Transforming IT: Utility Solutions driven by Global Delivery

Transcription

1 Transforming IT: Utility Solutions driven by Global Delivery Zinnov February, 2010 This report is solely for the use of Zinnov client, Zinnov prospects and Zinnov personnel. No part of it may be circulated, quoted, or reproduced for distribution outside the client organization without prior written approval from Zinnov.

2 Agenda 1 Evolution of Engagement Models 2 Current Trends 3 Next Wave 4 Appendix ( Engagement Models Explained) 2

3 As the IT has evolved from main frames to more recently deployed grid solutions, outsourcing and offshoring have become a key optimization strategies Key Drivers for IT Adoption Key drivers for IT outsourcing Automation Information Sharing Need for Scale Need to Reduce Cost of products Need Wide Variety of Expertise Increasing Complexity Evolution of IT Adoption 1980s 1990s 2000s Key Driver was automating the back office Emphasis was on stability and reliability Automating the front office Emphasis was speed Today, Automate the IT Infrastructure to adapt to every business decision Emphasis on stability, reliability, speed and return on investments. Grid Deployment Personal Client Server Internet Service Centric Management Web Services Business Process Management Mainframe Silos of technology, inflexible to change, and over provisioned Horizontal Architecture, flexible, stable and supply matches demand Source: Canadian CIO s department IT adoption curve, Zinnov Analysis 3

4 In the past 15 years, Offshoring have evolved from simple T&M models to more risk sharing, SLA based Managed Services models Evolution of Engagement Models Complexity of Executing the Model Shared Service Engagement Model Managed Services Engagement Model Time & Material Engagement Model Fixed Price Engagement Model and its Variants 2006-Till Date Outsourcing Maturity 1980 s Till Date The model is the simplest model to enter into an outsourcing engagement and is extremely flexible allowing for change requests and to build domain expertise The model however has high level of client overheads, 1990 s Till Date The fixed price model allows for tighter budget controls and allows to bring about transparency through SLA s The model substantially reduces the management over heads that are incurred However the model requires the project to be well scoped out and it is difficult to make scope changes 2003 Till Date The model is best suited for organizations with seasonal requirements and ensures cost optimization through economies of scale. The model does not ensure stability of resources and there are high over heads to manage the relationship. However, the model does offer the benefits of optimizing budgets and resourcing flexibility. The model has high cost predictability, where quality, productivity and other parameters are measured against SLA s The model offers clear clarity on costs and ROI and encourages efficient management of client resources The model however reduces control of client and makes it difficult to bring in specialized changes This model could also be expensive compared to others promotes vendor sloppiness and lacks accountability Suitable only for short projects U1 8-9 years Source: Interview with 10 top IT service providers, Zinnov Analysis 4

5 Slide 4 U1 Any particular significance? User1, 11/23/2009

6 CIO s whose role is to align IT goals to business goals are tired of T&M models due to ever expanding budgets, poor quality issues and slipping timelines Year 1980 s Today Role Differentiation CIO Role Business Process Managing Engineer Technical Specialist Business Centric ChiefInformation Officer Business Generalist Customer Centric Managing Engineer High level of technical knowledge Chief Information Officer High level of concept knowledge Technology Mainframe centric Network centric, virtual connections Engineering Management Skills Leadership skills, communication skills Networking Centralized limited Many to many access, Linear Knowledge Disconnected Managed Security Physical Physical + Virtual Driven by automation agenda Tracks IEEE, Reads Bytes, attends computer conferences Budgets based on what was wanted and available Driven by share holder value and Business process management Tracks business trends, WSJ, Attends policy and management conferences Budgets based on return on share holder value CIO cannot anticipate Delivery Encourages Sloppiness amongst Service Providers Challenges with T&M Model High Management Over Heads CIO s have to manage overheads Source: Interview with global CIO s, Zinnov Analysis 5

