blackberries and iPhones seem whimsical by comparison. CIOs accustomed to pushing back against new ideas based on security threats and support burdens will increasingly find themselves cut out of the deal by end users who can go online and provision SaaS (software as a service) and IaaS (infrastructure as a service) with a credit card.

As Vivek Kundra, until recently the White House CIO, has said, “the more a CIO says ‘no,’ the less secure his organization becomes.”

Infrastructure Becomes Commodity

New — and largely uninvented — processes are required to deal with all of this change. Governance, compliance and security are all matters that 20 years of client/server policy is ill equipped to deal with. On top of this, CIOs must develop policies for the rapid growth of collaboration technologies (and, yes, social media) that employees will increasingly require in order to do the job the CEO is asking of them.

These shifts signal the need for the new CIO to bring an entirely new set of skills to the game. Yes, the new CIO’s job will continue to require an understanding of infrastructure and architecture, but a knowledge of how to turn the dials and knobs will be far less important tomorrow than it was yesterday. Tomorrow’s winning CIO will bring an MBA’s understanding of finance, marketing, operations, HR and the other functions. CIOs will understand how to say “yes” to new services that make their companies competitive, while mitigating risks and allowing for small-scale failures in the pursuit of long-term success.

Code Red – Stat! | Sherpas in Blue Shirts

From time to time we get to witness the death of a market. This is seldom pretty, as many are affected with pain and denial. In extremely rare cases an enterprise arises from the ashes of a market implosion, reincarnated with new products and services, a renewed vision, and bright growth prospects. But most often, a string of failures is apparent: some go down spectacularly as they miss the warning signs and skid off the edge of a cliff; some suffer a slow and painful end, dragging along those who dedicated much to the firm, but failed to overcome denial of the changes needed as they dream of the good old days; and some commit suicide, refusing to grapple with fundamental truths as they meet their demise.

For those of you who have an eye for the macabre and are interested in witnessing such a spectacle, we suggest you pay close attention to the legacy IT infrastructure outsourcing (IO) market over the next few years. As illustrated in the chart below, the legacy IO market has been migrating through a maturity cycle, moving from slow growth to flat or stagnant growth and now has large segments that appear to be contracting.

Infrastructure outsourcing market size and growth for traditional IO players

The IO market is primarily built on large contracts, often over $100,000,000 in size, with durations of three to 10 years. Many of these contracts include substantial capital for assets such as servers, data centers, networks, and capitalized transformational costs. These contracts are notoriously inflexible, driven by a combination of factors including the need to predefine service level agreements (SLAs) and scope over a long period of time, pricing that has to anticipate changes in volume and technology, and the substantial capital cost that must be retired over the life of the contract. As you can see from the chart below, these contracts delay the profits to the service provider, and only deliver modest profitability late in the contract term.

Rate of return for a typical traditional IT outsourcing contract

The combination of unrealized earnings and undepreciated assets has the potential to create substantial stranded costs if the contracts are terminated early or significantly renegotiated midterm. These stranded costs have been the bane of the industry, creating a steady stream of blow-up deals – some of which consistently further suppress earnings in the sector.

Sometimes a decision to transfer assets to a service provider was driven by an artificial increase in return on capital that the buyer would show after assets were moved from its books to those of a provider. Nonetheless, even this benefit eventually disappeared due to changes in assets accounting in an outsourcing transaction (see Everest Group’s Research report “Show Me The Assets! The Changing Role of Asset Ownership in Infrastructure Outsourcing”)

The patient starts to look anemic

Over the last few years, customers have been increasingly turning away from these long-term IO transactions. Most current market activity involves only those already committed to these contracts – and only then renewing their arrangements because of the substantial difficulties associated with bringing processing back in-house once the talent and data centers have been transferred to a third party. In many cases, these organizations have opted to descope their contracts and/or actively seek alternative delivery vehicles. To this point, the industry has been able to cope with these negative secular trends through consolidation, cost cutting and restructuring. One need only look so far as the acquisition of EDS by HP, and the ongoing struggles at CSC, to confirm this truth.

Aggressive new organisms attack the weakened prey

The growth of remote infrastructure management outsourcing (RIMO), co-location services and, most recently, cloud computing, provide the market with less expensive and far more flexible alternatives. When combined, these transformational offerings present the IO market with a compelling rationale and clear migration path to move quickly from the legacy IO model. Everest Group’s analysis of the economic justification for wide scale industry adoption points to significant acceleration of existing IO customers’ movement away from their traditional models by breaking contracts, non-renewal or substantial descoping. We have been tracking the dynamics of this departure from traditional IO for some time. See our research on this and other IT-related topics.

