Tag: IT transformation

Changes are Afoot in the Canadian Infrastructure Outsourcing Marketplace | Sherpas in Blue Shirts

HP’s 2008 acquisition of EDS reduced an already small number of large infrastructure outsourcing (IO) service providers with a significant footprint in Canada. While for a time that meant buyers in Canada who were uncomfortable entering into agreements with IO providers with lesser presence in Canada had a smaller pool to choose from, the landscape is quickly changing.

First, the HP-EDS acquisition was quickly followed in 2009 by that of ACS by Xerox and Perot by Dell. Both Xerox and Dell have capabilities and resources on the ground in Canada they can utilize to increase ACS’ and Perot’s presence in the country’s IO space. Additionally, Canada appears to have caught the attention of offshore providers over the last few years, with many of the Tier 1 Indian providers making headway and developing Canadian practices with strong delivery capabilities. Also increasing competition in the IO space are providers that are leveraging emerging technologies to replace traditional IO deals.

What does this mean to the service provider community? The big Tier 1 multinational firms with strong footholds in Canada need to beware. Competition is coming from expected places, such as from major players that in the past have not focused their attention on Canada, as well as less expected up-and-comers that are gaining ground in using cloud offerings, for example in development and  testing environments. The Indian players, continuing their push into the Canadian marketplace, must become better focused in order to effectively compete with the large multinationals that already have a strong track record, strong relationships, and a greater presence.

What does this mean to the buyers of IO services? Many more options. Take, for example, midrange services. They can use a large Tier 1 ITO provider and go the soup to nuts solution route. They can split the physical aspects of the data centre and servers from the services and leverage an offshore provider for remote infrastructure management outsourcing. They can use a cloud solution offered by anyone from a large Tier 1 provider to a niche vendor. As the market has matured and IO services buyers have gained experience, the risk around leveraging a new set of providers and emerging technologies has decreased, which equates to additional option advantages for Canadian buyers.

This increasingly competitive environment challenges service providers to clearly articulate the value that their solution, their proposal, and their company bring to their clients. But buyers aren’t off the hook. They must ensure that their sourcing process allows for the consideration of providers with very different capabilities and value propositions than those to which they have become accustomed.

The Consumerization of IT and Business Processes: Why the Shift to End-to-End Processing Puts Power in the Hands of the User | Gaining Altitude in the Cloud

Service Delivery Automation (SDA) encompasses cognitive computing as well as RPA (robotic process automation). Software providers that provide SDA come to market with an enterprise licensing structure that basically requires the customer to license a number of agents for a specific length of time. But in using this licensing model, service providers unintentionally constrain adoption and open the door for competitors’ differentiation. Along with the average Joe becoming increasingly accustomed to downloading an app to a smart phone in seconds and receiving immediate gratification utilizing powerful, easy to use technology comes uncomfortable questions for corporate IT. “Why can’t you do this? If it only cost me $5 to get this from Apple, why does it cost me millions to get a much worse product months, if not years, later from you?”

Behind this new sense of entitlement is the growing reality that these new apps offer dramatically increased levels of automation, allowing for activities that were previously the providence of experts but are now self-service, giving the user far greater control. Even more profound is the complete reorientation of perspective as technology is developed and deployed from the consumers’ ease-of-use rallying cry, increasingly far away from delivery organizations’ focus on efficiency and corporate control.

These same secular forces that are creating a profound change in IT are also beginning to drive change in shared services organizations and how they address business processes. Think end-to-end processing for talent management and learning in HR, and purchase-to-pay and record-to-report to name in F&A. As with their IT counterparts, these processes are increasingly being automated and shifting toward a self-service delivery structure. This not only reduces costs but also places increased power in the hands of the user community.

Now those internal groups that deliver IT and business processes are facing a harsh reality. They are no longer dominated by stovepipe delivery organizations designed to capture the efficiency of specialization, centralization and labor arbitrage. Rather they are quickly turning into flatter organizations that are delivery-oriented around a user’s view of the process, with emphasis on the transparency of information flow, and process designs that prioritize ease of use over traditional corporate command and control.

As these changes rework the business process landscape, they portend coming shifts in how third parties will be utilized. It is likely we’ll see a reversal in the current trend that allows for increased provider control of processes, with firms increasingly choosing to design solutions that place control within the firm and wherever possible in the user community, thereby also reversing the current provider push for outcome-based pricing. And increased levels of automation may diminish the amount of labor arbitrage which is utilized.

All of this is best summed up by a client who recently told me, “I am no longer looking for a delivery vendor that provides high quality silent running. I am now looking for a transformational partner that will help me implement my new vision and then play a supporting role.”

