While writing my story this week on CIOs looking to renegotiate IT outsourcing contracts to take advantage of cost savings, I found the drop in pricing for application hosting services particularly interesting.
As my story said, analyst firm Gartner Inc. predicts that the cost of outsourcing IT infrastructure will decrease 5% to 20% during the next two years, both domestically and abroad (with particular pressure on Indian outsourcers thanks to, among other factors, the Satyam scandal). The potential average outsourcing price reductions in 2009/2010 broke down as follows:
IT infrastructure outsourcing services and the average outsourcing price reductions:
Data center services – 5% to 15%
Desktop/help desk services – 5% to 10%
Network services – 10% to 15%
Application hosting services – 10% to 20%
Why might application hosting decline more than other areas? Gartner’s Richard Matlus explained:
“We think the reason that percentage is a bit higher is because people are going to be looking at SaaS as a solution,” Matlus said. “We’ll see more of those access-ready services delivered.”
Matlus went on to say that enterprise organizations’ decision to invest more deeply in Software as a Service, as well as virtualization and automation, will drive the price of application hosting lower, as IT outsourcing companies scramble to retain customers — even if it means dropping their prices. This is an area in which we can expect to continue to see big growth in 2009 and 2010.
Are you a CIO or IT executive renegotiating an outsourcing contract? Or seeking change your approach to application hosting? I’d love to hear your story.
Welcome back from the weekend! Here are the latest stories from SearchCIO.com, dealing with the private cloud, identity and access management, and some very newsy security standards for compliance for federal funds.
Beyond server virtualization: The private cloud – Turning server virtualization and the cloud computing concept into a private cloud is more than semantics. Our expert details how it differs from a virtual server farm and more.
The challenges and benefits of a private cloud – A private cloud may leverage server virtualization to drive business flexibility, but many of its management challenges (both people and boxes) are as yet untested.
CIO turns to identity and access management to solve business problem – Growth and turnover made user provisioning a huge task for business owners and the IT organization at Brookdale Senior Living, before the company launched a major effort to classify users and deploy an identity and access management system.
Security standards to help manage compliance for those federal funds – The disbursement of federal funds will open up risks and come with stricter requirements — a CIO group offers a checklist that can help IT executives at any organization stay in compliance.
The news today from The Wall Street Journal that IBM is expected to cut a large number of U.S. workers in its global services unit and move that work to IBM employees in India reminded me that IBM, in addition to its possible takeover of Sun Microsystems Corp., is also rumored to be a buyer for Satyam Computer Services Ltd., the struggling Indian IT provider undone by the financial fraud perpetrated by former chairman B. Ramalinga Raju.
The WSJ piece said the planned IBM layoffs show that even profitable companies continue to cut costs— “some of them by taking advantage of cheaper Asian labor.”
It can’t be long, with or without a purchase of Satyam, that someone suggests the I in IBM stands for India. But that, it seems, would be selling IBM short.
In a round of layoffs made earlier this year (an estimated 2,800 by some reports), IBM lived up to its International moniker. The company offered laid-off employees in good standing and willing to work under local conditions and terms the opportunity to go work offshore at one of IBM’s centers — not only in India, but also in Nigeria, Russia, Argentina, Brazil, China, the Czech Republic, Hungary, Mexico, Poland, Romania, Slovakia, Slovenia, South Africa, Turkey and United Arab Emirates. Not surprisingly, Project Match sparked a strong rebuke from labor unions slamming the Armonk, N.Y., provider for not only offshoring jobs to low-cost countries but now wanting employees to offshore themselves.
It will be interesting to see if IBM makes the same offer to laid-off employees this time around.
Greetings, bloggers! Take some time away from your NCAA brackets and delve into the latest from SearchCIO.com on risk management, SaaS and SOA, and disaster recovery plans for branch offices:
Balanced Scorecard founder: In recession, think risk management – Risk management is among the key performance indicators to measure for strategic success, says Robert Kaplan, co-developer of the Balanced Scorecard methodology.
