Software-Defined Infrastructure: A Revolution in the Making | Market Insights™
June 13, 2014
Software-defined infrastructure:a revolution for the infrastructure landscape
Software-defined infrastructure:a revolution for the infrastructure landscape
In a landmark move with far-reaching implications, Infosys appointed ex-SAP CTO Dr. Vishal Sikka as its new CEO and managing director, making him the first non-founder at the helm in the firm’s 33-year history. Accompanying this change, the founders are getting out of the new chief’s way. Current CEO and co-founder SD Shibulal will leave by end of July, while NR Narayana Murthy will vacate his role as executive chairman on 14 June, continuing in a non-executive board role until 10 October to ensure a smooth transition.
The fact that Infosys engaged an executive recruiter to look for a successor reflects a dramatic shift in ethos for the firm. It represents the strategic decision to bust up a certain inward-looking culture that has come to represent Infosys. That Infosys reacted to market and customer expectations by bringing in an external technology visionary bodes well for the critical imperative to change to a customer-centric culture, rather than firm-centric.
What Works
The Gujarat-born Dr. Sikka holds a Ph.D. in artificial intelligence. He spearheaded the development and marketing of HANA, SAP’s flagship analytics product. His experience in these areas could give Infosys a sizable edge as service providers look to establish credentials in next-generation technology avenues such as big data, analytics, cloud, robotics, and artificial intelligence.
He seems to have been given a wide mandate, per the large-scale changes in senior management that are accompanying his appointment. This will allow him to exercise a free hand as he attempts to reshape the beleaguered company. Infosys’ long-standing strategic imperative to let the founders control the firm has been widely criticized.
He joins a long list of industry outsiders taking charge of IT majors. Louis Gerstner was unanimously credited with turning around IBM’s fortunes when he took over in 1993, after previously leading RJR Nabisco and American Express. Closer to the Indian IT services landscape, Vivek Paul, a GE-alumnus transformed Wipro, fast tracking growth from a US$150 million company in 1999 to over US$1 billion in sales in five years. Last year, Apple announced UK fashion chain Burberry’s CEO as the head of its retail and online business.
Appointing an outsider tends to bring fresh perspective to inherent legacy issues plaguing companies. Free from the baggage and expectations associated with firm veterans, Dr. Sikka can look to usher new life into Infosys.
What May Not
Since he comes from primarily a products-driven business, it will be interesting to see how he adapts to the IT services industry, which has inherently different business dynamics and challenges. The focus will be on streamlining project management, client delivery, and sales efforts. Dr. Sikka’s experience in driving sales and marketing at SAP will be a crucial asset in this regard. Being a CTO of a products-based company is an entirely different ball game than leading a global services behemoth, as product-driven businesses rely primarily on the strength of intellectual assets, while services businesses are an amalgamation of resource management, delivery, and expectations handling.
In spite of the large-scale management changes, Dr. Sikka has his work cut out as he navigates disgruntled senior management. How he soothes frayed nerves and reassures them will be essential for stability. A cultural shift he will seek to implement will revolve around Infosys’ limited risk appetite for investments. Infosys needs to invest significantly in boosting its expertise in next-generation solutions through alliances and possibly acquisitions. Although it has made some notable acquisitions such as Lodestone, the firm has generally been fairly risk-averse in exercising its significant cash pile.
The role that NRN Murthy assumes will also determine the efficacy of Dr. Sikka’s roadmap for revival. If Murthy remains strictly in a mentorship role overseeing the transition, without overriding Dr. Sikka’s strategic decisions, the sailing should be smooth. However, if those lines blur, it could create a vicious cycle of conflict, decisions embargo, and execution paralysis.
Another important but often ignored challenge of such senior-level changes is the risk of culture mismatches outweighing the business positives. Echoing Peter Drucker’s “Culture eats strategy for breakfast,” bringing in a rank outsider can have controversial implications. For example, John Sculley joined Apple from PepsiCo, and during his time had long-standing disagreements with Steve Jobs due to divergent management styles and priorities, ultimately resulting in Jobs’ exit in 1985. The entry of a new top-level entrant is not easily accepted by the old guard, leaving open the possibility of wilful sabotage. Dr. Sikka will need to build bridges with senior stakeholders to avoid stepping on toes.