Time to Call the Real Experts – What We Can Learn from Ants about Cloud Governance | Gaining Altitude in the Cloud

IT rarely loves end users, and for good reason…they constantly invent new problems. They customize their laptops, creating unmanageable software Frankensteins; they bother IT with all kinds of new whims; they want to use all types of new mobile devices, each scarier than the previous one, etc. But the biggest reason of all is that end users always think they know better than IT what tools they need to conduct their business.

But IT can fight these battles with a mighty tool – centralized governance. The less control IT gives end users the better and more stable the system architecture will be, and centralized IT control always produces more efficient results. . Right? Actually, it’s no longer true. While centralized IT governance works well in a traditional IT ecosystem, it quickly fails in the new generation IT environment. The powerful promise of cloud computing is that any user can get easy access to a diverse set of IT resources – not just those available from the internal IT group –for the precise period of time they are needed, and shut them down once the project is completed. But all this requires a new type of governance – decentralized – which allows every user a choice of technology tools and operational flexibility, while still enforcing integrity and consistency of the IT architecture.

Is this even possible? Is there any precedent that shows this can work? There sure is, but not exactly where we would expect to look for it.

Introducing Governance, the Ants Way

Ants solve very complex problems everyday. A few of them include:

  • Conducting comprehensive project management of building large anthills capable of accommodating the whole colony
  • Running sophisticated logistical optimization exercises of finding food for the whole colony day after day
  • Administering a complicated supply chain of anthill maintenance and repair, food storage, and perimeter security per major environment changes (e.g., rain), and constant competition (e.g., other ants)
  • Managing HR – or rather AR, (Ant Resources) – of ~40,000 ants

What’s most striking is that they do all this under conditions of completely decentralized governance!

Ants

In fact, every ant has total operational flexibility to select its own tools, make optimization decisions, and manage its own work. The only guidelines they follow are their direct job responsibilities (e.g., worker, soldier, queen) and the overall goal of the colony.

This type of decentralized governance is what IT today must adopt and embrace to successfully manage cloud-based IT delivery. Business users will need to make IT decisions every day, and there is no way they can run every one of these decisions through IT for architectural approval, procurement for buying authorization, finance for budgeting, etc.

New flexible guidelines must be designed to support end users’ IT decision making. IT will still need to maintain the overall architecture, but it should not, for example, dictate to the end user exactly which server build and OS stack needs to run the user’s email. Procurement will still negotiate deals with cloud providers, but it should not micromanage every end user’s buying decision as long as the decisions comply with the overall goals. And finance will still set the budgets for business units and business users, but it should step away and let users select their own tools within the budget guidelines. Indeed, the enterprise will operate just like a colony of humans, with every worker optimizing his or her IT decisions within the overall company guidelines. Yes, to attain the full benefits of flexibility and agility of the cloud, enterprises need to learn to govern it the ants’ way.

This approach is certainly not without its challenges. While ant colonies have no issues with guidelines enforcement as ants are “compliance hard wired,” we certainly can’t say the same about human IT end users. Hence, IT’s issue will be how to enforce policies while still enabling users to enjoy the benefits of the cloud model. This is a non-trivial challenge for which there are no easy answers…yet.

Evolving Cloud, Evolving Advisory Role | Gaining Altitude in the Cloud

Avid readers of this blog can tell by now that Everest Group is excited to participate and contribute to the market discussion on the impact of the rapidly evolving cloud industry. We get tremendous satisfaction from both the online and in-person conversations our blog topics have generated in the last year and promise to continue to contribute our informed viewpoints with continued enthusiasm.

Enterprise IT leaders we talk with every day find themselves at a crossroads. The cloud revolution is nearing an inflection point, promising to radically transform the way IT services are delivered. At the same time, there is an equally strong “echo chamber” effect in which promises and benefits are refracted through various service provider prisms, creating a significant challenge in separating what’s possible from unhelpful hyperbole. Additionally, the focus in the current market tends to be on the ever-evolving technology upgrades and releases of various cloud components, which leaves most CIOs in the dark when it comes time to try and sell the economic benefits of cloud technology to their key internal stakeholders.

IT organizations have had enough theory and are ready to start working in more practical terms:

  • How do we transform the provision of IT services to our business to meet its needs more effectively?
  • How do we build a strategy to get us there?
  • What does the financial case look like to achieve our desired outcomes?

We’re excited to share the vision of our Next Generation IT Practice with you, because we believe it to be the natural evolution from our current practice of assisting Global 1000 firms drive greater operational efficiency. Our expertise allows us to help transform IT organizations to strengthen both their long-term strategic and economic positions by leveraging the next generation of technologies.

