One of Gartner's top predictions for 2010 was that 20 per cent of companies would have no IT assets by 2012. With that time now fast approaching, is it really possible for companies to ditch their in-house IT?
Stephen Hains, director, global technology services at IBM, believes it is quite possible that 80 per cent or more of Australian businesses will have no internal IT within a fairly short period.
His reasoning is that there are around 820,000 companies in Australia with employees, and 89 per cent of those have fewer than 20 staff. Using existing cloud services for productivity applications, customer-relationship management (CRM), enterprise-resource planning (ERP), etc, would already enable a six- to 10-person company to go all cloud.
For the top end of the market — the 1200 companies with more than 500 employees — Hains says IBM's research shows that only 17 per cent intend to keep all of their IT in-house, and 65 per cent say they will "partner excessively".
Getting rid of internal IT completely "is absolutely doable today", according to Brad Freeman, VP global business solutions at CSC, at least as far as generic functions, such as email and collaboration, are concerned. If it isn't already possible in every case for financials and HR software, it soon will be.
Freeman is more sceptical on mission-critical applications; if an organisation gains a competitive advantage from a particular aspect of IT, then it should be kept in house. If it really is a commodity service, it should be outsourced, he believes.
However, that line is not always clear. Steve Tull, general manager, marketing and effectiveness at ASG, suggests that business intelligence is one example of a function that can be put in the hands of an outsourcer, and still deliver a competitive advantage.
Another test is how long the organisation can cope with an outage of a particular service. In many cases, it's no big deal if email is down for a day, but if the CRM system isn't available, business may grind to a halt. And if extremely high availability is required (eg, core-banking systems), Freeman says they need to be run in house, with the necessary facilities and processes to get them working very quickly if there is an outage.
Tull says his clients tend to perform some functions internally, and hand others over to an external provider, but notes that it can lead to integration problems, and it can be difficult to manage end-to-end service levels.
All told, the in-house/external decision "tends to be a bit of a yo-yo", and it isn't yet clear where the equilibrium point will be, Freeman says.
Things that tip this equilibrium point towards assets being held externally include not only outsourcing, but also bring-your-own-device (BYO) models, alongside other trends.
BYO and leasing
One of the ways in which organisations are reducing their IT assets is by arranging for user hardware — PCs, tablets, smartphones — to be owned by employees.
This trend, more pronounced in the US than in Australia, according to vice president and distinguished analyst Rolf Jester, is being driven by Generation Y, as greater numbers of this group are bringing their own devices into work. IT departments can't prevent the consumer tech influx, but they can manage the trend by using software to enforce security checks on devices.
One early adopter in Australia is Suncorp, which uses technologies, including virtualisation, to connect user-owned devices with the applications that they need to do their jobs.
BYO isn't the only way to get those assets off the books, however. Leasing is another contributor to external IT assets, and it applies to mobile and desktop devices, right through to the datacentre.
According to Hains, in the post-GFC era he sees a lot of leasing aimed at getting capital back into businesses. Existing PC fleets and datacentres are being sold and leased back, he says. Even small businesses, such as retailers and tourism operators, can benefit from this, although he notes that some operations — most notably electricity suppliers — are financially disadvantaged if they get IT assets off their books.
Organisations are "ploughing the ground" for outsourcing, either traditional or cloud based, with virtualisation projects and the adoption of common platforms. This is happening "in a very serious way", according to Jester.
Although virtualisation projects keep things in-house, they promise reduced costs, greater simplicity, easier management and more. According to Jester, this means that subsequent decisions can focus on issues such as cost and service delivery. That is, they become procurement rather than technical decisions.
Recent Gartner surveys, including the company's annual CIO survey, show an expectation that an increasing share of the workload considered in this procurement decision will be pushed into the cloud. While less than 3 per cent of organisations say that more than 50 per cent of their transactions are being processed in the cloud, 42 per cent expect this to be the case by 2015. "That's a massive shift. Everyone's looking to the cloud," says John Roberts, also a vice president and distinguished analyst at Gartner.
Jester says that his discussions with IT buyers about contracts for services reveal that organisations always put at least one cloud provider on the list of candidates. "I can't think of one exception," he says.
He says that most organisations are already using some cloud services, even if senior managers don't already know it. Examples include employees putting Amazon Web Services or cloud back-up services on their corporate credit cards.
While Jester thinks that cloud computing is about to enter the "trough of disillusionment" (the stage in Gartner's "Hype Cycle" where interest wanes as some experiments and implementations fail to deliver on their initial promise), he notes that interest is still high. A major study carried out by the firm in late 2010 covered more than 400 companies, and found that 17 per cent of companies were already using some cloud services, 17 per cent planned to adopt them within 12 months and a further 17 per cent planned to adopt in 12 to 24 months. Only 38 per cent had no plans to adopt cloud services.
He predicts that new businesses — whether start-ups or new units within larger organisations — will generally outsource their IT infrastructures by using "a well-respected cloud provider". Those that start with cloud and other outsourced providers will continue to favour them as they grow, he predicts.
How does this trend affect staff numbers?
According to Jester, an outsourcing effort will result in fewer people needed to keep firms' own infrastructure running, but he sees it being offset to a greater or lesser extent by a broadening of the IT department's scope.
He notes that 30 per cent of CIOs are now responsible for leading business-process improvement efforts, so the skills required of in-house staff are moving increasingly towards those of a business IT consultant rather than a pure technologist.
This means that technical and operational specialists largely disappear, and the remaining IT function looks after the high-level architecture, advising the business on what is possible, understanding business processes and working out how services and support are delivered to users.
