Nonlinear Thinking

The Only Constant is Change: Addendum

When it rains, it pours, or so it seems.  On the heels of a recent Forrester report on the future of IT services which I wrote about here, management consultant A.T. Kearney weighs in with their own, very similar view on that future.  This recent op-ed in Businessweek by Arjun Sethi and Olivier Aries sees most of the same external drivers highlighted in the Forrester report  but offers a different and altogether more interesting futurescape for IT services.

“ In the next five years outsourcing as we know it will disappear.  The legion of Indian service providers will be sidelined or absorbed. U.S. and European companies that pioneered this corner of the high tech industry will suffer similar fates if they don't wake up.  Who will emerge as the new leaders?  Google and Amazon.com , brands that we associate with search and retail, will become better known for outsourcing."

Longtime readers of this blog will know that I have been harping on the threat that Amazon and Google, in particular, present to the old guard of IT service providers as I have written about it here, here and here. SaaS/cloud technologies, under any name, have been a game changing disruptive force for the past 10 years. When IBM acquired Corio five years ago, that should have, de facto, been some kind of canary in the coal mine.

In their commentary Sethi and Aries also conjure up a vision of what the new outsourcing model will look like.

“In the new model, outsourcers provide standard, off-the-shelf software on a "pay-per-drink" basis. For that, they will leverage so-called cloud technology, which lets users tap into computing power available via the Internet, rather than on a desktop or computer server housed locally. The appeal is scale, flexibility, and efficiency: Thousands of server computers can attack a task more quickly—and cheaply—or handle a patchwork quilt of different technologies that companies use to run their businesses. This approach will let businesses outsource entire tasks such as the tracking of inventory, paying only for the information accessed or used.”

The commentary also mentions who might be the losers in this new model (mid-tier Indian outsourcers), possible winners (SAP, Oracle, Microsoft, Salesforce), and a several major players that are not moving fast enough (Accenture, Xerox, Dell, HP).  

I am guessing that this commentary and the Forrester report will be far from the last discussions regarding the changing IT services landscape.  I would also imagine that we will see more and more discussion of the death of the internal IT department beyond the many books and reports already written.  Fasten your seatbelts.

The Only Constant is Change

"To improve is to change.  To be perfect is to change often." - Winston Churchill

Forrester has a new report out discussing the dynamic evolution that traditional IT services providers are going to experience over the next several years.  This analysis is very timely and it addresses a combination of external drivers that I have been writing and speaking about for the past several years.  The authors, John C. McCarthy and Pascal Matzke have done a masterful job in codifying the thinking around these externalities and their impact to the existing IT service provider business model. This excerpt from the executive summary delivers the high-level on the emerging metamorphosis.  

“The tech services market is about to undergo a massive transformation that will call traditional provider business models into question. Four factors will combine to dramatically change the dynamics, economics, and competitive landscape of IT services over the next three to four years: 1) the “restructuring economy”; 2) innovation moving to the edge of the enterprise; 3) the redefining of buying and governance dynamics in accounts; and 4) “as-a-service” becoming the norm.”

For those that have been engaged in surveying the technology market landscape over the past decade, the conclusions McCarthy/Matzke draw from their analysis is no surprise.  Unfortunately, few of those individuals appear to actually work for the major players in global tech services because those firms have made few, if any, alterations to the business model they have employed for the past 15 years.  As innovation in IT moved from the data center to the business units, on-demand/as-a-service and other cloud-based solutions gained traction, and social/mobile activity emerged as integral parts of the technology platform, Nero fiddled.

And the hits just keep coming.  The Forrester report offers a forecast of why and how the IT services model of today will cease to exist by 2020.  

• Forrester sees at least nine new services entering the market as cloud/SaaS redefine the services business.
• Selective sourcing and utility pricing models broaden their footprints.
• Digital natives and the advance of business (unit) buyers push traditional IT into the background.
• Standardization in cloud/SaaS solutions create pricing transparency and profound pricing pressure on traditional service models.
• Cloud/SaaS drive increasing standardization and process industrialization of services leading to delivery models based on solution partner ecosystems.