Our vision for this new practice is simple: provide a bridge between strategic direction and technical execution for IT transformation without bias towards the desired end state. We believe this is where the current advisory market falls short and Everest Group can add the most value.

Our Next Generation IT team is successfully able to:

  • Build on existing experience helping large IT clients develop strategies
  • Leverage our breadth of research on the service providers’ strengths and weaknesses
  • Adopt a time-tested methodology to include next-generation technologies
  • Utilize our business case modeling skills to construct a versatile tool for helping assess transformation economics in a way that is unique in the marketplace

We cannot wait to share more details about how our team at Everest Group has helped clients develop a roadmap towards transformation in the coming weeks, so that we can continue to contribute thought leadership in this space.


Learn details about how our Cloud Transformation and Next Generation IT offerings can help your organization achieve the strategic value it’s seeking.

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.

Einstein’s Definition of Insanity and Its Applicability to the Healthcare Solutions Industry | Sherpas in Blue Shirts

Starting with the premise that all providers and all clients in the healthcare industry enter into large, multi-year arrangements with honesty, fairness, and a desire for a successful engagement…why do only a small handful come in on time, on budget, and with measurable outcomes? I think Albert Einstein’s famous statement, “The definition of insanity is doing the same thing over and over and expecting different results,” is, unfortunately, applicable here.

In financial and clinical implementations, ITO/BPO engagements, ADM solutions, clinical transformations, and clinical trial deployments over the past several decades, the providers and clients have been doing essentially the same thing, again and again, and in most cases the engagements have ranged from lackluster to volatile. Yet with all the increasing governmental requirements, major advances in personal and mobile technologies, and demands from patients, customers, physicians and clinicians – and let’s not forget escalating competition – we need to stop the insanity to ensure the problems of the past aren’t continually replicated in the next generation of healthcare solutions.

For healthcare industry improvement or transformation initiatives to succeed, we need methodologies. We need qualified staff to help guide and manage the projects over a multi-year period. And we need to deal with unplanned turnover, inflexible contracts that don’t allow for any change in the client’s strategic direction, ever-shrinking budgets, and the client’s desire to finally have measurable outcomes. So, assuming both sides want to deal in an environment of honesty and candor, and both parties have strong resources, why do we continue to fail? One single word – misalignment.

Misalignment occurs between clients and providers due to differences in objectives, priorities, and performance. For example, if the provider thinks the major objectives are cost and capital expense avoidance, and the client thinks improved service quality, skills and innovation, and time to delivery are the critical success factors, we have misalignment. And the result is relationship tension that can ultimately derail the engagement. Yes, in a perfect world each party knows the other’s objectives. But we don’t live in a perfect world, and so this doesn’t happen often. Combine that issue with the changing landscape the client deals with over a multi-year engagement, e.g., acquisitions, new product offerings, strategic changes in direction, etc., and the relationship can explode quickly. And even if the two parties agree on the business objectives, it does not mean they both give them the same priorities. For example, I know of one particular instance in which the client wanted significant focus on innovation and meeting strategic objectives, while the supplier felt it was doing its job by using low-rate resources. Without understanding these types of gaps, how can we fix the misalignment? We can’t!

We’ve heard similar discussions before, and each fix had a methodology or clever name. But few were implemented, and even fewer were successful. The result is continuation of Einstein’s definition of insanity. As we deal with next generation solutions for the healthcare industry, let’s get sane and change the results by viewing large, complex or strategic engagements from a holistic point of view.

Indian Heritage Providers Are Achieving Differentiation | Sherpas in Blue Shirts

One of my partners recently returned from a conference remarking that he could randomly put any service provider’s logo on any of the collateral being distributed and nobody would notice.  Everyone’s message was essentially the same as their competitors. It is difficult to differentiate among the Indian heritage providers. Or at least it has been. Recently, three of the Tier 1 firms have emerged with highly divergent and (to date) successful differences at the strategic intent level.

Before we look at what these three firms are doing, let’s look at how the maturation of the global services industry is manifesting itself:

  • Clients are becoming progressively thoughtful about which providers they want in their portfolio, and are actively working through portfolio rationalization to achieve that mix
  • New logos are increasingly hard to come by and expensive to acquire; as a result, providers are focusing their efforts on growing business within existing clients – wallet share is king
  • The difference between ITO and BPO providers is blurring, and clients are increasingly looking for a provider that can deliver services across a wide range of areas
  • As client firms mature in their use of labor arbitrage, they are increasingly delegating decision making, giving rise to the purchasing function as a more influential player; this is starting to commoditize the offshore services market and is putting pressure on price
  • Simultaneous to the delegation of decision making, senior client firm executives are increasingly wondering and questioning what they should do next, specifically beyond arbitrage, to increase value.

