Seismic Shifts In Outsourcing Land

It wasn't too long ago that outsourcers were causing considerable consternation in both IT customers and vendors.

Mega-outsourcing was all the rage.  If you were a large IT organization, you took this trend very seriously, for all the right reasons.  And if you were an IT vendor like EMC, your world was very different if your customer got outsourced.

But I think that the outsourcing marketplace itself is going through some pretty massive changes.  And, as I spend more time with outsourcers, I realize that some are moving quickly towards the new reality, and other -- well -- others are moving a bit more slowly.

And, if you're an industry watcher like me, it's an interesting story for customers, vendors and outsourcers alike.

The Classic Outsourcing Argument

The outsourcing pitch - at a conceptual level -- has mostly been as a way to get better IT for less money, and allow businesses to focus on what they do best -- serving customers -- without having to invest in being world-class IT players.

Outsourcers make powerful arguments around economies of scale.  And expertise.  And freeing up resources on the balance sheet to go do other things. 

And it works -- up to a point.  At the time, I remember reading about mega-deal after mega-deal.  And wondering if it would keep going.

Like most successful trends in the real world, the outsourcing trend appears to be subject to the same limiting factors that kick in after a while.  The model slows, regroups and reforms, and heads off in another direction. 

The previous model had its strengths -- but also its weaknesses.  And I think we're seeing the model start to shift and adapt in new directions.

Breaking Up The Value Proposition

Classic outsourcing was usually an all-or-nothing proposition.  Hand over a big piece of your IT, we will run it for you.  Don't ask for too many changes after you do that.  We'll reduce your costs, but we'll do it our way, not yours.  And, if it's not in the contract, well ...

I remember a time when I was fascinated with Costco and Sam's Club and all those big-box discount stores.  I'd come home with a three year supply of Cheerios, or frozen buffalo wings, thinking I was saving all this money, and -- well -- it usually didn't work out so good. 

Hard to forecast what you're going to want to eat three months ahead of time, isn't it?

One strong theme in outsourcing is the decomposition of services -- how can a massive, complex outsourcing offering be broken up to make it more appealing and more saleable?  And offer it in a more flexible, just-in-time manner?  This trend is causing all sorts of discussions.

I've seen some powerful and recurrent themes here -- some of which might be worth sharing.

The Virtualization Conundrum For Outsourcers

I know that the outsourcing crowd is taking virtualization (and VMware) very seriously.  But I'm not sure they entirely know what to do about it.

Challenges are everywhere.  As I've written before, the infrastructure requirements are very different in a virtualized environment.  And the IT run book has to change to fully exploit the value of dynamic IT.

But perhaps the scariest part from an outsourcer's perspective is that it's disruptive.  Think about it -- the majority (and their whole process) is based on a unit of physical computing -- the server (or desktop).

They're being asked to invest heavily in new technology (VMware and associated infrastructure) as well as new process (provisioning, management, etc.) for potentially less financial returns, since -- obviously -- virtual servers and desktops should be priced lower than physical ones, right?

Yes and no.  What many people do not fully appreciate is the speed and flexibility that VMware brings to an environment.  Things get done far faster than before.  And, in this world, people will pay for speed and flexibility.

An airplane ticket that's flexible is worth more than one that isn't.  FedEx overnight costs more than FedEx ground.  And so on.

True story: I may have mentioned that I'm running a social media initiative here at EMC, and as part of that, I worked with our IT group to put up a platform.  They gave me two choices: wait three months for a physical server, or be up and running on a virtual server in a matter of days.

Here's what nobody realized -- I would have paid MORE to run in a virtual server, simply because I could have it sooner.   I also knew that upgrades would have been easier, as well as test environments, etc. etc.  But the team spent all of their time trying to tell me how they were going to save me money. 

Saving money is nice, but so is speed and flexibility, right?

How does this translate to outsourcers?  They're going to need to learn to charge for the additional value in a virtualized environment: primarily the ability to react fast (and cost effectively) to new requirements from their customers.  And, from the early discussions I've had with a few people, I'm guessing it'll be a positive-sum game, and not a break-even one.