8 Complexities of the solutions and the recent trends in the ICT industry is forcing the IT organizations to relook at their current investment and engagement models a Cloud Computing / SaaS SaaS adoption has crossed the tipping point and is ready for increased corporate adoption. Post 2010, there is going to be a business transformation, SaaS market is expected to reach USD 30 Billion annually As SaaS based solutions are adopted by large corporations and SMB, these solutions is increasingly serviced in global delivery model Mega Trends in Software Industry b Service Oriented Architecture Growth of SOA is driven by a drive to reduce cost using enhanced software automation and by the integration of different processes. Service Oriented Architecture market is expected to touch USD 9.4 billion by 2015 c Convergence of Devices Convergence of various devices is driving future business decisions made by individuals and enterprises. Increasingly mobile devices, thin clients, entertainment systems and computing devices are converging into multifunctional devices Source: Zinnov NASSCOM Product Study, Zinnov Analysis 7

9 Cloud computing & SaaS with its inherent advantages have been brought into the spotlight due to the ongoing recession that forced CIO s optimize costs Worldwide IT Spending Growth, E 10% 8% 7.1% Economic Downturn 6% 4% 4.2% 4.4% 5.5% Cost Pressure 2% 0% 0.5% E 2010E 2011E Cloud/ SaaS Focus Total Cost of Ownership (TCO) Analysis* of SaaS Vs. On-Premise Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 SaaS TCO On-Premise TCO Note: * The analysis is done for a small-medium business with employees and 50 users Source: NASSCOM-IDC; Computer Economics, Zinnov Analysis 8

10 Declining sales for large hardware vendors; Falling margins, low global delivery costs have forced the conversion of large IT services providers to global solutions firms (1/2) New Strategies for Growth Scale in Services Eroding Sales Volumes Eroding Margins Route Challenges faced by hardware vendors Mergers Acquisitions Company Acquisition Value Increasing Manufacturing costs Delayed Replacement cycles 1 2 DELL Perot Systems USD 3.9 Billion XEROX ACS USD 6.4 Billion 3 HP EDS USD 13.9 Billion Source: Zinnov Analysis 9

11 Declining sales for large hardware vendors; Falling margins, low global delivery costs have forced the conversion of large IT services providers to global solutions firms (2/2) Dell Perot Systems Revenues(USD Bn) Xerox ACS Revenues (USD Bn) Dell Services Perot Systems Total Xerox Perot Systems Total Global Suppliers Revenues (USD Bn) Hardware Services IBM Global Services HP Enterprise Services Accenture Capgemini Xerox Global Services (With ACS) Dell (With Perot Systems) Source: Company Annual Reports, Zinnov Analysis 10

12 In addition, changed macro economic conditions and other trends have provided an opportunity to further evolve the existing engagement models 1 Easy Access to Funds Globalservices firms (especially offshore based companies) have huge cash reserves and also easy access to low cost funds to drive expansion strategies. Servicesfirms are using these funds to invest/buy infrastructure assets, build delivery capabilities, acquire clients as they offer high returns over a longer period Supply Side 2 3 Platform Services IP Creation by Vendors IT services firms are looking at economiesof scale to be able to deliver greater value to their clients. The first steps in this direction have been to create platform based services like platform BPO, platforms to enable SaaS enablement for client solutions etc. Global vendors are increasingly creating IP around their services to enable them to offer services to clients at transaction activity level Vendors are also providing the IP to reduce clients time to market or efficiently ramp up capabilities 4 Size of Business As global services firms crossthe USD 30 Billion threshold they are looking at ways to scale to USD Billion one of the efficient ways is to look to optimize end to end stack of hardware to services for large clients Demand Side 1 2 CAPEX Avoidance Process Maturity Post the recession IT organizations are moving towards getting out of none core CAPEX investments and move towards an OPEX model that allows them to manage costs optimally Companies are also exploringopportunities to liquidate their infrastructure investments for conserving cash and to channel investments into business growth Enterprisesacross the board have become increasingly matured to work in a global delivery model where they have limited management overheads and most of IT functions are managed by third parties 3 Movement to cloud in next refresh Organizations are looking to move from desktop based solutions to cloud based solutions to be able to have an IT on a Tap model where they pay per employee or per unit (flexibility to procure on as needed basis). Source: Zinnov Analysis 11