These dynamics are challenging the Indian heritage Tier 1 providers to evolve their strategies and tactics in order to retain and grow their client bases, as well as secure new deals with a next generation flavor.

So how are three of the biggest addressing these issues per their strategic intent?

TCS’s strategic intent is “flawless execution.” TCS’s clients and the market are increasingly viewing TCS as a superb operator with a well-polished and effective talent management model.  Many view TCS as the leading example of how to deliver consistently high quality work at attractive prices. It invests significantly in becoming its clients’ strategic delivery partner, including focused initiatives to build relevant IP. TCS has been very thoughtful in segmenting the market and organizing its business by vertical industries. The multinational provider it is most similar to is IBM. Both have a large client base, are very deliberate in their strategies, are highly intentional in their investments, are very focused on deep and broad client relationships, and work consistently to identify and nurture them.

Infosys’ strategic intent is being a “transformation partner.”Infosys has invested considerably in building a large and impactful consulting organization in order to combine consulting with delivery to achieve transformation for its clients. That objective is being bolstered by its 3.0 co-creation strategy, which is a move further down the line of transformation. It is achieving many successes, and is considered a formidable player. The ongoing transition of senior leadership at Infosys seems to be well along its path with clear succession planning underway and significant investment to develop the next generation of management. Yet, Infosys is taking a challenging strategic intent route as it is squarely emulating Accenture’s strategy. The transformation hill is steep to climb because of the difficulties involved in combining consulting with delivery. Accenture has done well, but others have struggled to succeed along this path. Infosys’ ability to resolve the key conflicts between consulting and delivery will determine its long-term success.

Cognizant’s strategic intent is superb “client engagement.”Cognizant is simply the best at working with clients on business issues. Its secret sauce is an ability to engage with clients on problems and pull through consulting and delivery services. This is different than Accenture’s and Infosys’ transformation model in that Cognizant focuses on the client relationship and client engagement by working through the suite of problems currently on the client’s plate, as compared to game-changing transformation. Cognizant invests significantly in highly empowered onsite teams, and its delivery and consulting organizations are tuned to be responsive to the client engagement team. This overall model and strategy is quite different than any other Indian or multinational firm, and is achieving significant growth and profitability returns.

Each of these strategic intent approaches appear successful to date, and has moved each of these three firms to a superior level of performance. Indeed, as clients increasingly recognize the clear difference among these players, and other providers follow their lead to secure true differentiation, we will see a new Tier 1 emerge in the Indian heritage provider space.

Simplicity – the Emerging New Normal in IT Consumption | Sherpas in Blue Shirts

Several weeks ago, I took my brand new smart phone to the service center for repair. Even though it’s one of the most advanced and sought after handsets, its performance was horrible. After hours of testing, the technician said the root of the performance problem was that too much complexity and too many features were built into the phone. At that moment I realized that while I had paid a fortune for the phone, I wasn’t aware of 50 percent of its features, 30 percent of its capabilities were useless to me and the 15 percent I really wanted didn’t work! Perhaps I should have bought a simple phone that worked, had the features I needed and was easier to manage.

In a déjà vu type of moment, a week later I attended two large IT service providers’ briefings where the focus was on their ITO transformation strategy. They spoke about various aspects of the IT landscape, yet I couldn’t escape the consistent theme in their discussions… simplicity.

For years the ITO industry has allowed complexity to breed complexity. Many CIOs believed – and many still do – that their businesses were so unique that they needed custom applications and systems. And the outsourcing service provider community played to this belief in order to seal large, complex, customized transformation deals when the reality is that high level of customization wasn’t, and isn’t, necessarily required. Moreover, with highly complex and customized outsourced IT environments, project management, vendor management, execution risks and other issues related to business applications support become highly challenging and extremely costly to develop and maintain.

However, the recession and continuous pressure on internal IT teams to show value are now forcing many CIOs to pick and choose the services they want from their outsourcing provider. In their smart unwillingness to tinker too much with their current IT systems and environments, they are instead increasingly asking for plug and play services, especially those where they can pay by the drink.  Moreover, the general acceptance of the fundamental principles of cloud computing, especially the SaaS model, are also impacting the approach of CIOs towards consumption of simpler, off the shelf IT assets.

Granted, outsourcing providers will need to develop appealing solutions that are modular, standardized and consumed on a pay per use basis. But it is high time for both buyers and providers to open up, see beyond the traditional ways of sourcing IT systems and leverage the power of modularization and productization of services. While this will require a great deal of unlearning, relearning and resetting of current skill sets, it is critical if buyers and providers want to adopt the emerging new normal in IT consumption.

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