SaaS and SOA quiz for enterprise CIOs – How much do you know about Software as a Service (SaaS) and service-oriented architecture (SOA) solutions? Take this quiz and find out.
A disaster recovery plan for branch offices: Five layers of redundancy – This CIO’s disaster recovery plan for branch offices (or hospitals, rather) seems to have it all covered — including the business mission.
I was talking to IQNavigator the other day. They have software that helps companies manage what they spend on contingent workforces, such as IT contractors, and on vendor services, among other things.
Companies also outsource the management of things like invoicing and time cards to them.
What was interesting was how much money people were losing or overspending in these areas and didn’t even realize it.
For example, companies have a set rate for hiring contract laborers, but many hiring managers skirt this rate to get the best person for the job, or don’t track a contract worker once they’re hired, leading to contractors being with the company for five or more years. That opens a whole can of worms regarding whether they are full-time employees who deserve full-time benefits. Or, some vendors bypass the agreed-upon rate for their services by calling up departmental managers instead of the central procurement office.
When it comes to IT vendors and IT contractors, the CIO should take charge and enforce a consistent rate for services instead of letting your departments deal with suppliers on an individual basis. Put out an RFP and be clear on your rates. If you’re a big enough company, you should be able to reduce your number of suppliers and get them to agree to a set price.
If they don’t agree to it, then they shouldn’t be on the list of your providers, whether for labor or technology services, points out Kieran Brady, vice president of business solutions for IQNavigator.
Now while IQNavigator and other vendors offer services procurement software and spend management tools, in tough economic times such a system might not be realistic to install now (although if you really need to get your arms around spending, such an investment could pay for itself). What are your thoughts: Do you know how much you’re spending on IT contractors and services? Would software help you get your arms around it, or can you do it well enough through policy?
This past week, SearchCIO.com homed in on business intelligence strategy, IT transformation, cost reduction tips for your strategic sourcing contracts and IT governance in an economic recession. Read, learn and don’t forget to comment!
Business intelligence strategy success a matter of alignment – It sounds basic, but it isn’t always happening: IT must partner with the business for a successful BI strategy. Here’s where things go wrong.
As recession deepens, IT transformation best tackled in chunks – Transformative IT will enable companies to emerge from the recession ready to compete, gurus say. But big projects, it seems, are best taken in chunks these days.
Cost reduction tips for your strategic sourcing contracts — CIOs should revisit their strategic sourcing contracts and work closely with their suppliers to analyze current spending and achieve maximum cost reductions.
IT governance, corporate governance must align in economic recession – IT governance in an economic recession is more important than ever, as IT organizations must align with the business, justify costs and adapt to market conditions.
At the Gartner BI Summit this week, Robert Kaplan, a professor with Harvard Business School and co-author of the Balanced Scorecard, shared a few interesting anecdotes on how CEOs motivate employees to stay in sync with the corporate strategy.
The Balanced Scorecard is a performance management methodology that helps executives develop and measure strategic corporate objectives and make sure that everyone in the company is aware of his role in making the corporate strategy a success.
A lot of that methodology involves setting objectives and measuring those objectives. For example, Southwest Airlines had an objective of faster ground turnaround times for its planes. Executives did not measure this by timing takeoffs alone, but by how many ground crew employees were stockholders. In other words, being a stockholder would motivate ground crew to get the planes off the ground faster. More importantly, executives measured the success of this objective based on how aware the ground crew was of this objective and how it related to the airline’s overall corporate strategy.
One CEO at a financial services company drove the message of corporate alignment home by walking up to random employees with a corporate strategy map in hand. A strategy map is a visual representation of a corporate strategy that charts out the objectives of an organization, such as to increase employee satisfaction, and shows the link between that objective and how it will be implemented and measured. The goal is to show the cause and effect that objective has across several perspectives: financial, customer, internal business processes and learning and growth. A measurement linked to the employee satisfaction improvement objective could be employee turnover rate, for example.