14 These trends all point to the continued emergence of a Utility Solutions model which will greatly leverage low infrastructure costs and global delivery Cost-Value Map Low Client Overheads T&M Managed Services Shared Services Project Based Utility Solutions With the evolution of globalization, the needs of organizations using/evaluating outsourcing is also changing. Organizations are not just looking at cost savings in a single business function but are also looking at cost savings across the board for the their organization (across business functions) Zinnov believes that globalization will be driven by what one can call utility solutions where the CIO organizations will increasingly look to cut down on capital investment and procure goods and services in a pay per use model. This trend will give rise to mega outsourcing service providers who will optimize across infrastructure stacks to provide the benefits to the clients High Low Cost Predictability High Size of bubble indicates the partner preference status Source: Zinnov Analysis 13

15 Imagine a world where the entire IT assets of the organization are owned and managed by a third party and you pay as you go, that s the world of Utility Solutions Additional Services L1, L2, L3 Support Imagine all this owned and managed by partner User Interface Vendor Application Layer Security CIO Organization transforms to strategic managing core IT Strategy linkages to business goals Cloud/ SaaS Driven Global Delivery Model Databases Telecom Networking End users: Employees of the organization, company pay per employee, per unit, per CPU, per month, per transaction etc Storage Server Basic Hardware 14

16 Utility solutions will get popular as companies stop CAPEX investments or divest existing investments, there are trends indicating the movement towards this model 1 Adoption of SaaS and Cloud Computing The adoption of open and private clouds and the consolidation of infrastructure is an early sign that firms looking to cut costs are looking to bring down their capex costs and rid them selves of unwanted IT assets 2 Vendor Acquiring Client Assets Vendors are proactively working with clients to acquire their assets in return for long term contracts which is another key indicator of utility solutions being the next evolution 3 Hardware players moving to services Large hardware vendors like IBM, Cisco,HPandDELLwiththeirnew services capabilities can offer clients the end to end stack and services across the business functions In most companies less than 20% of the systems provide competitive edge to their businesses a The model allows clients to procure services on pay per use basis Pay per Use Major Advantages with this model No Capex to Client Clients can avoid making CAPEX investments unless it is core to business Additional Internal Bandwidth Created b Opportunity to sell infrastructure assets Smaller vendors might take a collaborative/partner approach to offer these benefits to clients d Clients can divest unwanted infrastructure /resources to vendor Internal human capital can be freed for other value added activities c Model is yet to fully mature for IT organizations (internal & external) Pricing has not been standardized for various functions Challenges with the model The contract terms will be much longer Flexibility will be compromised 15

17 Though this model is not suitable for all organizations, Utility Solutions model will mature to enable the corporations to leverage the cost and efficiency benefits. The biggest driver for the model is likely to be the desire of large Global Services firms to continue to grow by offering the entire portfolio of offerings from hardware to software to services Sustain Standardize Transfer IT Strategy of Global firms Clients will sustain existing IT Infrastructure Transition of fixed bids with dedicated teams to managed services Move to Cloud Computing Standardize applications and various infrastructure stacks for economies of scale internally Move as many processes as possible to managed services Transfer IT / Sell IT assets to vendors and focus on core business Align IT strategy to core business by moving to more flexible pay per use utility solutions model Drivers Reduce new CAPEX investment next to Nil Consolidate IT vagaries in global organizations Manage IT on Tap allocation to users Drive to move to OPEX mode Optimize vendor partnerships Align IT Strategy to business goals. 16

