When companies need every competitive edge they can get to survive and grow, why are they so slow to adopt technologies that could help to drive more business?
The take-up rate of any change by a company, or any of us for that matter, is related to a number of factors:
·Strength of the external driver
·Cost
·Perceived complexity of the change.
Change also passes through a number of phases starting with the early market adopters, typically individuals and small innovative businesses who enjoy trying out new stuff. It then gradually spreads until it hits what has been referred to as a tipping point where herd behaviour kicks in and the more conservative larger corporations jump on board, even if they do not always fully understand what it is at first!
If the driver is strong, costs low and the change simple then it can jump the chasm to mass adoption relatively quickly. Many large companies initially failed to grasp the importance of Websites for their businesses until small competitors with no real estate suddenly started to take significant levels of market share and eat into their profits. Not surprisingly the larger companies quickly moved to address this and put up their own web presences.
Websites didn’t represent much of a change for most companies. They already produced marketing material or post adverts in magazines so it wasn’t much of a difference to put up an on-line advert in the form of a website.
If the change is complex or has a high attached cost it takes time and evidence of a tangible benefit via pioneer early adopters to drive enough interest to move the change to mass adoption. Alternatively you need a very large market event or ‘Black Swan’ to create a different set of rules that will catalyse the change process.
A good example of this can be seen in high end AV technologies. The technology is essentially very simple and essentially consists of a large screen linked to another large screen somewhere else. The underlying technology that made it this work effectively was hugely complicated but the user didn't need to be aware of this.
2 years ago this was the kind of stuff that vendors loved showcase at technology events but couldn't sell much to their customers. After all, if you had no restrictions on travelling (and perhaps quite enjoyed those trips to NY) why invest the best part of £1/2M plumbing in a pair of screens in your offices?
Along came a truly gargantuan market event in the shape of a recession and every company CFO was frantically looking for ways to reduce costs and travel was a very large overhead for many companies. Suddenly high end AV technology had found a requirement and a demand on main street was generated. Many companies invested in the technology to reduce their operational costs, the technology price started to drop as the vendors recovered their development costs and the market became competitive. High end AV moved rapidly from early adoption to its mass market tipping point in a matter of months.
Other technologies like Social Networking offer huge potential to elevate company client reach and performance at a much lower price point than high end AV but they represent a much more complex change. I recently sat in a bar with some colleagues aged 45-60 and few understood Blogs, Twitter or Facebook. They didn’t see any of their competitors embracing the technology or any clear research to support its adoption. Worse still, they saw it as a distraction for their younger employees and a few had restricted or banned its use.
These more complex changes take a bit longer and are likely to be incremental rather than big bang unless another large event changes the rules and helps to catalyse uptake. Without this event the likely scenario is that the consumer end of the technology will continue to spread (adoption of converged devices) and will gradually become integrated into corporate systems. In parallel those early adopters and fast followers will start to generate the base data to prove the benefits and the message will start to spread.
During the boom years the growing demand for IT services encouraged companies to scale their internal team sizes and increase operational costs. The key drivers here can probably be summarized as follows:
·A vast pool of businesses opportunities and market tolerance for fee levels drove salary levels up and companies aggressively competed with each other to acquire and retain valuable skill sets
·Internal service delivery teams started to be sized based on forecast rather than actual demand in the belief that this was the most cost effective and controllable way of absorbing new business
·Sales teams were more concerned about the risk of having to delay or turn away business and applied a lot of pressure on IT managers to provide assurances that they could cope
·Internal career paths were linked to departmental size, the larger the team the bigger the career reward, there was little focus on cost of delivery
·IT vendors progressively insisted that their partners maintained a number of expensive, and at times quite exotic, organisational roles to realize product discount levels.
When the market slumped in 2008 increased client price sensitivity and competition for a smaller pool of new business sent costs to the top of every CFO’s list of priorities. Many companies were forced to cut back staffing levels and some also retreated into core territories where the cost of sale was lower and work pipelines more assured.
The new market drivers will catalyse dramatic change in our industry as less efficient businesses either fail or are acquired by those that have greater economies of scale who are better able to win new business and generate higher profits via consolidated services.
The new challenge for all of us moving forward is to:
·Make pricing levels more competitive to win business andgenerate better profit levels from existing services
·Differentiate from competitors and provide a compelling reason for clients to both renew and extend contracts by delivering a better quality of service
·Implement an organization that can work efficiently and scale without lag or additional overheads to meet new demand
·Change the internal behaviours that created the existing issues.
