September 2, 2011
Mobility, cloud, and smart computing will drive tremendous growth and significant changes in the IT industry over the next few years. My fellow analysts have brilliantly covered these topics in the past few months.
I would like to build on these views and focus more specifically on the productivity race that the IT services industry and its clients have been in during the past 10 years or so. While IT services vendors have managed to improve their output levels in order to protect margins in a market of severely eroding price points, I believe they will rapidly reach a plateau if they continue to use traditional methods. Instead, the most successful IT services firms of tomorrow will increasingly leverage disruptive methods in order to fulfill the client expectations to always “do more with less.”
Ever since the Internet bubble burst a decade ago, clients have pushed their providers to find ways to provide them with continued price decreases for similar or greater output levels. This was achieved thanks to two main levers to decrease the amount of resources required to run IT systems by end user firms:
- Fewer resources: Optimizing the utilization of resources in order to reduce their consumption. For example, most projects around asset management, infrastructure standardization, consolidation, and virtualization yield the most evident returns as sources of productivity improvement. This is the case in particular in developed countries where companies need to cope with multi-layered legacy technologies that render IT systems as complex and expensive to maintain.
- Cheaper resources: The advent of large pools of IT talent available at lower costs in emerging economies has rendered this path possible. Both end users — via captive delivery centers — and IT services vendors have massively invested in these pools in order to benefit from offshore and nearshore delivery models in recent years. This route will eventually prove less effective as the cost of human resources grows rapidly in inflation-prone economies.
While these models have served the industry well, they are starting to run out of steam. In order to develop more sustainable models for the years to come, IT services firms will need to leverage the following approaches better:
- Shared resources: Two concepts are at play here: mutualization (pooling and sharing) of a common resource for multiple clients (both internal and external) as well as economies of scale aimed at aggregating discrete requirements in order to benefit from stronger negotiation levers.
- Automation: This is where the IT services industry follows a Schumpeterian growth model and will increasingly replace human capital with software capital. While this evolution is not new, the change has accelerated in recent months with pure IT services firms investing to build IP-based solution accelerators aimed at providing faster time-to-market to their clients (among other things). Investments are also focused on the process automation for development, testing, and maintenance of applications leveraging factory floor concepts.
- Self-service (automated provisioning): This fifth route has been opened more recently with the inception of “as-a-service” models. Here productivity improvements occur by transferring the cost of IT resources directly to the end user, which enables, in theory and thanks to the dynamic nature of these models, the optimization of the utilization rate of these resources.
In the IT services industry, traditional outsourcing models have relied heavily on the first two routes. In general, the mutualization and automation paths have returned lower performance, mostly because traditional outsourcing models have followed a one-to-one delivery approach and are therefore failing to deliver sufficient economies of scale.
However, this will change dramatically over the next few years as IT services companies reinvent their outsourcing models in order to continue to deliver increased output levels at similar or lower costs for their clients. In particular, IT services providers will now focus more on leveraging the last three routes (shared resources, automation and self-service) and deliver their service around their own “business platforms.”
I will be working on this research topic over the next few months and I would love to hear what you think!