Commentary - Historically, if you wanted your information technology (IT) managed efficiently and expertly, one way was with an outsourcer or a service provider (MSP), But over the last several years, there is a new set of technologies that enable remotely accessed and highly scalable IT services, referred to as ‘cloud’, has emerged.
‘Cloud’ refers to a method of IT service delivery and consumption where compute power and storage are accessed remotely in a scalable ‘on-demand’ manner, that allows the enterprise to provision, use and pay for exactly the volume they actually use. Central to this definition are the concepts of immense variability and the choice of paying per use. In other words, this describes how an enterprise can derive ‘anything as a service’ in a true compute and storage utility model.
The managed services model has in recent times morphed to include features that new cloud-leveraged delivery platforms can provide. Some would say the cloud marks the end of the traditional, staffing centric outsourcing model, used for reducing IT costs associated with remedial tasks or commoditized developmental work. Others would say that the two trends are converging with each other, with service providers poised to gain a large portion of the fast-growing cloud services market by virtue of their ability to use cloud based platforms for services delivery.
Cloud creates an opportunity for CXOs to change the way their services are bundled, consumed and purchased. This affects all of IT, encompassing infrastructure, platforms, applications, support and business process outsourcing (BPO) services. While customers move towards simplifying their IT service procurements, they are looking for arrangements that align well with their own targeted business outcomes rather than technical service level agreement (SLA) metrics. Therefore those service providers that are able to package and deliver their offerings around ‘successful business outcomes’ rather than SLA metrics, will win.
A convergence of people, technologies and tools
The traditional approach to IT involves selecting a medley of technology vendors and systems integrators, to make sure the project is implemented and managed effectively. But a service-driven platform restructures how those contracts are organized. The buying nature of customers is changing. CIOs are looking to buy solutions, not silos of technology. Instead of a multi-SLA mix, these tools are now consolidated into one line of business.
As a result, service providers are building bundles of various technologies designed to solve one particular business case. This involves leveraging platforms and relationships with an ever growing ‘ecosystem’ of partners, not just implementation expertise, For example are providing Mortgage Processing as a Service or delivering specific Customer Relationship Management outcomes as a service. That said, partnerships in the new cloud-leveraged world form the core of a strong service delivery framework -- rather than a set of convenient alliances formed around specific opportunities.
This convergence also changes how large technology vendors and service providers will interact with each other. The big winners are the customers and providers that focus on delivering a relationship based on constant value enhancement for the customer’s business outcome.
From labor arbitrage to trusted partnership
A value-driven relationship seems a natural next step in the outsourcing industry. Traditionally, many thought of outsourcers in the traditional context of labor arbitrage. Projects are handled by third parties in a cost-effective fashion, allowing the internal IT department to focus on delivering strategic value to the business. However, with the cloud conducting off-premise business management as well – at a more cost effective rate, no less – this strategic capability is curbed, leading many to wonder how outsourcers will react.
As a response, service providers have evolved to including consulting capability on a variety of related infrastructure, application, platform and process portfolios. With many having extensive experience in portfolio rationalization, service providers have the knowledge on-hand to evaluate which types of applications are best suited for migration into a cloud environment. Many also have a diverse ecosystem of partners and providers, alleviating issues of becoming locked into a particular vendor relationship. An additional advantage of these consulting skills is the value they provide in terms of identifying enterprise risks and putting in place risk mitigation strategies.
As with the service convergence example, this shifts a CIO’s emphasis from reducing cost and risk to creating value. This value-driven shift applies to the pricing model as well.
Shifting pricing models lead to a focus on business outcomes
One of the cloud’s biggest advantages is its flexibility. This applies to not only the delivery of services, but how they’re consumed and purchased. From the service provider perspective, this can be seen as a disruptive element into the marketplace. Service providers that relied heavily on monthly retainers or project-based models will be challenged by clients for a more flexible approach to their pricing.
We view this as a natural extension of what’s already been taking place. Instead of looking at the scope of work, look at the value the provider has delivered. This aligns IT with business and allows the CIO to more closely connect with other C-suite colleagues. The goal of outsourcing was to allow IT to focus on more business-driven initiatives – an outcomes-based approach is an extension of that principle.
For example, a claims processing organization would traditionally work with an outsourcer in a “time and materials” mode, where it paid for the technology needed, along with the implementation specialists and support. Each element had multiple contracts, In the new paradigm, all elements that work towards achieving the ultimate business outcome of processing the claim - the software, the applications, the tools, the platform and the set of human operators comprising the traditional ‘operations’ - are bundled into one package delivering a set of business outcomes. The end result is simply a larger number of claims processed more effectively and efficiently. Delivering higher volumes of claims reduces the price per claim to the outsourcer, and the time it takes or the materials used becomes irrelevant to the customer. This allows a claims organization to relate their cost directly to the value generated, marking an opportunity to better align cost with value and not worry about managing the back-end operations.
There’s little doubt that the cloud is disrupting the way technology gets delivered – and many have looked squarely at the outsourcing community for a response. Any alert service provider will learn to embrace the cloud, but there’s a clear opportunity to change the way success is delivered and measured.
The evolution of cloud technologies has created a new form of IT service delivery and a radical new way of value enhancement – that of partnering for successful outcomes delivered and not by the scope of work done. This enables lower customer risk, a more aligned pricing approach and a more efficient and direct way to work and solve business problems or drive desired business results. With this new approach to service delivery and outcome-aligned pricing, the CIO can, finally, devote maximum time to enabling business instead of just supporting it.
Sean Narayanan is Chief Delivery Officer at iGATE Patni.