The start point is a roots and branches review of how services are currently being delivered to understand the true existing cost of delivery. Few companies currently have the information needed to help them accurately assess these costs as there was no pressure to implement them when business was plentiful and fee levels were steadily increasing. One example is with staff utilisation levels where the lack of understanding of its purpose created KPI’s that often falsely indicated a high level of utilisation. This due to one of more of the following reasons:
·The reporting mechanisms were not granular enough (e.g. billable and non-billable time was not clearly broken out)
·Personnel had not been correctly trained in using the reporting system and/or there was not enough oversight to ensure that the system was being used correctly
·In some cases the system can be so difficult to use that personnel take an easy path through it. One client used a phone based time recording system that required keypad entry and long chains of options. Many teams set up bucket tasks to speed entry!
·Personnel are financially incentivised to achieve high billing levels, not surprisingly they will book as much time to billable codes as possible regardless of actual time spent.
Our analysis of a number of companies indicates thaton average 30% of in-house professional services personnel are not being fully utilized throughout the year with up to 50% for operational teams with field services.
In terms of bottom line profitability a company with 50 consultants, 5 project managers, 12 operational analysts and 20 field services engineers could be carrying over £1M of annual overheads. One client recently estimated that out of their 60 man field services team around 25 were ‘white space’ at an annual cost to the company of £750K!
Once you understand the current run costs of your services the next challenge is to look at the alternate options to delivering those services at lower cost and higher quality. The two options that tend to be exercised most frequently are:
·Offshore
·Cut back more
Offshore is a viable approach if the services are highly defined and tightly controlled. It is not as effective where clients expect a flexible and adaptive service. Cutting back more requires a lot of insight into just where those cuts could take place without impacting service delivery agreements and client satisfaction. Many outsourcers have had to reduce planned staffing levels to make a service operationally profitable and many have also lost the business at a later date!
Another option is look at identifying what areas of service fulfil a core and known demand and which address potential or un-planned requirements. It can be quite staggering to see just how much your company may be investing on a ‘just in case’ basis. One approach here is to contract out potential and un-planned demand to a trusted partner. The unit cost of delivery may be a bit higher but the operational run cost is likely to be significantly lower. This model also allows the company to transition back in-house work that starts to be new core and known to realize the cheaper operational run costs.
Behind the scenes there is also a need to re-work the HR policies and practices that encourage managers to create large empires to achieve career objectives. As one of our very astute clients put it ‘I need to teach my teams to stop thinking so much about team management and a bit more on running a service to a P&L’.
The title of this article was initially penned in response to a number of discussions I have been having recently on what IT themes are going to be important to businesses in 2009/10. I firmly believe that the credit crisis represents a Black Swan event that will fundamentally change the way we view and manage our IT investments. Many of the focus areas below are likely to continue to drive company strategy well beyond 2010.
In a recession, most businesses focus on aggressive cost reductions, essentially measures to help them survive. Now, as the first signs of a recovery are becoming apparent decisions have to be taken in respect of capital investment in a risk adverse market place. Research on previous downturns indicates that the successful businesses invest heavily in preparing for a growth market at exactly this point.
CFO’s and CTO’s will be looking for expert guidance on which IT investments are key to both leverage opportunities in a downturned market and preparing the foundations for growth as the market recovers. The discussion areas will be around business and not IT transformation. IT service providers will need to transform their approach to their clients or be replaced by competitors better prepared to provide strategic advice.
The credit crisis challenged many long held assumptions on how IT should be managed and the fall-out is likely to be a more exhaustive and far reaching analysis of what fits the company needs best from a commercial perspective. IT service providers needs to be attentive and innovative in helping their clients to address these new challenges
In previous market downturns better prepared companies made divestments and intelligent acquisitions at rock bottom prices to outpace weaker competitors. IT service providers need to provide support to their clients in preparing and executing cost effective separation and integration strategies.
I have outlined below the key areas where IT investment are likely to be focused in 2009 and 2010. I would welcome any feedback
1.Managed Services
2.Professional Services
3.Virtualization
4.Business Intelligence
5.Cloud Computing
6.Green IT / Energy reduction
7.Unified Communications
1. Managed Services
The recession has created a unique set of conditions in the IT marketplace that the IT services businesses will recognize and use to catalyse growth. The first of these is in Managed Services where the increasing need to reduce operational costs is encouraging the outsourcing of many services.
Ovum recently released a study recently projecting that the global market for managed services will deliver revenues of $66 billion by 2012. The study, which collected data from more than 1,300 enterprise managed service users in 14 countries, projects that managed IP-based services will see a compound annual growth rate of 18% over the next four years.
According to IDC research there is a growing acceptance that a managedservices engagement not only results in cost savings, but also provides access to technology that enables a transformation of IT infrastructure to drive productivity and boost competitiveness.