From my perspective, the most provocative item in the report is the following table that contrasts the top ten service providers in 2010 with a forecast of what the top 10 will look like in 2020.

 

Looks like a whole lotta growth, death and consolidation in the sector.  Ten years may seem like a lot of time for the current top ten to embrace and adapt to this new environment, but the truth is that this evolution has been ongoing for at least five years.  Too many of the incumbents lack the cultural and operational survival instincts to revolutionize their business models.  Some of the logos we have come to recognize in the global tech services space have already vanished.  It will be interesting to watch how this all plays out over the next decade.

Crowdsourcing for Innovation

One of the key challenges faced by almost every middle market enterprise is that of continuous innovation.  Whether we refer to business model innovation, product and/or service innovation, marketing/selling innovation or any other process, the ability to achieve real innovation rests on an almost insurmountable need to invest human, financial and, sometimes, structural capital that middle market enterprises generally don’t possess. But, there is a way.

The emerging process of “crowdsourcing” provides an avenue for creativity and innovation by tapping the power of the Internet and social media. According to Wikipedia, “crowdsourcing is a neologism for the act of taking tasks traditionally performed by an employee or contractor, and outsourcing them to a group of people or community, through an "open call" to a large group of people (a crowd) asking for contributions.” The community that sprang up around the development of Linux is a benchmark example of the success of crowdsourcing. The process of crowdsourcing is viable for any number and genre of tasks that might benefit from a varied and populous creative resource.  This includes developing new technologies, designing new products or analyzing huge amounts of data/information. Crowdsourcing can shorten time to market for new products, uncover ways to cut costs or improve service levels, and heighten market success for new products or enhancements.

The global economy remains challenging for businesses of all sizes, but particularly for those in the SMB market.  The notion of leveraging Web 2.0 technologies to harness the potential of tens or hundreds of thousands of talented and knowledgeable individuals in a forum for mass collaboration is the essence of crowdsourcing.  While the challenges may be local, the solutions could very well be global and make the difference for middle market firms looking for sustainable channel for competitive differentiation.

Critical to success in this emerging model is precise articulation of the objective.  Achieving that, companies can then access thousands of people possessing design, engineering, R & D and promotional skills that are simply not available to firms that are reticent to staff up in the current environment.  Crowdsourcing is not risk-free.  Participants are not employees and, thus, are not subject to enterprises’ established policies, procedures and controls.  That may be a small price to pay to access critical competencies in a cost-effective and expeditious manner.

The Changing World of Infrastructure Outsourcing

In much the same way that application outsourcing is being redefined by the combination of offshoring, service-oriented architecture, and Software-as-a-service (SaaS), the delivery model for infrastructure outsourcing is challenged by a number of external drivers that will fundamentally alter it.  The convergence of the value propositions for the traditional global providers with those of the emerging offshore suppliers, a maturing remote infrastructure management delivery model (RIMO), and rapid growth in labor arbitrage by traditional suppliers is driving consideration of what the optimal platform for infrastructure outsourcing should be going forward.  

According to Ross Tisnovsky, Vice President of ITO Research at Everest Research Institute, and Senior Analyst Rod Bourgeois of Sanford C. Bernstein & Co, offshore RIMO suppliers still hold a minor share of the IO market; nonetheless, there are increasing signs of the sophistication of RIMO leading to a growing convergence of the models of infrastructure delivery. The trend poses a challenge for buyers who need to understand the complexities of the offerings and suppliers who must refine their strategies, said Tisnovsky.

"The convergence of IO models is driving offshore suppliers to one of three choices," said Tisnovsky. "They can continue to adopt key elements of the IMS model, build added value to their RIMO offering or simply continue to focus on classical RIMO services that rely on labor savings as a key driver. On the other hand, traditional IO suppliers are confronted with a simpler, but not less challenging option: focus on end-to-end infrastructure deals that avoid direct competition or develop variations of a converged RIMO/IMS offering with an active role of labor arbitrage."