A terminal outlook?

The picture we’ve painted above depicts a mortally ill market whose heart has failed but is being kept on life support. Yet massive organ failure is imminent, and will set off a cascading sequence of events. Consider a scenario that might play out as follows:

  • Industry-wide awareness of compelling next generation economics combined with frustration with IO inflexibility drive an accelerated movement away from traditional IO.
  • Enterprise customers recognize the rapid pace of change and refuse to lock in to longer-term IO arrangements due to fears that such commitments will enable their competitors to race by them as they adopt the flexible, low cost next generation solutions.
  • Service providers with a large book of IO business are left with substantial stranded cost and massive losses in top-line revenue. While they may have the technical prowess to deliver next generation offerings, a strategy of cannibalizing the legacy is unattractive as replacement revenue is far less than the original legacy business model.
  • This loss of revenue, combined with the hit to profits as the providers absorb stranded costs and severance due to layoffs, overwhelm attempts to build positive momentum in participating in the next generation of RIMO and cloud services.
  • Leaders in the alternative solutions far outpace the incumbents who try to compete, but any growth just isn’t large enough to offset the legacy IO runoff.

The final breath is snuffed out as legacy outsourcers find it increasingly difficult to cross-sell other services as frustration mounts in the IO customer base due to actions taken to safeguard their stranded investments and prolong the inevitable.

Stat

While the timing element of the prognosis is still a bit uncertain, the wolves are at the door, the doctor has left the room, and the hearse is on its way.

Expect Changes in the IT Security Landscape | Sherpas in Blue Shirts

The worldwide IT security market is already quite sizeable, exceeding US$25 billion. And all industry analysts are predicting 20-30 percent growth in the next three years. Multiple drivers will fuel this growth, including increasing complexity of IT solutions – which raises the level of challenges for supporting security – and much higher value assigned to proprietary information.

Yet, I believe the structural nature of demand will drive quite an important shift in customer buying preferences going forward. As large enterprise clients recover from the global economic crisis of 2008, they are increasing their emphasis on costs. And despite increased willingness to pay, IT security cost is not immune to this pressure. In order to avoid separate management costs associated with standalone IT security service agreements, enterprises prefer to bundle IT security support with either large IT outsourcing deals or existing telecommunications contracts, as the network is still perceived as the most security-exposed element of IT delivery. Moreover, large corporate clients prefer to deal with a single point of responsibility for actual IT delivery and corresponding security support, which eliminates any risk of finger pointing, and streamlines their governance activities.

So what are the implications of buyer preferences for the existing provider landscape? I believe they will be game-changers primarily for niche IT security service providers and traditional security software vendors. Under the threat of missing their portion of anticipated incremental demand, they will be actively seeking alternative distribution channels and experimenting with different forms of industry cooperation. Everest Group also expects to see increased M&A activity in the IT security industry as large, integrated IT suppliers will be seeking ways to further enhance their capabilities in efforts to capitalize on the rapid growth of this market.

So let’s check in one year from now on the state of the IT security industry, although there is no doubt that it will look different from what we see now.

Eleven in 2011: Everest Group’s Predictions for the Global Services Industry | Sherpas in Blue Shirts

The number 11 holds far-reaching significance in numerology, in the bible, among doomsday theorists, and in the dice game craps, to name just a few instances. What’s the significance of Everest Group’s 11 predictions for the global services industry in 2011? Let’s take a look.

 1. Unleashed discretionary spend that fueled the 2010 global services industry will fizzle out by the end of Q2 2011, resulting in market growth flattening.

While most forecasters suggest accelerated market growth through 2011, we predict a flattening of growth in the global sourcing market as companies work through pent up demand. Assuming economic forecasts hold, we expect to see continued increased activity fueled by the discretionary spend that began in 2010 to last through Q2, then drop back to its “natural” level consistent with the economy. Transformation agenda activity, precipitated by changes in the industry, will increase slightly in tandem with a slowly recovering economy. “Run and maintain” activity will also move in the direction of the economy.

2. Provider pricing power will not regain pre-recessionary traction in 2011.

We predict low and modest pricing power in the provider segment, or a return to pre-recessionary pricing levels. This will force them to continue to differentiate themselves by performance outcomes, rather than price. As a result, select providers will grow disproportionately, taking clients away from others.

3. Global companies will continue to channel efforts toward services portfolio rationalization and increased adoption of hybrid sourcing models.

While for the last decade the industry worked to understand, test and deploy models to capture value from labor arbitrage, organizations with mature global services portfolios are now focused on making them more effective and able to deliver end-to-end impact. The global services market has shifted accordingly, helping global companies extract value from third-party service providers, shared services organizations and combinations of both via hybrid models. At the same time, attractive new markets for labor arbitrage remain for mid-sized companies who are late adopters of more robust sourcing strategies or for portfolio extensions of mature clients.