Although Intel's cloud efforts are largely internal, Liam Keating, the company's Asia-Pacific IT director and China country manager, reports that the IT workforce does move onto higher-value tasks, requiring them to learn new skills. Staff see this as a net benefit, he says, and the adoption of cloud technologies "has not led to any job losses in the IT organisation".
Even if an outsourcer is able to provide the business analysts needed to turn a business unit's requirements into functioning IT, organisations that frequently introduce new products (such as telcos) will want to keep this function in house, partly to improve agility, but also so that they are better placed to tell the business whether or not a proposal is reasonable, Hains says.
Technical skills that should stay in house include running core applications that distinguish an organisation from the competition, and integration, whether that's between internal and external systems, or to link functions delivered by different providers.
The need for vendor-management skills is likely to expand significantly. Yet, although contract, finance and IT skills are needed in house to manage an outsourced contract, Sheila McGregor, a partner at Gilbert & Tobin, believes that it may be possible for just one person to do the job. As the size and complexity of a deal increases, it may require as many as 30 people. One way of reducing the size of the in-house team is to outsource some of the management aspects, such as invoice checking, which can be an involved and time-consuming task.
The shadow organisation
Hains says typical IBM customers — those with at least 50 employees — keep the strategy and architecture positions in house, and leave the rest to IBM, but the larger the organisation, the more "nervous" it is about putting all of its IT in the hands of outside providers.
Freeman notes that organisations feel stranded if they lose their own IT architecture skills, as it prevents them from responding sufficiently quickly to changes. IT needs to be managed like any other asset, he suggests; just as you need a mine manager to run a mine, you need an IT manager to run your IT, even if a provider is doing the actual work. Yet you need higher-calibre technologies to deliver to the business, rather than keep applications running.
McGregor notes that her clients tend to keep their IT specialists on staff, and expect them to move from hands-on roles to those of contract managers. The problem is that they tend to spend at least part of their time on their former, comfortable and perhaps enjoyable tasks. This leads to the situation where an internal "shadow organisation" is duplicating some of the functions that have supposedly been outsourced.
"I don't think [the existence of a shadow organisation] will derail [an outsourcing project], but it will add to your costs," she says.
She suggests that the issue is partly related to the outsourcing maturity of the organisation, and fades as the right people become established in various jobs, but Hains points out that an existing "hands-on" culture can foster the emergence of a shadow organisation, typically two or three levels down the hierarchy.
He has seen "fiefdoms" hanging onto tasks that the outsourcer should be doing, perhaps by unnecessarily positioning themselves between business units and the outsourcer. While IT needs to be connected to the business, he says that the retained organisation should be managed carefully to avoid paying twice for the same function.
Freeman believes that "it should be straightforward" to avoid a shadow organisation by focusing on outcomes and then letting the provider deliver. Encouragingly, Tull says the shadow organisation is rarely a problem these days, and that his clients usually get the expected headcount reductions.
The difference in skills required for an in-house shop to an outsourced one means hiring staff with "a profound shift in skills" in mind, according to Jester, noting that some CIOs have already recognised this, and are changing their organisations accordingly.
"You need to up-skill your internal people if they used to be in technical delivery roles," McGregor says. The alternative is to bring in new people, but "a reasonable level of corporate history can be useful" so that the internal IT team is familiar with the issues that led to outsourcing. This is important, according to Roberts, who believes that loss of knowledge of how the business actually works is one of the biggest challenges for organisations trying to outsource the bulk of their IT, as the companies need someone who can make sure that the provider does the right things in the right way.
Roberts says that while some organisations buy in skills through hiring or using consultants, larger outfits (typically those that hire new graduates) recognise the need for continuing education for their staff.
Employers should look more broadly for recruits, Jester says, as people with a business or liberal arts education can be as relevant as computer scientists. Roberts suggests that as many as 20 or 40 per cent of internal IT staff could be drawn from the business side of the organisation, especially where the implementation of packaged software is concerned. Hains notes that vendor-management skills — especially important to large new businesses that are doing a lot of outsourcing, such as NBN Co — also may be found within the procurement function.
However, there's not much point in training or recruiting staff only to lose them to one of your service providers, so McGregor says that it may be worth considering the inclusion of "no-poaching" clauses in the contracts.
Was Gartner right?
Jester now says that the figure was "a bit aggressive", and that it is safe to say it won't be reached in Australia, although the US will come closer.
Yet although Jester believes the idea of very large organisations having no IT assets in the foreseeable future is "a bit of a stretch", he believes that they are moving in that direction..
Data from ZDNet Australia's IT Priorities survey, which asked questions of over 1000 Australian industry participants, showed that 21 per cent of respondents believe that the economic conditions, which saw many reduced budgets, are increasing the use of outsourcing in their organisation.
Despite this, only around 24 per cent think that a project will happen or will be considered within the next two years; 17 per cent have already completed their outsourcing projects, and 65 per cent have no plan to start a project. Yet cloud, which also outsources work from the company, is going to be considered for new projects by almost half of the respondents. Over 20 per cent of respondents think that cloud considerations are important when choosing a new technology partner. Respondents are also thinking about both cloud and outsourcing when they make their decisions on hardware purchases. Considering that, it might not have been such a stretch to have thought that 20 per cent of companies would have no assets by next year.
It seems that outsourcing, whatever name it is given, is alive and well and on the increase. Whether the outsourcing of work and assets will lead to the level that Gartner had predicted will only be borne out by future surveys.
What do you think? Are we heading towards the death of the in-house IT asset?