18 Emergence and acceptance of Utility Solutions will have a major impact on all key stakeholders in the IT outsourcing eco-system Biggest Impact On: Indian IT Service Providers Impact Parameter Global Services Firms Governments/ Regulation/ Policy a. Business Model b. Revenue Model A B C D Strategy People Infrastructure Go-To-Market a. Hiring of critical & Processes resources such as product managers, a. Clear roadmap for architects and other scalability and specialized skills performance of b. A flatter and effective technology organization b. Feature and use case structure definition c. Nurturing talent with c. Knowledge/ Domain product/solutions transfer from existing acumen customers or services experts d. Risk/ Change Mgmt c. Channel Strategies and Support Models d. Partner strategies e. Investment strategies Effective Governance Strategy a. Leveraging channel partners b. Higher spend on sales and marketing c. Creating a community to include customers, partners and solution providers d. Accountability, Risk/Reward approach 17

20 Time & Material Model Advantages with T&M Model Simplicity Flexibility Ease of Evolution The T&M model is famed for its simplicity that allows firms to easily plan their outsourcing initiatives. This model makes it easy to integrate teams with onsite teams The T&M model offers the flexibility to accommodate change in scope and is bestsuitedwhenthescopeisopen endedandcanevolveovertime The T&M model because of its inherent advantages offers an ease of evolution with respect to creation of teams, Offshoring relationships and projectswhichisamajorusp. Challenges with T&M Cost Allocation is a hassle Client has to manage overheads High over heads and budget management costs Not incentive to optimize Very Limited accountability Trends Most T&M models offered clients an option to either work on a pyramid structured rate card where the billing rates varied on experience or offered a blended billing rate of resources Another trend that evolved later on was of using a blended team based rate card for the companies looking at outsourcing 19

21 Fixed Price Model Tighter Control on Budgets Benefits of the Model In a T&Mmodel there isn t too much control on budget in case of time over runs. However a fixed price engagement model offers tighter control on budgets Key Challenges with the model Scope of the engagement has to be clearly defined Low Management Overheads UnlikeintheT&M,in afixedpriceengagementmodeltheoverheadsare much lower as the service provider is forced to manage the overheads and ensure delivery Continuity tends to get lost as people move on after projects Trends Transparency through SLA s Fixed price projects are driven by stringent SLA s and thus ensure that quality, time and other minimum project expectations are met and there is transparency through the entire process Costfor fixed price projects are calculated using two techniques, one is a bottoms up approach and the other is a top down estimation approach Scope changes are hard to manage with change orders and budget discussions Possible surprises with quality and timelines if the vendor works in a black box mode Not a oft used model for large projects 20

22 Shared Services Model Cost optimization through economies of scale Use of the resources as needed (mostly pre-planned) Beneficial for companies with seasonal requirements Ability to optimize the budgets as required People are not dedicated (leveraged from a pool of available personnel Inability to able to build domain expertise (impacts productivity optimization) Team integration could be a challenge Ramp up and Knowledge Transfer could be an issue (depending on expertise) Extensive client overheads in managing the relationship Data security, confidentiality and compliance issues In a shared services, people are not dedicated a pool of talent is available for a client to choose from which along with other resources is shared amongst multiple clients Pyramid rate structure (based on experience/skill) Blended rate per resource Dedicated team and extended team rate structure 21

23 Managed Services Model 1 High Cost Predictability Challenges with the model 6 2 Process Maturity advantages brought by vendor Advantages of Managed Services Model No Management Overheads 5 3 Clear Clarity on costs and ROI Quality, Reliability and cost of services measured through SLA s Lack of Control Specialized needs is a challenge Relatively higher cost of service Industry Compliance and security concerns need to be addressed Efficient Management of client resources 4 Vendor Viability is a concern Trends Most managed services models offer clients an option to either work on a pyramid structured rate card where the billing rates varied on experience or offered a blended billing rate of resources Another trend that evolved later on was of using a blended team based rate card for the MNC s looking at outsourcing 22

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