This CEO would place the map on the employee’s desk and ask:
Do you know what this is?
Can you explain to me what this is?
Can you explain what you were just doing on your laptop and how it applies to our strategy?
The point of this exercise was not to instill fear in employees, although it did; the point was that internal email traffic exploded after an employee received such a visit, with everyone saying, “You better be prepared to answer these three questions.”
The CEO accomplished his goal of making sure employees knew what the corporate strategy was and their roles in making it a success.
The CIO should be taking a similar tack, or the IT department may find itself outsourced, Kaplan warned. Your success is tied to the success of your customers, the business users. You must be aligned to their needs.
“You should know what your value proposition is in the overall strategy and link your strategy to that of the business users,” Kaplan said. “That’s how you can sustain your existence and not be replaced by an Infosys [outsourcing company].”
So are you prepared to answer those three questions?
For the latest from SearchCIO.com – including cloud computing tips, conference coverage, cost-cutting strategies for CIOs and our guide on Software as a Service (SaaS) and service-oriented architecture (SOA) – check out the stories below.
Cloud computing helps firm bring call center in-house, integrate apps — Cloud computing allows a firm to bring its call center in-house to improve customer service, plus integrate applications and provide executive dashboards. Here’s how.
Innovative financing strategies for IT bring big rewards for CIO — Leasing and two-for-one deals yield better IT equipment for less money — key for a CIO who must support new business with no capital budget and a 20% staff reduction.
SaaS, SOA and packaged apps: Optimizing your software investments – CIOs are optimizing their software investments in SaaS, SOA and packaged applications to be more cost effective, functional and customizable. Visit our latest CIO guide for more.
IT transformation is off the table in a recession, CIOs say — Can you really “do more with less” during a recession? Don’t miss Senior News Writer Linda Tucci’s take on the matter as attendees at the Fusion 2009 CEO-CIO Symposium weighed in — and feel free to weigh in yourself!
Are Indian outsourcing firms turning down business out of fear of U.S. companies going bankrupt?
As a result of the current economy, there’s an uptick in U.S. companies sending work offshore to places like India. So you’d think Indian offshore companies would be happy about the potential new business opportunities and very aggressive about going after them. Think again.
Only a few Indian offshore companies are chasing these new deals, according to Partha Iyengar, vice president and regional research director at Gartner India. In a Reuters story published March 3, Iyengar went on to say that “Indian firms need to focus on revamping their sales models to help generate cost savings and add value to the client’s operations.” But not everyone agrees with this reason for not chasing potential new business.
In a follow-up comment to the story, one reader from India brought up the concern that U.S. clients could go bankrupt by the time payment is expected. He has a valid point. Although offshore outsourcing does provide some cost savings to U.S. businesses, it doesn’t guarantee they’ll come out of the recession in one piece.
Nonpayment isn’t a concern for Wipro Technologies, an IT solution and services provider in India. Wipro just follows good business sense and selects customers based on their ability to pay their bills, according to Theodore Forbath, chief strategist and practice leader in Wipro’s Boston office. “And in today’s market, it’s not a secret to see which companies are struggling and which are doing well,” he added.
Dean Lane, former CIO and current principal of The Office of the CIO, completely disagreed with the notion that Indian outsourcing companies are not aggressively going after new business. “In this market, anyone who can get business will take it,” Lane said. He also added that he knows of a number of second-tier (based on company size) Indian companies that are always looking for business. The payment issue is not affecting them at all.
It seems like Indian outsourcing businesses still want our business — they’re just being overly cautious about which companies they go into business with. And do you blame them?
Maybe CIOs can learn a lesson here from these Indian businesses. Even if the offshore market gets tighter and it’s harder to find a partner who wants your business, don’t give up your right to be selective. Make sure the partner is economically viable and has the services and reputation you need. You can be slow and steady. Hopefully it still means you’ll win the race — or in this case, survive the recession.