Forrester believes that a perfect storm is brewing. Technological change, the technology investment cycle, and difficult economics are combining to push some types of managed services over the chasm. While the very largest firms may be able to afford the investment needed in the coming decade, small and medium-size businesses will not, making them a prime market for managed service offerings that minimise initial capital cost and do not require an investment in IT staff.
IP VPN services are the largest global managed services market, with revenues of $17 billion. VPN services are projected to remain the most widely deployed managed service in 2012. VoIP is projected to experience the fastest growth over the next four years with a 39% CAGR.
There is a demand for service providers and managed service specialists to deploy and manage client networks to reduce costs and improve efficiency hence significant opportunities for those able to meet those needs.
Data published by business research and consulting firm Frost & Sullivan forecasts that the managed security services will exceed $6 billion by 2011. A poll conducted recently by CompTIA showed that nearly one-third of 322 organizations surveyed planned to make new investments or increase spending on managed security services.
Software-as-a-service (SaaS) model is predicted by Gartner to grow at 22% this year with SaaS revenues totalling $9.6 billion €7.05 billion) in 2009, a 21.9% increase from 2008 revenues of $6.6 billion (€4.8 billion), and reach a staggering $16 billion (€11.7 billion) by 2013.
It is also projected that North America will overtake Europe as the largest overall market for managed services by 2010, and that the Asia-Pacific managed services market will see 27% CAGR that the study says will be driven mostly by growth in India and China.
2. Professional Services
In ‘What’s happening to our workforce’ (see below) I talked about the transformation that has been taking place in the way we think about our internal and contracted workforce. The recession has certainly helped to catalyse a lot of change here by encouraging companies to look closely at their resource costs and consider what needs to be retained in-house, typically those activities that are deemed business critical.
Rather than move all IT outside in terms of an outsourcing arrangement and losing a degree of control and flexibility companies are looking at new hybrid resourcing strategies to reduce costs and increase capabilities. These comprise selected out-tasking and off-shoring for cost reduction supported by contracted resource where a higher degree of control is required. Off-shoring requires highly structured and well defined work elements and is less well suited to complex change requirements where a degree of agility may be required.
Alongside fully contracted project work companies will also look for unbundled service elements that can be used to help them either bridge resource shortages or provide expertise in specific areas.The client retains full responsibility for the delivery process and treats the service provider’s resource as part of the client team for the duration of the work. Whereas a contracted employee has to be paid a set amount for an agreed number of hours, this new model allows a utility based charging mechanism (i.e. you pay for what you use). It also provides a degree of re-assurance re skills levels, behaviour and availability (e.g. the service provider can provide holiday cover).
3. Virtualization.
In the IT arena, fads come and fads go, but when the concept makes bottom-line sense, then it stays and becomes part of our infrastructure. This is what has happened with virtualization.
Much of the current buzz is focused on server virtualization, but virtualization in storage and client devices is also moving rapidly. Virtualization to eliminate duplicate copies of data on the real storage devices while maintaining the illusion to the accessing systems that the files are as originally stored (data de-duplication) can significantly decrease the cost of storage devices and media to hold information. Hosted virtual images deliver a near-identical result to blade-based PCs. But, instead of the motherboard function being located in the data centre as hardware, it is located there as a virtual machine bubble. Various virtualization approaches have significant potential to reduce IT costs
Virtualizing allows companies to simplify the management of their infrastructure and decrease downtime. This is a money saving step. There are several different virtualization vendors on the market. They range from basic free to a cost-based full management environment. Microsoft Hyper-V, Citrix/Novell Xen, and VMware all offer free virtualization platforms.
Virtualizing will save money; it is how much work you put into it to make it a smooth transition that determines the amount of money being saved. The savings don’t always happen during the process, but over time, the TCO is drastically lower than with physical equipment.
4. Business Intelligence
Business Intelligence (BI), the top technology priority in Gartner’s 2008 CIO survey, can have a direct positive impact on a company’s business performance, dramatically improving its ability to accomplish its mission by making smarter decisions at every level of the business from corporate strategy to operational processes. BI is particularly strategic because it is directed toward business managers and knowledge workers who make up the pool of thinkers and decision makers that are tasked with running, growing and transforming the business. Tools that let these users make faster, better and more-informed decisions are particularly valuable in a difficult business environment.
5. Cloud Computing
Cloud computing is a style of computing that characterizes a model where providers deliver a variety of IT-enabled capabilities to consumers. They key characteristics of cloud computing are 1) delivery of capabilities “as a service,” 2) delivery of services in a highly scalable and elastic fashion, 3) using Internet technologies and techniques to develop and deliver the services, and 4) designing for delivery to external customers.