Swimming in Choppy Waters Ahead
Essentially, whether or not Dr. Sikka manages to snap the once industry bellwether out of its funk will depend on his ability to make the transition from a technology visionary to an empathetic business leader combining technical expertise, client management, and people development, while maintaining the focus on innovation and thought leadership. He will try to take Infosys out its comfort zone, bridge service gaps with more nimble rivals, and ultimately reassure clients that their business is in sound hands. He needs to show that a brilliant pilot can be a swimming coach as well.
About 2/5 IO incumbent providers were replaced with new providers in 2012 and 2013 as buyers sought change and control
Wage inflation in India for engineering and IT talent has been going up consistently because the demand exceeded supply, particularly for experienced talent. But Everest Group is making a bold prediction that we we will see a lowering of the inflation rate in India, Europe and, to some degree, in the Philippines over the next few years.
Why? Because demand and supply have come into balance, thanks to the impressive work that the Indian government, Indian providers and GICs have done in building the recruitment and education mechanisms that feed the services industry. We can now clearly see those feeding mechanisms are more than adequate to satisfy demand.
We now have enough experienced resources in the country, so there is no longer a shortage. Supply is coming into balance with demand for both new and experienced talent, which inevitably will act to significantly moderate the past wage inflations.
Implications
The implications are fairly significant. First, with moderating wage inflation, we think both providers and enterprises can adjust their COLA requirements.
In addition, the moderating wage inflation also could aggravate enterprises to ask for a bigger piece of the rupee depreciation windfall to providers’ profits. To date, the full effects have not been passed along because the wage inflation somewhat modified the depreciation windfall. We believe that the lowering of the wage inflation rate — which is likely to stay moderate in the foreseeable future — may change people’s negotiating positions over the rupee.
When Accenture completes its acquisition of Procurian, (announced October 3, 2013, and expected to close by end of 2013), the firm will hold a formidable one-third of the procurement outsourcing (PO) outsourcing marketplace.
For non-regular followers of the PO space, Procurian was incepted in 2000 per its own acquisition of Accenture’s ePValue e-procurement venture. The somewhat latent PO market finally found its footing, with a US$1.7 billion and a five-year CAGR of 13 percent in 2013.
While the PO marketplace has become increasingly competitive in the past several years, as evidenced by numerous acquisitions by Xchanging, IBM, Infosys, and GEP, Accenture’s acquisition of Procurian represents a game changer in the PO space, and has far-reaching implications for providers and buyers alike.
The new dynamics in PO?
Bottom line, given the combined capabilities of Accenture and its come-back-home compatriot Procurian, this new PO powerhouse should make other global service providers step back and think about their PO service capabilities.
For more details on the Accenture/Procurian acquisition, and Everest Group’s insights on it, please go to: Accenture + Procurian = One-Third of the Procurement Outsourcing Market viewpoint.
“At times, Indian IT service providers fall behind expectations in new and exciting technology areas that extend beyond the traditional outsourcing paradigm.” – A large MNC buyer of IT outsourcing services
With traditional models of IT outsourcing facing increasing competitive pressures, Indian service providers are looking at a multitude of solutions to drive success and retain competitive advantage. Chief among these are emerging technology solutions from start-up firms. Service providers have realized that to compete and stay relevant in the changing paradigm they have to focus on developing niche and specialized products, boost efficiency, and develop IP. Primary traction themes include data analytics, big data, cloud computing, and enterprise mobility. Niche start-ups with innovative technology solutions help providers augment their existing service offerings.
