The Reckoning for old IT service and outsourcing Firms

Brian Sommer Profile picture for user brianssommer January 1, 2015
IT service firms may be in for a tough slog the next few years – 2015 may be when we really start seeing the pain. The biggest firms could be in for the roughest adjustments.

The biggest IT services and outsourcing firms could be in for the roughest adjustments they've seen in years. They will almost certainly have to shed data centers and possibly thousands of workers. Why is this shift occurring and why now?

There are three major forces undergoing change today: software buyers, software vendors and IT in general. Let’s look at each in detail.

End of the Industrial IT era

Todays market - Sommer
The Industrial Age was not a pretty sight. Yes, it enabled great leaps forward in productivity and efficiency. It made thousands of products more cost effective to produce and purchase. During the Industrial Age, powerful steam and electric powered devices could assume the work of people especially where the work was potentially dangerous, required lots of exertion or was hugely repetitive.

The Industrial Age of IT wasn’t pretty either. Remember punch cards, green screens, etc.? Industrial IT brought another wave of productivity and process improvements to businesses. The cost of many firm’s back office functions fell from 4% of total revenues to under 1%. The Industrial IT Age helped drive down costs, improve business results, etc.

But the firms that used Industrial IT tools had a lot of baggage. These firms had their own data centers, their own bespoke or on-premises application software, etc. And, these firms had to have staff to patch and repair this stuff on a daily basis. So, instead of boilers, water wheels and electric generation plants of the Industrial Age, Industrial IT Age firms had a whole infrastructure dedicated to this on-premises IT plant and equipment.

Integrators and outsourcers saw this Industrial IT world as an opportunity to add some incremental value to these firms. Their responses to this market were predictable and frequently mimicked from one firm to the next. These firms saw Industrial IT as a means to reducing costs a bit more so they deployed labor arbitrage mechanisms to aid firms in transferring key IT systems and roles to lower cost countries. Integrators and outsourcers didn’t change the Industrial IT landscape except to move the data centers,, and to potentially save clients a little money in the process.

The integrators of the last few decades did not define the IT Industrial Age – they only existed to add some incremental value to the space. Some brought a smidgeon of process re-engineering, virtualization and other value-added things to the table but these were not transformational improvements for most clients. This was incrementalism and no amount of integrators shouting the word “Transformational” is going to change that. Why? Because the really transformational change was the introduction of multi-tenant clouds – and – the integrators had nothing to do with that change.

What clients want today

In dustrialization - Sommer
Software buyers have fundamentally changed and the arrival of cloud solutions will hasten this change.

Software buyers want to be rid of IT debt. That’s the nasty thing that keeps accumulating every time a software user defers an upgrade or maintenance activity. Multi-tenancy in cloud solutions is killing that.

Software buyers want to be out of the software game – out, done, finished. They don’t just want multi-tenant solutions (where the software vendor applies upgrades for the customer). They also want to be rid of the regression testing of integrations and interfaces every time the cloud vendor issues a new release. This is the hallmark of new age integrator OneSource Virtual. It’s why they have done almost half of the Workday implementations out there.

Software buyers want integrators to connect more and more of their new cloud solutions to other cloud solutions. They don’t want an integrator who does just one-time, basic wiring work. And integrators that can try to connect the new cloud apps to old school on-premises aren’t really that relevant either. That’s commodity stuff. No, software buyers want someone like Appirio which not only knows cloud brokerage services but can design radically new, mashed-up combo cloud apps. This is why Appirio is so steeped in mashups involving products from cloud leaders Workday, Salesforce and Google.

More and more software buyers no longer want to run their own data centers and they really don’t want to be in the application maintenance business either. Just like the Industrial Age firms weaned themselves off of their own power generation sources (and used a common electrical grid), businesses no longer see the value in having their own massive data centers or patching code. Check this from Quartz:

Today the cloud market has many players. Yet if Amazon’s entire public cloud were a single computer, it would have five times more capacity than those of its next biggest 14 competitors—including Google—combined.

Software buyers expect commodity-priced large scale clouds. Proprietary hardware and platform software based clouds are premium-priced products that don’t add much, if any, incremental value. To the buyer, they’re extravagances that should be avoided. Few, if any, software companies or software buyers can match the economies of scale of Amazon Web Services. Likewise, software buyers don’t want or necessarily need an integrator to host or provide an MSP version of a cloud software solution. Software buyers expect the solution to be on the lowest possible cost cloud environment. Labor arbitrage is not the answer here: scale, commodity hardware and open source tools are the answer.

Cloud solutions – not a deployment choice but the end of Industrial IT Age

New benefits - Sommer

What would happen if Napoleon’s army suddenly found itself up against a modern mechanized army complete with modern weapons, cruise missiles, jet air support, etc.? It wouldn’t be pretty. Yet, this is how some integrators and outsourcers are approaching the post-Industrial IT age. They still want to use their Industrial IT age tools, methods, process designs, approaches and personnel in a radically changed IT world.

It won’t work. Bringing all that old baggage to the cloud world is like bringing a six-gun to a nuclear war. Those are the wrong weapons for the fight.

Listen to an integrator try to pitch themselves to a cloud vendor. It’s pretty jarring. The integrator will describe all the old-school ‘differentiators’ they possess and yet few of these are even relevant anymore. What these integrators don’t get is that cloud vendors don’t want traditional integrators to implement their products.