And, if you think this idea is interesting as it plays out for server virtualization, just wait until desktop virtualization (VMware VDI et. al.) gets big ...

A New Flavor Of Multi-Tenancy

Multi-tenancy is an easy concept -- one infrastructure that provides shared services for lots of different customers.  It's a great way to keep costs down.  Environments have to be designed for multi-tenancy, or should be.

Most outsourcers have not done much with the concept -- they've optimized things like server racks, power and cooling, maybe security -- but, at the end of the day, everyone's got their servers, their apps, and their storage.

Some outsourcers are going after multi-tenancy by providing a shared application environment (e.g. Exchange, SAP, Salesforce's CRM, etc.) that offer customers limited flexibility.  That's fine, but it limits the market appeal.

I think one of the benefits of VMware is a new style of multi-tenancy, one where everyone's got their own (virtual) server image and application, but there's a greater degree of sharing with physical server resources, storage, backup/recovery, replication, security, management -- as well as the processes that provision and manage all this stuff. 

Customers are free to do whatever they want within their virtual machines -- but everything else is standardized for multi-tenancy.

Moving Up The Stack With Services

Let's face it, getting someone comfortable with any outsourcing decision is a long, expensive and painful process.  So I think there needs to be some thoughts towards "on ramps" that lead to a potential outsourcing decision.

Many of these customer engagement "on ramps" will be services-led.  A consulting engagement to rationalize IT.  A virtualization engagement that makes IT easier to move.  Someone to figure out your business continuity strategy, or help you improve service levels. 

Or, heck, maybe just some smart people to help your run your existing IT.

Any outsourcer with a broad range of IT professional services (independent of outsourcing) will be at a significant advantage going forward. 

As an example, Wipro (an EMC strategic partner) recently acquired Infocrossing (a national outsourcer here in the US).  I think that's a powerful combination going forward, I think.  Wipro can engage on literally hundreds of fronts with a customer, and now has an outsourcing / service provider option as part of their portfolio.  Looks like 1+1=3 to me.

I think we'll see more integrated combinations like this going forward.

Unbundling The Offering With New Segmentation

Many outsourcers have created "portfolio offerings" in an effort to find the right initial fit with new customers.  While this is good, I think the segmentation has been around traditional IT needs, rather than newer IT requirements.

When you talk to most outsourcers today, there's usually an operations offering, help desk, asset management -- you know, all the classical IT functional offerings.  But I think there's an entirely new portfolio of potential service offerings around newer IT challenges, rather than traditional ones.

And, if you're an outsourcer concerned about commoditization, it might behoove you to think in terms of what's new, rather than what's old.

Now, from my admittedly biased perspective, we see a lot of newer opportunities that align with EMC's current portfolio.

As an example, there's the "post-virtualization" outsourcing opportunity.  Once an application (or desktop) environment is virtualized, it's far easier to move it to a service provider, isn't it?  And, sadly, I've met customers who are looking for a commercial-class outsourcer who'd be willing to take on their now-virtualized environment, but -- no offers they like as of yet.

I'm also rather intrigued by a whole raft of new opportunities around information management delivered as a service, rather than a product (see previous post here on IMSPs).

As an example, EMC entered the fray this week with MozyEnterprise (enterprise-class remote backup for desktops and midrange servers) built on the Fortress platform.  Outsourcers and service providers can simply resell the service under their own brand (many are), or use our template to offer their own.

You may be familiar with our enVision product that does security event information management.  Basically, what it does is gather all those security logs that no one looks at, does real-time correlation, saves everything for posterity, and runs security audit reports on demand.

It's managing security log information.  Most customers prefer to consume this as a service, not as a product.  And we have a few enterprising partners who've found some nice opportunity here.

You probably know that many large companies use Documentum for collaboration and content management.  But many of these companies want to collaborate securely between themselves and their business partners.  The product can do that easily, but what's missing is "neutral territory" to host the collaboration environment -- it's not ideal to put it behind one company's firewall or the other.