Increasing Traction
This echoes the strategy often adopted by multinational technology firms including Cisco, Microsoft, Yahoo!, Intel, and SAP, which back a plethora of emerging firms. Indian providers are now looking to invest and form alliances with ventures in niche domain areas. This is a dramatic shift in the status quo, as Indian IT providers have historically paid minimal attention to start-ups due to their own lack of a proper ecosystem to facilitate such transactions and a fairly low-risk appetite. Yet, of late, they have increasingly set up funds and accelerators dedicated to tech start-up initiatives.
|
Company |
Mandate |
Notable Involvement in Start-ups |
|
Infosys |
Has set up a US$100 million fund to invest in start-ups, besides spotting and funding internal innovation |
OnMobile, Yantra Corp |
|
Tech Mahindra |
Has established a US$50 million fund exclusively for investments in global technology start-ups |
Launched an initiative – i5 Startnet – to scout for firms in cloud, mobility, networking, and vertical-specific technologies |
|
MindTree |
Created a team led by the Chief Strategy Officer to look for start-ups and next generation solutions |
7Srata |
|
Wipro |
Actively picking up stakes in cloud and big data firms |
Opera Solutions, Axeda |
|
TCS |
Formed its Innovation Labs and Co-Innovation Network (COIN) to bring together academic institutions, start-ups, venture funds, strategic alliance partners, multilateral organizations, and clients |
iKen Solutions, Perfecto Mobile, Computational Research Laboratories |
|
Cognizant |
Set up an emerging business accelerator |
Incubated 20 ideas over the past 18 months |
Changing Ecosystem
Slowly, but steadily, the ecosystem is developing to encourage such start-ups. For instance, in June 2013, NASSCOM announced a program to fund and incubate 25 start-ups to be established by young Indian entrepreneurs. Additionally, it held an event that brought together promising technology start-ups and IT service providers including Infosys, TCS, Cognizant, Wipro, and MindTree. The gathering was an effort to provide young start-ups a platform to showcase their capabilities, connect with leading service providers, and generate investor interest.
Quid Pro Quo
Increasing competitive pressures and changing market dynamics have made Indian service providers truly value innovation, viewing it not just as a buzzword but rather a core operating lever to drive growth. Partnering with start-ups is an effective method of achieving innovative solutions without the allocation of time and resources they can ill-afford. And the mutually beneficial relationship between the two segments can lead to sustainable ecosystem in the long haul.
As a result of the consumerization of IT within today’s businesses, many technology service providers struggle to find a sales approach that drives greater growth. With CIOs now playing a far less prominent role as an intermediary determining the best solutions and, instead, business stakeholders making buying decisions, traditional solution selling is not a very effective approach today. But something akin to solution selling is meeting with success in the business stakeholders market.
At Everest Group, we have come to think about this issue as the difference between a “push” or pull” approach. Here’s what they look like:
CIOs and IT organizations tolerate the traditional push approach, but it doesn’t get traction with the business stakeholders market. In fact, they find the push approach offensive. If you use this approach, you run the risk of coming across as arrogant, effectively telling them that you know how to run their business better than they do.
The surest way to get to a positive sales outcome in the business stakeholders market is to get them to solicit you for a solution. But how can you create a pull and get them to invite you to help solve their business problem?
Two steps are foundational to a pull approach.
1. Establish your credentials as an expert through marketing
First of all, you need a reason to be in the room having a discussion with the prospective client’s business stakeholders. Thus they must perceive you as relevant. In other words, they perceive you as an industry expert and/or an expert in their functional area.
That perception must occur without you going in and positioning yourself, telling them you’re an expert. They need to already think of you that way and pull you in for a discussion. Hence, the role of marketing is crucial.
2. Demonstrate interest in the client’s issues — without selling
You need to express interest in the client’s issues. How do you do that? One highly effective way is to motivate the sales prospect to commission your company to do research in an industry or functional area. First you must show that you recognize they (not you) are the expert in that area.
For example, you could say, “We are looking to make new investments in your industry (or functional area) to serve you and others like you. We recognize that you are a leading firm in this area, and we would appreciate your telling us your thoughts on specific aspects.”
The key to making this succeed is not having a salesperson make that approach. If you move to a sales pitch at this point, you will alienate your prospect.