Evidence of convergence can be seen as offshore suppliers of remote management services are not limiting themselves anymore to targeting smaller companies with a basic labor arbitrage value proposition, says Bourgeois. Large buyers (above US$10 billion in revenue) now account for 55 percent of the deals signed by offshore suppliers. Although the majority of offshore deals are still based on delivering remote services offshore, RIMO suppliers held 24 percent of more traditional 'IMS-like' deals in 2007 compared to only five percent in 2004.

Ross Tisnovsky and Rod bourgeois will be conducting a Webinar on July 10th on this topic.  You can register for it here.

The 2008 Black Book of Outsourcing

Doug Brown and Scott Wilson are back with their 2008 edition of The Black Book of Outsourcing, a document that has traditionally been a flashpoint for discourse, debate and diatribes from those service providers that aren’t “comfortable” with their ranking.

The 2008 list of the Top 50 best managed global outsourcing providers witnessed another significant reordering.  The providers in this year’s top 10 are:

1. HP
2. Perot Systems
3. CSC
4. Unisys
5. EDS
6. Wipro
7. Satyam
8. Genpact
9. ADP
10. Ciber

HP gained the top spot prior to the merger with EDS, but with both in the top 5 this year, the announced combination of the two powerhouses looks even stronger.  Also interesting is the showing of the India pure plays, with three in the top 8, all of whom are focused on building their presence in North America.  

Notable declines in the rankings from 2007 include:

• Capgemini (from 2 to 12)
• WNS Global (3 to 26)
• ACS (4 to 31)
• SAP (7 to 46)
• IBM Global Services (14 to 48)

Surveying to support this kind of analysis and reporting is always difficult and fraught with peril, but Doug and Scott do a nice job pulling it all together.  For those so inclined, you can view the complete report here.

I imagine I will have additional thoughts on this once I have time to digest the report.

Conventional Wisdom

Traditionally, the outsourcing service provider community has viewed periods of economic distress, such as we are experiencing now, as an opportune time to initiate the outsourcing discussion with C-level executives in their targeted prospects. However, that hypothesis was tested and validated during previous downturns based on an outsourcing value proposition that was almost completely about cost savings and the liberation of capital budget to invest in other parts of the business.

As we have moved from the first to the second and, now, the third generation of outsourcing, the theme of the outsourcing conversations with many, if not the majority, of prospective customers is more often about innovation and more complex qualitative value propositions than about saving 10% on IT spend.

If the value sought by customers in entertaining an outsourcing initiative, at any scale or scope, is truly shifting from purely cost-based to something more ambitious, will the conventional wisdom hold during the current economic downturn?

The early returns, based on industry performance over the past six months, seem to indicate demand for outsourcing solutions during a downturn is perhaps agnostic with respect to any particular value proposition. If this challenging economic environment becomes protracted, it will be interesting so see if demand remains strong, what the structure and focus of the demand is in terms of processes being outsourced, and which decision criteria drive the plurality of new outsourcing contracts.

Trends - Outsourcing

Findings from the Q1 TPI Index indicates that trends emerging in the last half of 2007 in the Americas are firming up in 2008.  While the health of the market globally is strong, the market in the Americas appears to be exhibiting signs of a re-orientation.  Key findings from the Index:

• Americas contracts are smaller and shorter in duration ( less than 5 years for first time ever)
• Staff augmentation continues to obviate some outsourcing opportunities
• BPO continues to be stronger than ITO
• Mega deals and mega relationships appear to be on the wane in the Americas
• Strong increase in "new scope added" to existing contracts
• EMEA now accounts for more total contract value than the Americas
• Overall BPO strength is being driven by strength in non-traditional services including facilities management, document management and supply chain/procurement.
• 50 different service providers won $25+ million awards in Q1

While one quarter's results in no way define a new market structure, it does appear that a combination of competitive and technological drivers are beginning to impact the outsourcing market in the Americas.