Tag: IT modernization

IT modernization: Fool’s Gold for Transformation and Gainshare | Sherpas in Blue Shirts

Contracting exemplars for digital transformation are not to be found in IT modernization deals

If your enterprise is expecting digital transformation from a service provider and the incentive in the contract is based on cost savings, you’re likely barking up the wrong deal tree. Why? Because it likely signals that the provider will be approaching it as a legacy IT system modernization engagement, rather than a true digital transformation.

And there’s a big difference between the two, as Everest Group’s Founder and CEO, Peter Bendor-Samuel, talked about in a recent Forbes blog post. He explained that while big IT deals may contain transformational elements such as moving legacy infrastructure to the cloud or DevOps adoption, they are IT modernization programs, not digital transformation, unless they are motivated by fundamental business model change.

Don’t get me wrong: although IT modernization programs are important and big, they are not transformational. And in a competitive environment where experience and reputation count, enterprises need to be able to spot the differences between reference projects driven by the need to modernize or integrate infrastructure and those that genuinely transform their business models.

Here’s some food for thought

At an analyst briefing a few days ago, a senior executive from a global service provider described its firm’s recently completed multi-year transformation project for a major European banking client. I asked him afterwards about the delivery incentives for contract that was inked back in 2014. Had he, the service provider, been incentivized on business model transformation, or just cost take-out? Was there any element of shared risk or outcome-based incentive?

He was delightfully candid: to his knowledge, there isn’t a single major ITO contract in Europe or North America in which a service provider has accepted a gainshare incentive, and his case was no different. Programs of this sort that are being completed now are all about modernization. They are cost reduction exercises, albeit on a huge scale, but they are not business transformation.

Indeed, exemplars of shared risk incentives are few and far between. Even those in the public domain, including IBM’s 10-year, $700 million contract with Etihad in 2015, and ACS/Atos’s 10-year $500 million contract with Allscripts Healthcare in 2011—which had significant transformation scope such as data center consolidation or private cloud implementation—may have shined with the fool’s gold of transformation, as they were likely driven and funded by cost reduction, not business model transformation.

There is one public domain deal that is a genuine transformation exemplar: IBM’s 10-year $1 billion deal with Banorte in Mexico, which started in 2013. It is a top-down, long-term vision, driven by a strategy to deliver value through a customer-centric focus, rather than a requirement to upgrade creaking technology and save cost. The original press release hints at shared risk, and a joint venture-like governance model, in the way it was to oversee the project and measure progress.

But Banorte is an exception. In Everest Group’s own experience of analyzing dozens of ITO contracts over the past three years, gainshare constructs are exceedingly rare in the digital transformation space. And the evidence base of completed digital business transformations, as opposed to completed IT modernizations, is pretty much non-existent.

To gain deeper insights into digital transformation contracting incentives, we will be conducting extensive research among enterprises over the next few months to investigate the mix of output versus outcome-based pricing metrics. Keep your eyes on this space to read more about how the best enterprises are evolving their outsourcing models in this new digital frontier.

Technology Influence Pendulum Swinging Back to CIOs | Sherpas in Blue Shirts

For the past few years, the pendulum for control over technology decisions moved into the business, and the stakeholders other than the CIO gained increasing flexibility to deploy technology. Now we’re seeing a bit of a pendulum swing back towards the CIO’s influence. It isn’t that we’re going back to the days in which all technology decision making happened in IT. What’s happening now is a move towards a more integrated approach.

Why is this happening?

As digital transformation projects become larger, their implications cut across business units and across functions. These projects are not small pilots. The transformation is an end-to-end experience that requires substantial change from integrating legacy systems through new digital systems.

As these end-to-end journeys become larger and more complicated, the business is less able to drive them. The CIOs’ existing responsibilities naturally drive them to play a larger role. Also, the project management and change management skills within an organization are often vested in IT or closely aligned with IT. So, IT is in the best position in terms of its skills to manage end-to-end journeys.

Digital transformation involves more than collapsing a business process into a set of data

As companies drive deeper and further into the journey of digital transformation, many aspects of the business model must change, as processes and data are interrelated throughout the organization. As digital transformation starts taking hold and these projects begin making substantive business impacts, the CIO or CTO needs to be responsible for integrating existing enterprise apps and digital technologies to make the digital promise effective.

An interesting phenomenon is happening as the business unit leaders start relying more and more on IT. As the business gives more influence back to the CIO, it results in an imperative for CIOs to become more flexible, more business oriented and sensitive to business needs. It’s also causing CIOs to recognize the need to modernize the IT environment so that the business can operate in a more integrated, end-to-end manner.