In the course of doing the commissioned research, you will begin to understand the issues the prospect faces and how they view the world. If you can then further explore (again, not using a salesperson to pitch this) what it takes to resolve the problems you identified, prospects then often ask the question: “Can you help us do this?”
As we pointed out in our blog post about recent earning reports, Cognizant and TCS are leading the services provider pack in growth. We believe that, to at least a small extent, this is because they are being better listeners to their sales prospects in industries where they have expertise and are thus more often able to pull the question: “Can you help us?”
Eliminating your competitors
By the time prospects ask you for help with their business problem, you have already credentialed yourself in their minds. They believe you are interested in them and you have relevance to their problem. At this point, they’re not looking at your competitors; they’re looking to you for help.
At this point, and only at this point, will a sales approach find acceleration in today’s services market.
The traditional sales process with a push approach is quick to reach the RFP and proposal point but then takes a long time going through due diligence and the rest of the RFP process before getting to closure. That process inverts with a pull approach: it’s a long time to proposal, but getting to closure is quick once the prospect asks for your help in solving their problem.
In September 2008, Satyam, then the sixth largest India-based IT services company, received the coveted “Golden Peacock Global Award for Excellence in Corporate Governance” award. Then, just four short months after this recognition, one of the biggest cases of fraud in the Indian IT service industry came to light, with the firm’s Chairman B. Ramalinga Raju admitting to financial fraud to the tune of ~US$1.5 billion.
The industry was shaken. The company’s stock and fortunes crashed.
Satyam’s much-needed rescue support came from the Indian government and the new Satyam Board, which consisted of numerous stalwarts from the Indian industry. This provided the required handholding to avoid a complete collapse, protect the interest of its employees and clients, and uphold the image of the Indian IT industry. Consequently, a sense of stability was achieved in April 2009 when Tech Mahindra won the bid to acquire a majority stake in Satyam (which was later renamed to Mahindra Satyam).
Since then, the company went through struggles, twists and turns, and finally reached a steady stage under the Mahindra umbrella. Following is an analysis of company’s financials and its stock price movement during its turbulent times and through its last financial year:
The formal merger of Mahindra Satyam with Tech Mahindra in June 2013 made “Satyam” brand history. The combined entity, retaining the name Tech Mahindra, regained ground to again become the sixth largest Indian IT-based service provider, intensifying competition for the industry-wide known WITCH (Wipro, Infosys, TCS, Cognizant, and HCL) group, and turning it into the TWITCH group (with Tech Mahindra being the new addition!). This turn of events strengthens Everest Group’s hypothesis about the possible formation of new groups in the industry (for details, refer to our blog “The Changing Pecking Order and Emerging Irrelevance of the WITCH Group Term”
The new Tech Mahindra, with US$2.7 billion revenue, has laid down an ambitious roadmap to be achieved by 2015, where each digit of this year denotes a meaning:
|
2015 |
The aspiration |
The realism |
|
2015 |
Reach US$5 billion revenue by 2015 |
|
|
2015 |
Zero differential between its bottom line and the EBITDA of the fastest growing rival |
|
|
2015 |
Being number one as the best employer and amongst the best-known companies for corporate social responsibility |
|
|
2015 |
Five focus areas – telecom; manufacturing; mobility analytics, cloud security and banking; network services; and banking, financial services and insurance |
|
 |
|
|
Do you believe that Tech Mahindra has the mettle to reshape the contours of the India-based technology provider landscape?
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.
Implications
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.
ITO deals in which service providers’ compensation is linked directly to the business outcomes they achieve for the clients have started gaining prominence. While the idea has been around for some time, and indeed should be part of a gradual evolution process from pure FTE or T&M models through to gainsharing arrangements, we’ve observed with interest both parties’ strategic interests (see image below) converging through shared business outcomes on several mega deals.
A number of clients have recently asked for our advice and insights on the upsides and downsides of outcome-based pricing models. Following are the factors we told them they must carefully consider before asking their providers to make the change:
At the end of the day, an outcome-based model is a bit like marriage – it represents the triumph of hope over experience. So be clear about why you are getting into it, choose your partner carefully, share space, and who knows – you could live happily ever after!
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