While working as the CTO of a Fortune 500 size organization, I always wondered what could be done to make the enterprise IT supply chain more flexible and efficient. We constantly struggled with how we could more effectively control the IT cost curve while at the same time more quickly deliver business value and innovation.
I dreamt of having my business partners and IT staff collaborate, specify and select the best solutions quickly with a clear understanding and comparison of costs, risks and quality of service – all across different combinations of providers and technologies, but with a clear sense of architecture. I also wanted a single financial system of record and spend management capability. Finally, we wanted the ability to continuously optimize IT asset utilization, cost and IT/business operations.
Unfortunately our major integrators and IT service providers had business models that essentially were at odds with these goals and objectives. In short, I thought our enterprise IT value chain was long overdue for a massive disruption.
The Old IT model
Traditionally, successfully delivering large scale enterprise solutions like an SAP or Siebel deployment required bringing many technologies, processes and people together in a complex, expensive multi-year effort. To address down this complexity and streamline management and coordination, enterprises would usually become highly reliant on one or two Tier 1 system integrators for large scale projects, or IT outsourcing (ITO) or business process outsourcing (BPO) providers for IT operations. These relationships were long-term in nature, with large financial commitments required.
With this dependency in place, the providers who built their business around this model had no motivation to bring the costs down, nor to bring innovation to their customers. Since enterprises needed to refresh their infrastructure every few years, SIs and ITO providers could also depend on a consistent revenue stream. But this did little for customers who were seeking more flexibility, cost efficiency and innovation. As an enterprise, we could not afford to be without their services, and hence the relationships continued in context of pure labor arbitrage as the only real meaningful basis of cost savings.
The Cloud-Enabled Next Generation IT model
With cloud-based delivery models, this dependency is now broken. Cloud provides a platform to consume applications and infrastructure as a service, quickly mix and match best-of-breed services to build solutions and scale them based on business need. CFOs, CIOs and business unit heads can now control the cost curve through not only labor arbitrage but cloud service arbitrage as well, all while quickly meeting business needs.
As a result the enterprise SI, ITO and BPO models are up for massive disruption. This disruption should be and will be driven by enterprise CIOs, CFOs and business unit heads. The SIs and ITOs no longer have to own, integrate and manage hardware boxes and software platforms/applications, which eliminates complexity that drove cost and revenue. The delivery processes and roles are also different with cloud, enabling self-service that in many cases remove the need for ongoing external services and support. Essentially much of the value that SIs and delivered is not relevant in a cloud-centric world. As a result their 35-45% margin businesses are now at significant risk as it does not deliver the value in cloud.
The New Business Model for Service Providers
So what’s next for the SIs and ITO providers? Their role clearly changes to quickly configuring, delivering and managing solutions by aggregating and integrating cloud services. The expectation will be to deliver the best value (low cost) solution at the fastest way possible.
SIs and IT providers have an opportunity to be an aggregator/broker in the cloud. For this they need new capabilities that enable them to re-sell cloud services from multiple providers, compose solutions and deliver them from a common service catalog or platform. It’s a new business model. It’s a high-volume, relatively lower margin (15-20%) transaction business. For this to work, the SIs need to build new skills, processes and technology capabilities, and importantly their culture, relationships and mindset must also change. It will not be easy. Some will change, others will not make it and new ones will be born.
It is also important for the SIs to understand that this new model will not be driven by them but rather their customers and their enterprise CIO, CFOs and business units. It’s already happening to enterprise IT internally — it’s called shadow IT.
With the global SI business worth more than a trillion dollars annually, SIs, ITO and BPO providers need to quickly figure out how to play in this new IT supply chain or they will be disrupted by a new generation of cloud-based managed service providers.