How much pressure are CIOs feeling to deliver the proverbial more with less? At a lunch yesterday of IT and business executives in Madison, Wis., the strain was palpable. So was a creeping weariness with the do-more-with-less strategy that’s been the boast of every hotshot CIO since IT’s own economic Armageddon of 2001-2003. It’s one thing, it seems, to do more with less when there’s money in the banks, or drive IT transformation when business goals aren’t a moving target.
“Why are people at my door asking for more work, when I have less dollars to do it?” asked David Cagigal, CIO for Alliant Energy Corp. “Some of the customers just don’t get it.”
The lunch was an invitation-only precursor to the Fusion 2009 CEO-CIO Symposium put on by the Wisconsin Technology Network. Cagigal was responding to the lunchtime talk given by Ajei Gopal, executive VP for CA Inc.’s products and technology group. Gopal gave a progress report on his company’s reorganization since the scandal-ridden days before former chairman and CEO Sanjay Kumar went to jail for improprieties related to his job, and to deliver the message that now is the time for bold action. While it may be seductive to stop spending, CIOs should be investing in long-term strategies that break down information technology silos and weave IT into every aspect of the business so that CIOs see what they need to see and respond appropriately to provide the business with (ready for the next proverbial?) end-to-end IT services.
In CA’s case, the internal strategy is not so much on gee-whiz technology, he said, but in tying technology together in innovative and novel ways to serve the customer. Moreover, Gopal predicted that in the vendor world, the integrators — not the point-solution companies — will prevail when the upturn comes because customers, too, will be looking for end-to-end solutions. (Unless, Gopal, they don’t work.)
The spiel was met with some pushback. Alliant’s Cagigal pointed out that CA was ahead of the curve, fortunate to have reinvested in its technology strategy before the crash. How do you convey the need to optimize the business now?
Another CIO observed that IT transformation is a good deal easier at a company whose business is technology than at an organization such as hers — the Wisconsin Department of Children and Families. “The challenge I have as a CIO is to try to help translate the investment of IT to the mission of the agency,” she said, to bosses who don’t understand IT well enough to appreciate the argument. If money becomes available, the agency’s instinct is to hire more social workers rather than sort through how IT could make the current workforce more efficient. (And when the need is urgent, who’s to blame them, as IT transformation doesn’t happen overnight.)
Frank Ace, CIO of the Wisconsin Department of Justice (DOJ), echoed that sentiment. For the DOJ, getting more law enforcement on the street will always be more important than adding another MB. Frank said that IT may be a victim of its own brag: The industry does promote IT as the tool that can help organizations to do more with less. And now CIOs may be caught in a trap of their own making. The cost of IT has slipped down the list of priorities for many organizations.
If you follow the trend of doing more with less, eventually you’ll do everything with nothing. IT’s a slippery slope, Gopal agreed.
“The positioning of the value of an incremental dollar spend in IT versus on something that might be seen as the first line of defense, whether it is cops on the street or social workers, is difficult.”
But it is a case that has to be made on value, Gopal said. “That is the conversion you have to make. You can’t talk about a Unix administrator, but the outcome of having that Unix administrator.”
And what happens when the recession basically turns business goals upside down? One audience member wanted to know what happens to IT shops that, like CA, forged a long-term strategy to meet business goals, when those goals no longer exist? The market trend upon which the IT investment is predicated is no longer viable.
The question was met with a kind of grim silence from Gopal and the audience — a reminder of how cataclysmic this recession has already been for some companies.
This being the Midwest, the hand-wringing did not go on too long without a rejoinder. An IT executive with Kohler Co. admonished the audience not to whine. CIOs are working themselves into a lather about cost reductions, but everybody across the company is feeling the pain. And the worst thing IT could do now is single itself out as a victim. “You will generate a lot of resentment among other staff,” he said.