Although cost is a potential benefit for small companies, the biggest benefits are the built-in elasticity and scalability, which not only reduce barriers to entry, but also enable these companies to grow and absorb acquisitions quickly. As certain IT functions are industrializing and becoming less customized, there are more possibilities for larger organizations to benefit from cloud computing. However, caution is advised since significant privacy and security issues exist. Cloud computing is not appropriate for the full spectrum of enterprise applications.
6. Green IT / Energy Reduction
We’re facing some stark realities. CIO’s are faced with spiralling costs as energy prices rise. Power and cooling costs are projected to exceed infrastructure spend in 2010. Gartner projects that 40% + of UK Data Centres will run out of capacity in 2009-10. In India Data Centre capacity will need to double in the next 2 years!
Governments are also driving change: US Public Law 109-431 and Energy Star Program, new 2008 EU Code of Conduct and UK 2009 Carbon Reduction Commitment scheme will mandate energy reduction targets on UK’s top 5000 organisations.
Migrating to more efficient products (e.g. upgrade to more efficient and intelligent devices that can help to reduce energy consumption) and approaches (e.g. virtualization) can allow for more equipment to fit within an energy footprint, or to fit into a previously filled centre. Regulations are multiplying and have the potential to seriously constrain companies in building Data Centres, as the effect of power grids, carbon emissions from increased use and other environmental impacts are under scrutiny.
Alternative solutions to be evaluated can include co-location to reduce immediate costs along with potentially off-shoring the capacity requirement albeit many companies are still reluctant to move their core data outside of their territories and direct control.
In the near term it’s highly likely that environmental benefits will likely take a back seat to the cost savings from lower energy use!
7. Unified Communications
The expectation is for a merged market between UC and collaboration, even more trial activity, business executives getting more involved with UC selections and deployments, IT managers continuing to demand interoperability based on standards and UC managed service adoption. All these elements support growth which according to Forrester account for a $2.8 billion market by the end of 2009.
Increasingly sophisticated users will realize that they have multiple products and vendors performing the same communications functions, and that this redundancy creates additional expense (both for licenses, operations), makes it more difficult for users to learn, and increases the complexity of integration. They will look for service providers to help simplify their architectures and drive down costs. This is particularly the case where an acquisition has taken place and systems need to be rapidly consolidated and cost savings realized.
According to Gartner in the next five years the number of different communications vendors companies may be reduced by at least 50%. Gartner says this change is driven by increases in the capability of application servers and the general shift of communication applications to common off-the-shelf servers and operating systems. As this occurs, formerly distinct markets, each with distinct vendors will converge and drive massive consolidation in the communications industry.
Companies will look to integrate the matrix of different installed communication types in order to provide a seamless communication system across multiple networks, applications and devices.
Videoconferencing has traditionally been a difficult technology to implement in the enterprise with problems like latency, jitter, poor video equipment, insufficient concern over the videoconferencing environment, lack of business purpose, organizational commitment, and comfort with using this technology all contributing to poor take-up
However video is now considered to be a key tool to help companies reduce costs and all those problems represent challenges and revenue opportunities for IT service providers to address. Most people probably relate ‘telepresence’ to Cisco but Tandberg, Teliris, Polycom and Digital Video Systems all now all provide high end video systems to compete with Cisco.
The whole market, which includes telepresence equipment, network services and managed services, is forecast to grow from a 2007 level of not quite $126 million to nearly $2.5 billion in 2013. Telepresence solutions can cost in the neighbourhood of $300,000, but many telepresence operations are handled as managed services. And less expensive “executive” systems designed for one or two people mean that telepresence technology is now starting to address a wider range of requirements.
The telepresence marketplace now comprises:
CEO and senior executive travel reduction (whether corporate jet or commercial airline travel),
Employees working across company locations
Room rentals for companies unable to afford their own rooms.
In conclusion
The recession and the impending market upturn present real opportunities for growth albeit underpinned by a high level of expenditure controls by CFO’s. IT service providers will need to adapt to a very different set of demands and challenge assumptions that may now no longer be valid. Those that successfully embrace these changes will be rewarded by closer client relationships and stronger revenue streams.
Welcome to my IT Strategy Blog. My career in IT has included
time with business start-ups, SMB's, national and global corporations. For many
years I have focused on helping organisations develop and fully leverage their
professional services capabilities to drive greater profit levels and market
penetration. I do get invited to run workshops and seminars so please contact
me if you are interested. Outside of work I enjoy spending time with my
beautiful wife Leanne.
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