The bottom line is IT is increasingly in a better position to deal with large digital projects and end-to-end transformation journeys; so, CIOs and CTOs are gaining a little more influence in technology decisions. Note that I said, “a little more influence.” Currently, CIOs and the business are sharing decision making and influence. But at least for the time being, the pendulum seems to be moving slowly back to the CIO. However, I don’t believe it will swing back to the old command-and-control world of IT.

 

Leadership Tips For Driving IT Modernization and Transformation | Sherpas in Blue Shirts

Digital transformation and IT modernization initiatives require strong leaders to lead an organization through change – and not just technology and process change. Mindsets, organizational principles and policies, as well as combatting resistance to changing the status quo are major activities in these types of initiatives. I recently blogged about a highly successful initiative at NYU Lagone Health. Now let’s delve into some of their leadership activities and strategies. I believe executives can gain tips from how they handled these challenges at NYU.

Jim Song, former Vice President, IT Infrastructure and Shared Services was brought into the organization to lead the IT change effort. He soon recognized the need to bring other leaders into the organization.

Read more in my blog on Forbes

The approach to IT modernization at NYU Lagone Health | Sherpas in Blue Shirts

I’ve consulted with and observed many organizations undertaking IT modernization initiatives. An organization that achieved impressive results is NYU Lagone Health, the academic medical center at New York University. The initiative started with the vision of the chairman of the board and the CEO to grow the business and make NYU the best hospital in New York. But the hospital’s IT capabilities at the time couldn’t enable the business to accomplish these objectives. To make matters worse, Hurricane Sandy blew through and destroyed key systems that were in the main hospital’s basement, which included connectivity. And this happened while the hospital was undergoing a major shift to replace the electronic medical record (EMR) to the new Epic system and acquiring many specialty group health practices throughout New York’s tri-state area annually. To learn more about the approach the hospital took in modernizing its IT and growing the business amid major challenges, I recently had a conversation with Jim Song, former Vice President, IT Infrastructure and Shared Services.

 

Enterprises Mistakenly Conflate Approach To IT Modernization and Digital Transformation | Sherpas in Blue Shirts

Two important activities are happening today in IT. One is a requirement to modernize IT. The second is digital transformation. These are the types of initiatives happening now in all enterprises. Both are important. Both drive value. Both prepare IT to make a bigger impact on the business, and both lower costs. But their starting orientation differs, and their sequence of goals differs. Therefore, the approach to deal with each type of initiative is different. Unfortunately, companies are mistakenly conflating the approach to both types of initiatives.

It’s important that enterprises understand both types of initiatives.

Read more in my Forbes blog

IT Modernization Investments to Dominate 2018 | Sherpas in Blue Shirts

What are the major areas where companies will focus their spend on technology or third-party services this year? What challenges will impact those investments? In reviewing the trends in 2017, I believe we’ll see more of the same this year and an increase in digital adoption. However, I believe we’re at the beginning stages of a megatrend for the next five years, and I’m calling the start of this phenomenon: I believe 2018 will be the year of IT modernization.

Over the next five years, large enterprises will drive relentlessly to modernize their IT environment. This activity will range from moving workloads out of legacy environments into the cloud, adopting agile and DevOps and investing much more deeply and thoroughly in world-class security.

I differentiate modernization from digital transformation. I see a different set of initiatives occurring often in the same companies, which I characterize as digital transformation. These initiatives often use some of the same technologies; however, they arise from the business and are focused on achieving competitive advantage. The funding, project management, and impact on change management are different in kind and scope. The rise of IT modernization will not slow the need and velocity of digital transformation, which I believe will continue to grow as well.

With respect to digital transformation,  we can expect the 2017 trend of digital pilots moving to much bigger programs to continue. However, change management and business model redesign will be a major constraining factor for successful digital transformation, and I believe we’ll see companies start focusing more on managing digital change.

As IT organizations prepare for modernization, they increasingly focus on three main journeys:

  • The journey to cloud resulting in establishing cloud as the infrastructure of choice
  • The journey from waterfall to agile
  • The journey to implement adequate security.

IT modernization will sweep across an organization’s entire IT portfolio, rethinking and restructuring infrastructure, networks, applications, and the process and policies that govern them. I expect IT modernization to drive a profound rethink of the enterprise IT structure as it will both collapse the IT stack and cause organizations to align services by end-to-end functions rather than horizontal functions. In contrast, digital transformation goes end to end and integrates the portfolio. In digital transformation, a company considers pulling workloads and activity out of the enterprise IT function or segmenting it into a different organization that is run end to end.

The results of this modernization will lead to a dramatic decrease in IT costs, while significantly increasing the speed and agility of IT’s ability to react in a timely fashion to business demand. This sudden increase in efficiency will have a dramatic effect on the service provider community, shrinking their existing revenue streams while demanding new skills and capabilities.

