Tag: remote infrastructure management outsourcing

Expanding the Wings of RIMO | Sherpas in Blue Shirts

For the past few decades, Infrastructure Outsourcing (IO) was a proverbial elephant in the outsourcing room – huge deals, led primarily by multinational corporations (MNCs) and so capital and hardware intensive that some would beat the revenues of some medium-size businesses. At the turn of the 21st century, most non-MNC service providers, especially those based in India, did not even have Infrastructure Management Services (IMS) as a separate business line. Investments required for traditional IO were massive, and none of these providers had the capacity to manage the scale. Only application development & maintenance (ADM) had the scope, size and convenience to suit the global delivery model that the offshore providers championed.

However, as it turned out, IO was too big a piece of cake to cater to the appetite of just the MNCs, and soon offshore providers, cloud players and other boutique IO firms (like IPsoft) arrived on the scene with a commitment to stay in the marketplace. Soon thereafter, with the advent of next-generational concepts such as Remote Infrastructure Management Outsourcing (RIMO), cloud and consumerization, IO achieved some of that nimble-footedness we have come to associate only with ADM.

More buyers, especially the large ones, started to explore the scope-breakdown model that RIMO offered. The huge size and scope of traditional IO required little buyer focus on the nuances of their outsourcing strategy. RIMO provided the buyers with an option to focus decision making not only on opportunity costs but also on strategic choices, i.e., whether and what aspects of infrastructure to outsource. Though traditional IO continued to retain major share of the IO market, RIMO steadily supplanted itself as a viable option (see below).

Infrastructure Outsourcing Market Size for MNCs

While RIMO continues to be small as compared to traditional IO, it is a model that traditional IO providers can ignore only at their peril. Astra Zeneca’s recent replacement of IBM with HCL Technologies as its provider of data center hosting and migration is a case in point. Offshore providers may indeed be leveraging RIMO to enter the space dominated by MNCs for so long.

However, this is not a David vs. Goliath story. The IO market is witnessing numerous such evolutions, not only because of what providers are doing (e.g., RIMO and cloud) but also because of what buyers are demanding. The following illustration only partially exhibits the incredibly interesting forces currently influencing the IO market. How the balance tilts will be determined by the innovations that providers bring to the table to align with the growing strategic focus that buyers now have on IO.

Infrastructure Outsourcing Demand and Supply

Want to know how this story pans out? We’ve covered it in our latest research report on RIMO: Expanding the Wings of RIMO.

We would also love to hear your comments on what you think of RIMO and the related trends.

Wipro to Sell Infocrossing’s Data Centers – About Time! | Sherpas in Blue Shirts

The news media a couple of days ago reported – not entirely unexpectedly – that Wipro is in talks to sell the U.S.-based data center assets it acquired when it purchased Infocrossing for US$600 million in 2007. Interestingly, the business was referred to as “non-core.”

The message the acquisition at that time sent to the market was that buyers are more comfortable in outsourcing end-to-end infrastructure to providers with their own data centers.

But the infrastructure outsourcing (IO) market has changed quite a bit in the past four years. Indeed, our Decline of Traditional Infrastructure Outsourcing research highlights the challenges in traditional IO and discusses the fundamental shift wherein newer and nimbler models such as RIMO and other next generation infrastructure services are outpacing and outsmarting the conventional IO strategy. With this news, it appears Wipro’s management agrees that the dynamics of IO have changed and that it has become largely immaterial whether or not offshore providers own a data center. And coupled with industry developments in which Indian IT providers are partnering with local data center providers to win IO deals against MNCs, Wipro seems to understand the broader strategic fit of these assets.

Other Everest Group research (e.g., Remote Infrastructure Management – “RIMO Strategy – Stick to the Basics, but Fine-tune Too”) has emphasized that Indian providers should focus on their core competencies of simpler engagements, global sourcing, resource management, flexibility, and asset-light strategy as the core of their IO services. This is not to say they should not move up the value ladder, just that they should not fundamentally alter the DNA of their infrastructure business.