There's opportunities for long-term retention of compliant archives that are accessible faster than tape or paper.  I think eDiscovery for legal groups would be great as an outsourced service. 

Put 3-4 smart people in a room for an hour, and I bet you could come up with a half-dozen more along these lines.

And Then There's Model-Based Management

I could write an entire post on the business impact that model-based management tools are having on outsourcers and service providers, but let me just give you a taste ...

When you think about the most expensive and difficult part of an outsourcers' sales cycle, it's discovery of the environment they're inhereting.  It's large, complex and usually poorly understood.  Get it right, you have a winning bid.  Get it wrong, and you're going to either have an unhappy customer, or an expensive mistake on your hands.

Today, this is done through manual discovery.  Teams of people start poking and prodding for weeks at time, trying to get some sense of what the customer has, what it all does, and how it's all connected.  It's expensive, and it's error-prone.

A while back, we started offering Smarts ADM for this specific problem.  You might remember that it cracks packets, detects application traffic, finds relationships, and then starts crawling the infrastructure -- every element, every configuration, and every relationship.

Give it a few hours, and it will deliver a near-real-time high-definition logical and physical view of your entire IT landscape, from the applications downward, without agents and without fuss.  People don't believe it's true until they see the demo in their own environment, and then they want this.

So, let's look at this from an outsourcers' perspective. 

If you're in the Big IT Project business, you can come up with far better proposals with far less risk in a fraction of the time.  During the migration, you have real-time version control, and detect when something changes when you're trying to move it -- that saves big time and big money. 

And, of course, you've got a portal for your customer so they can see their environment as it looks today, and how it looked a week ago, and ... well, you get the idea.

Now, take that model and use it as the basis of service delivery management.  Regardless of whether the outsourcer owns all the assets involved in a business process, or only a part of them, Smarts can use that model to help the outsourcer deliver outstanding end-to-end service levels without having to "own" the entire environment.

Should IT Feel Threatened?

It's understandable for people who've spent their lives working in corporate IT to be distrustful of outsourcing and outsourcers -- and, in many cases, they can make a pretty good case.

But, at the same time, I think it's fair to point out that -- when you look at the corporate landscape -- there are many corporate functions that are largely composed of outside service providers in many situations.

On my list of largely-outsourced corporate functions is HR, finance, marketing, product development, logistics, manufacturing, travel ... I'd even go as far as to say that most corporate functions have embraced using specialized outsourcing providers, and -- perhaps -- IT has been a little behind the curve on this mega-trend in the corporate world.

The people who work in these other functions haven't been marginalized, or made irrelevant.  If anything, they're making more of a contribution -- and are more important -- than ever before.

What does this mean for IT?  I think it means that they move up the value stack -- determining strategy and requirements, managing the portfolio of outsourcers and service providers, consulting with the business on the best use of IT, and so on.

And, of course, helping to define and implement information governance in their organizations.

Where Is It All Going?

Overall, I think the industry forecast is pretty good for outsourcers and service providers -- IT is getting more complex, and every company I talk to is usually considering one flavor of outsourcing or another.  And technological developments are making outsourcing even more appealing to more people: virtualization, security, model-based management, etc.

But, at the same time, outsourcing is a service, not a product.  And, like any service offering, the trick is to package it in such a way that your customers find it appealing -- the right offer, the right size and the right terms.

I think we're going to see incredible innovation in service offerings here in the next few years.  We'll see the traditional players morph a bit, but we'll also probably see new entrants.

Much press is given these days to the Googles and the Amazons and the Salesforce.coms of this world.  Each of these have found an under-served market that wants their services.  And I'll think these folks will be interesting players to watch.

But, at the same time, I think the real interesting parts to watch are the outsourcers and service providers that really understand corporate IT, and figure out ways to create exciting new offerings to meet new customer needs.

It should be fun to watch.

Comments

[Penegra]

Good work. interesting blog...