The new business models that emerge from this transformation are unlikely, at least at first, to be as profitable as the existing business models based on labor arbitrage. The combination of reduced revenues and lowered margins will place the incumbent service providers in a dilemma with very substantial conflicts of interest. The necessity to protect revenues and keep margins high is likely to make the incumbent service providers poor partners in the emerging digital marketplace.

One potential bright spot for the imcumbents, at least in the short run: although the overall legacy services segment will shrink, I believe IT modernization will result in a set of workloads with new workloads for service providers. For legacy workloads that have not been outsourced and are not ready to be modernized, companies will need to put them into a stable environment. I believe some of those workloads will move to the services market so companies can focus on modernization rather than legacy. This new work for service providers will partially offset some of the runoff that is happening because of IT modernization.

As I look forward to spending trends and challenges for this year, I think Robotic Process Automation (RPA) is hot and will continue to grow in adoption. Artificial Intelligence (AI) is starting to build momentum, and I think it will be red hot in 2018. I see AI being more disruptive than RPA and, therefore, causing greater change management and business model changes than RPA. RPA adoption already was constrained by change management issues in 2017, and I believe AI will be even more constrained by these issues because of its deeply disruptive nature.

We will also see blockchain technology grow in adoption. Although blockchain is truly a disruptive technology, its disruption will focus on specific areas where a distributed ledger can be applied (in comparison to AI, which has a broader set of uses than blockchain). 2018 will see a greater number of blockchain pilots, and some pilots will become programs. However, like AI, RPA and other new technologies, disruptive business model changes will be a major constraint to adoption.

Retrospective on the 2017 Global Services Market | Sherpas in Blue Shirts

As I look back on this year, it’s impossible to unplug digital from the determinants of the year’s most significant business changes. A review of how the rotation to digital impacted the global services market in 2017 provides a glimpse of factors that will be at play in 2018 as companies seek to be more competitive. In this blog, I’ll focus on three of the top factors that affected businesses this year.

Global Services Market Deceleration

Both the global services market and the Indian sector further decelerated this year. When we made projections for 2017, Everest Group was the only firm to make that call. In fact, although we were overly criticized for being overly pessimistic, the market decelerated even more than what we forecasted.

Deceleration is not the same as shrinkage. In the legacy space, the offshore labor arbitrage talent factories went from a growth space to a three percent contraction this year. Also, there has been portfolio rationalization and industry consolidation in that space. As the space shrinks, the larger firms do better than the smaller firms.

Related: 2018: The Year When Faking Digital Won’t Work Anymore



This year brought the rotation to digital with companies moving from services based on labor arbitrage to services based on disruptive digital technologies. The digital space now constitutes 25 percent of the overall market and is growing at 20 percent. The legacy arbitrage factory is 75 percent of the overall market and it’s shrinking at three percent. Within the shrinking, the big five Indian players are consolidating the market to take share; so they eked out a 1.5 percent growth while other providers shrank.

Interestingly, the compression driven by the cannibalization of digital and legacy environments is partially offset by new workloads coming into the legacy environment due to changes in market segmentation.

Market Segmentation Changing

A major factor at play in the services market in 2017 is the market beginning to segment between (a) digital transformation and (b) modernization of IT and business process services (BPS).

The digital market began splitting this year into two pieces: digital transformation vs. modernization. We clearly see two distinct, separate markets emerging in digital. This year we also saw digital transformation pilots go into programs. Pilots that ranged in size from $500,000 to $2 million in size now consistently hit between $50 million to $500,000,000 billion.

The legacy environment is also splitting into two markets: work that will be modernized and work that is too risky or expensive to modernize. We’re now 30 years beyond the inflexion point of where the market began moving from mainframe to client-server environments. Many companies still have a portfolio of applications remaining on mainframes. This is a classic example of legacy work that is too expensive or risky to modernize. As a result, companies are content at this point to let that work remain in the legacy structure. However, this year clearly brought movement in this space of companies building APIs and microservices to connect with that work, whether it is in an internal legacy infrastructure or in an outsourced legacy talent factory. This enables the companies to turn their attention to the work that they need to modernize.

What we haven’t seen is business process services (BPS) modernization take hold. IT is leading the pack currently. At the beginning of the year, we thought that BPS might lead the modernization, but it turns out we were wrong. The IT segment is moving much faster than the BPS segment in modernization work.

Rise of Small Firms

Also in 2017, we saw the rise of small provider firms. Where we see industry consolidation on the legacy side, we see vendor proliferation on the digital side. We believe this proliferation is because companies are looking to new firms to do new work. They believe the incumbent service providers are distracted and have a conflict in interest in moving to digital – a self-interest in preserving their profitable legacy arbitrage-based work. Consequently, this year brought a surge in companies looking to smaller, new service provider firms to help them understand and drive both digital transformation and IT modernization.

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