4. More inflammatory dialogue on offshoring, driven by political posturing in a weak economy, will drive offshore companies to establish a greater onshore presence.

2011 may see more protectionist measures proposed by the United States and politicians due to the high level of continuing unemployment. Most of these measures will fail to gain traction and pass into law, and those that do will be difficult to implement and audit. Yet the increased negative press will drive the major offshore providers to increase their onshore delivery capabilities, a trend already well underway per their need to deepen relationships with clients and add more complex and intermit work to their offerings. The United Kingdom will also likely move in a similar direction with proposed quotas on non-EU immigration of skilled workers. While it’s very unlikely that U.S. politicians and legislative agendas will have a significant impact on the sourcing industry, these pressures will probably eliminate or significantly restrict new markets for offshoring with government buyers.

5. Strong sourcing market growth will be in geographies with strong economies, led by Brazil, China, India, and the Middle East.

Countries with strong economies represent big markets with big demand for transformational and discretionary spend activity. Consulting firms and service providers will focus efforts on reaching these robust markets.

6. Cloud computing will be the technological breakthrough causing the most disruption.

While it will take time for cloud computing to mature and for companies to adopt it on a widespread basis, it is currently creating significant discontent and disruption in delivery models, and will continue to do so in 2011. Expect to see service providers continue to push development of cloud solutions and, in some cases, acquire smaller players to gain intelligence and/or expand capability offerings.

7. Industry consolidation will pick up speed.

Industry consolidation will be driven by several factors: 1) Infrastructure hardware providers seeking to extend services; 2) Japanese service providers engaging in increased M&A activity as they continue to look to expand their global networks; 3) Buyer organizations’ continuing desire to have a smaller portfolio of service providers; and 4) service providers seeking diversified offering capabilities as they continue to see traditional growth areas slow.

8. Emerging low-cost destinations will increase their momentum.

 The new, emerging destinations such as South Africa, Egypt, and Argentina will continue their impressive rise as attractive locations for specialized services, providing an increasingly important complement to the mega destinations of India and the Philippines. This increased importance will drive substantial job growth and present increased demands on countries infrastructure and, in turn, command more support from governments in the form of increased investments in regulations that are more attractive and policies, and more proactive measures to attract and maintain inflows of work and investment.

9. Cities, Counties, States and Provinces will join the party.

Proactive government entities, such as cities and states that have traditionally outsourcing to other locations, will realize the untapped potential of becoming mini hubs of global services work. These innovative government entities will be able to make targeted investments that attract high paying services jobs into their jurisdictions, leveraging the under-employment of key skills combined with emerging work from home and telecommuting technologies and business models. Over time, these will enable a new class of complementary and compelling services offerings, further enriching global services portfolio options while greatly enhancing the standard of living and tax bases of the locations that  embrace this new model.

10. There will be rising dissatisfaction and pricing pressure on the traditional IT infrastructure market.

 HP’s move to take out a substantial portion of EDS’ cost structure has already set off a chain reaction as other IT infrastructure companies increasingly recognize the new competitive realities and strive to cut costs and match price. The primary vehicle for cost reduction will be to move a greater portion of the delivery staff offshore to low-cost destinations, primarily in India. This mass migration of work is and will further stretch offshore delivery capabilities, resulting in decreasing quality and communication problems. We expect these issues, combined with the rising expectations emanating from the emergence of new disruptive models such as cloud and Remote Infrastructure Management Outsourcing (RIMO), will amplify the already growing dissatisfaction in the buying community.

11. Arbitrage will increase.

We expect increased wage inflation in the low-cost destination countries, and increased fourfold pressures as currencies of developing countries increase relative to their nation currencies of the Euro and Dollar. Nevertheless, we still expect it will become cheaper for providers such as Infosys, Wipro, TCS and others in that class, to provide work out of their low-cost destination locations relative to the cost of delivering them onshore. This is not to say we expect pricing drops from these firms; indeed, they will likely be vocal in pointing to their rising costs as a strong rationale for pricing increases. This arbitrage increase will apply to the overall cost of delivering the work, and may be misunderstood at an individual person or job class level. The reason for this surprising and counter-intuitive prediction is that we believe the class of providers that has mastered talent factories will be able to apply lean process improvements, and continue down-shifting their work to more junior and cheaper resources, overall widening an already growing arbitrage gap. This downshifting of work, which has been under way for a number of years, will be accomplished without materially affecting the quality of the services delivered.

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