Software vendors changed too

Software vendors want a different kind of integrator, too. They want firms that:

  • Bring a whole new (not re-packaged) set of value creators to the mix
  • Possess a huge pool of talented/seasoned cloud professionals. Old Cobol-trained, on-premises skills are not relevant to them
  • Build deep vertical or horizontal extension modules via the vendor’s PaaS (platform as a service)
  • Create huge opportunities for the vendor (not vice versa)
  • Enhance (not detract from) the vendor’s brand

When I spoke with the CTO of a major cloud vendor the other day, I asked him if he’d like to have a meeting with a major outsourcer’s CTO. He wasn’t interested as he didn’t see them as being particularly relevant. The outsourcer, in this CTO’s opinion, is still dealing with older package software, dealing with traditional data types and a user of a bunch of proprietary systems software products.

The cloud vendor’s CTO sees value in meeting with the CTO’s of his peers: Google, Twitter, eBay, Amazon, etc. He likes sharing insights with people who are dealing with massive, big data. He wants to know who has found a particularly effective open source tool that solves some critical cloud issue (e.g., security, in-memory loading, multi-threading, etc.). That conversation was an eye-opener as it showed how irrelevant the outsourcing technology and technology knowledge might actually be.

Can an integrator/outsourcer be relevant, again?

Restructure - Sommer
Marketers will tell you that words like ‘quality’, ‘value’ and ‘low price’ are so overused that most buyers tune them out. Buyers assume that if you had inferior products, you’d have been run out of business long ago. Likewise, if your products were ridiculously overpriced, you’d have no business either. But it’s rare to find the integrator or outsourcer who doesn’t automatically go for those old services’ marketing chestnuts – no matter how ineffectual those touts actually are.

Some of the ‘differentiators’ that integrators or outsourcers use to define themselves aren’t really differentiators at all. When an integrator tells a prospect that:

  • We only hire the best people
  • We have a best practices library
  • We have training programs for our people
  • We have ‘n’ people certified in this solution
  • Etc...

...they are talking to their own echo chamber.

The words are so generic, so commonplace and so overused to be deemed meaningless. Tired old bromides won’t cut it in the cloud world. The buyers are tuning out this noise and looking for a better more relevant kind of services firm.

The Reckoning

Decide - Sommer
Let’s start adding it all up.

Buyers won’t need all of those massive, people intensive offshore data centers anymore. Why should they? The application software vendors will provide these as part of their cloud offerings. Moreover, does any real integrator or outsourcer think they can deliver a scalable cloud service that can beat the likes of Amazon’s or Google’s? Remember the path to delivering the lowest cost solutions in a given market is paved with the carcasses of failed, more expensive competitors.

Yes, some capacity for these centers will exist and it will take a few years for customers to wean themselves off these solutions. But, customer stickiness won’t rest in package software. If customer usage of these centers lasts at all it will be for integrator-created or custom applications.

This poses a multitude of problems for integrators and outsourcers. They’ll clearly have a lot of excess computing capacity in these centers along with potentially a lot of excess talent, too. The equipment could be phased out over time but the people will be a big challenge. Could people be re-skilled and made relevant for the post-Industrial IT age? I’m not sure everyone can/will make this journey.

Let’s look at this from the buyer’s perspective for a moment. Buyers won’t need a lot of the traditional implementation skills in a cloud, analytic, mobile, big data, in-memory, etc. era. No, they want people that possess different skills. They want:

  • People who genuinely know businesses
  • People who have insights into new management science approaches especially those that use non-transactional data (e.g., external big data feeds)
  • People with serious social science chops
  • People who can design radically different processes – processes that are fueled primarily by data sourced outside of traditional transaction software databases
  • Major league analytic geniuses (not warmed over report and spreadsheet developers)
  • Etc

Just because an integrator had SAP configurator staff for $40 an hour doesn’t mean those people will be relevant for much longer.

Buyers will likely favor consultancies that are:

  • Populated with lots of real, deep subject matter experts not just a bunch of raw, ‘freshers’ straight out of school
  • Comprised of radically different team members who can bring technology, social science, design and other skills together to create all-new processes and applications that never before existed.
  • Not burdened with expensive data centers
  • Not encumbered with unchargeable generic people

At a recent major cloud application vendor’s user conference, I visited the booths of the major old-school integrators. Their marketing messages bothered me as they seem so off-target for the modern world and modern corporation. These integrators think the market needs:

  • strategic transformation of a function/process
  • application implementation
  • application maintenance
  • release management
  • business process transformation
  • business process outsourcing
  • software optimization
  • strategic process transformation
  • health assessment
  • process and technology roadmap
  • etc...

Sure, some of those things could be helpful (some aren’t actually relevant anymore) but most of them are generic old-standards that are as common as pennies. These are NOT services that were re-imagined or re-invented for the post IT Industrial Age. Nope – these are old services with new wrappings. Nothing more.

Buyers will want to do more with firms like Appirio and OneSource Virtual – firms that seriously rethought their role in a new services world. OneSource can take piles of pain away for customers with their massive integration management capability. Appirio has access to a crowdsourcing community of cloud developers – 600,000 to be more precise. It’s the future of outsourcing and integration.

It’s time for a shakeup in the services space and the time for this reckoning is upon us now.

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