Will this change the basic nature of the outsourcing deals in which Wipro can participate? Not really. Wipro saw early gains leveraging Infocrossing and, subsequently, carved out its place among traditional IO providers. After exploiting Infocrossing’s potential in traditional IO by providing integrated infrastructure services, Wipro is divesting out of the non-core assets, and that makes real sense. It appears Wipro has realized that the value proposition of Indian infrastructure service providers is different from that of typical MNCs and, therefore, is realigning its strategy.

While it does impact its business in terms of offering large end-to-end complex IO deals, we need to be careful in generalizing this as a hindrance toward its growth. Indian providers should walk away from deals that require them to perform tasks that are not in sync with their core DNA, rather than attempt a dangerous straddling strategy. Therefore, although Wipro may no longer be willing to offer hosted IO, we believe it is better off focusing on typical offshore infrastructure offerings augmented with its integrated infrastructure services through Infocrossing.

Will this impact Wipro’s cloud play? Not really. Most of the Indian providers are targeting cloud IT service/ orchestration/platform BPO to drive their cloud revenue than offering their own, in-house hosted cloud solutions. Moreover, if Wipro plans to develop its own data centers specifically for in-house cloud solutions, nothing stops it from doing so (e.g., Infosys earlier offered its SaaS-based iEngage platform through partner data centers and is now offering the solution in its own data centers as well).

Overall, divesting Infocrossing’s non-core assets could be a great help to Wipro, as the growth of its infrastructure business has lagged its Indian peers. We can count on Wipro’s management to ensure that the strategic advantage Infocrossing brings, especially in key verticals, such as healthcare, will continue. This will make more management and operational bandwidth available to focus on the core capabilities needed in infrastructure services that are fine-tuned with the general strengths of Indian infrastructure service providers.

HP’s Strategic Decisions – What’s the Next Shoe to Drop? | Gaining Altitude in the Cloud

In 1729, Anglo-Irish satirist, essayist, and political pamphleteer Jonathan Swift penned a satirical paper suggesting that to prevent the children of poor people in Ireland from being a burden to their parents or country, and to make them beneficial to the public, the Irish should eat their own children. Driving toward services leadership may require HP to make a similarly tough (yet certainly less ghoulish) choice – is it time to for HP to accelerate the next generation progress of its service business by actively cannibalizing the traditional IT infrastructure outsourcing business?

The IT infrastructure outsourcing market has already moved through a state of slow to zero growth into a phase of contraction.

ITO Market

The primary force disrupting this market has been the growth of the remote infrastructure management outsourcing (RIMO) model, which has effectively replaced traditional IT infrastructure outsourcing (ITO) contracts with a more flexible and cost effective alternative, resulting in services that generate as little as 25 percent of providers’ ITO revenue. (To clarify why providers only capture 25 percent of the revenue… with RIMO offerings, hardware, software, and data center costs are retained by the customer.) This disruptive trend may accelerate rapidly as it combines with the emerging forces of next generation data centers and cloud computing.

Based on HP’s recent bold strategic decisions around its non-performing businesses including PCs, TouchPad platform, and WebOS software, one wonders if it will also take a page from Swift’s proposal in setting direction for its services business. Doing so could enable it to accelerate its positioning as a next generation IT leader by actively eating its legacy customer base by rapidly driving cloud and other next generation IT services into it. This would likely generate significantly higher profit margins but result in lower overall revenue levels. So why should HP contemplate such a painful move? In short, if it doesn’t, someone else will! In fact, reports are that IBM is already snacking within its customer base, significantly expanding its next generation penetration while keeping a close eye on sustaining/growing its profit pool. Additionally, some Indian service providers have specific offerings targeted precisely at replacing legacy infrastructure contracts with more agile RIMO relationships.

As the Irish would have found had they followed Swift’s satirical advice, HP will find this move extremely painful and extremely unpopular in some quarters (e.g., Wall Street). True it will find solace in higher margins of these next generation offerings, which in many instances may be two to three times higher than its current low margins, and enjoy higher growth (albeit from a much smaller base). But this will offer scant relief from the real and emotional pain of absorbing significant stranded costs while replacing each dollar of “traditional” revenue with as little as 25¢ to 50¢ on the dollar of next generation services revenue.

I read the recent announcements about HP’s strategy as increasing the probability that the company will take such bold actions. It seems willing to take strong and decisive actions such as shuttering its WebOS business, TouchPads, and phones, as well as spinning off its underperforming PC business…so why leave its services business out of the mix?

The Changing Role of IT Asset Ownership in Next Generation Global Sourcing | Sherpas in Blue Shirts

Achieving the benefits of infrastructure outsourcing used to require the client transfer IT asset ownership to its service provider. The transfer provided not only a one-time cash infusion to the buyer, but also an increase in return on assets (ROA) due to the reduction of its asset base. By negotiating the costs of assets into the contract, the client could also ensure a predictable cost stream over the contract term. The asset transfer also amplified many of the operational benefits of outsourcing transactions, as the service provider possessed the scale and technology management expertise to drive ongoing improvements in operating costs and efficiency.

However, over time, most of these benefits have become achievable without asset ownership transfer. The key contributing factors include the emergence of third-party financing alternatives, remote infrastructure management tools and the introduction of server virtualization technology. A third party lease-back arrangement allows the buyer to eliminate the up-front investment without relinquishing control of the asset base. Most operational efficiencies can now be achieved through remotely led efforts. And the increase in utilization enabled by virtualization eliminates, to some extent, the scale advantage that was traditionally an advantage for a transaction involving transfer of asset ownership to the provider.

Additionally, pending changes in accounting rules will eliminate the advantage of improved ROA that could previously be achieved by either a sale or a sale/leaseback transaction. Current U.S. GAAP does allow ROA benefit if the outsourcing arrangement can be classified as an operating lease. But in August 2010, the International Accounting Standards Board (IASB) and the U.S. Financial Accounting Standards Board (FASB) published a joint exposure draft for public comment that, among other changes, would require that all leases be reflected on the balance sheet of lessees and lessors. In March 2011, the joint boards agreed to several changes to the exposure draft but did not change the requirement to record all leases on the balance sheet. However, I anticipate that in the future all lease arrangements will be required to be reflected on the lessees’ balance sheet, including assets transferred from the client and assets procured by the supplier to provide services that fall within the scope of the lease arrangement. On the other hand, the rules, if changed, will not apply to cases in which the client continues to own the assets, even if the service provider controls and operates them. Ala, ROA benefit from asset ownership transfer is eliminated.

Moreover, recent statistics show an accelerated movement toward adoption of an asset light model in which the client either retains ownership of its assets or engages a third party for a sale/leaseback transaction. Everest Group recently published a research study that found service provider asset ownership in high-value infrastructure outsourcing deals declined from 86 percent in 2007 to 15 percent by 2009. Server virtualization technology and Remote Infrastructure Management Outsourcing (RIMO) versus traditional infrastructure outsourcing will gain even more momentum as the offshore players continue to aggressively expand their market share in this sector.

Additional trends observed by the Everest Group research that support and correspond to this change in business model include a reduction in both term length and annual contract value for infrastructure outsourcing transactions. By 2009, the average term had declined to 4.2 years for traditional tier-one providers and to 3 years for offshore providers. And although at least partially due to the recession, both offshore and traditional service providers saw their deal size reduced by more than half in 2009.

There will always be some segment of the market that continues to prefer traditional data center outsourcing and application hosting models. But I believe that the trend toward next generation models involving RIMO or infrastructure managed services is a long-term phenomena. Although this model results in transactions with lower total contract values, I believe it provides better long-term alignment of client interests and provider incentives. Clients often find it beneficial to retain assets due to the inherent flexibility, control and benefits of scale that it enables. And service providers are able to simultaneously reduce their capital outlays and improve their ROA. Given the trend toward shorter deal terms, this benefit takes on even greater importance.

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