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From Broken to Renewed: Why the Cloud-Enabled IT Model Will Restructure the Enterprise IT Services Value Chain

August 14, 2013 No Comments

SOURCE: Gravitant

In my 7 years as the CTO of a $4 billion government IT agency, I spent a great deal of time strategizing what needed to be done to make the enterprise IT supply chain more flexible and efficient. We constantly struggled with how we could effectively control the cost curve associated with IT, while at the same time deliver an innovation that would increase business efficiency. I pictured an Expedia-like interface that allowed business partners and IT staff to collaborate, research and identify the best solutions quickly, and with a clear understanding and comparison of costs, risks and quality of service. To work, it needed to be across different combinations of providers and technologies, but with a clear sense of architecture.

Unfortunately our major integrators and IT service providers had business models that essentially were at odds with these goals and objectives.  It seemed there was little hope unless the enterprise IT value chain faced a massive disruption in what we had all come to expect.

The Broken IT model

Traditionally, successfully delivering large scale enterprise solutions required bringing many technologies, processes and people together in a complex, expensive multi-year effort. To address the complexity and streamline management and coordination, enterprises would usually become highly reliant on one or two Tier 1 system integrators for large scale projects, or IT outsourcing (ITO) or business process outsourcing (BPO) providers for IT operations. These relationships were long-term in nature, with large financial commitments required.

With this dependency in place, the providers who built their business around this model had no motivation to bring the costs down, nor to bring new innovation to their customers. Since enterprises needed to refresh their infrastructure every few years, SIs and ITO providers could also depend on a consistent revenue stream. But this did little for customers who were seeking more flexibility, cost efficiency and innovation. As an enterprise, we could not afford to be without their services, and hence the relationships dragged on in context of pure labor arbitrage as the only real meaningful basis of cost savings.

Next Generation Cloud-Enabled IT model

With cloud-based delivery models, this dependency is now broken. Cloud provides a platform to consume applications and infrastructure-as-a-service, quickly mix and match best-of-breed services to build solutions, and scale them based on business need. CFOs, CIOs and business unit heads can now control the cost curve through not only labor arbitrage but cloud service arbitrage as well, all while meeting business needs quicker and more efficiently.

As a result, the enterprise SI, ITO and BPO models were due for a massive disruption. This disruption should be and will be driven by enterprise CIOs, CFOs and business unit heads. The SIs and ITOs no longer have to own, integrate and manage hardware boxes and software platforms/applications, which eliminates the complexity that drives cost and revenue. The delivery processes and roles are also different with cloud. This model enables self-service that in many cases removes the need for ongoing external services and support. Essentially, much of the value that SIs had previously delivered is not relevant in a cloud-centric world. As a result their 35-45% margin businesses are now at significant risk as they can no longer deliver the value in cloud.

The Emerging Business Model for Service Providers

So what’s next for the SIs and ITO providers? Their role clearly changes to quickly configuring, delivering and managing solutions by aggregating and integrating cloud services. The expectation will be to deliver the best value (low cost) solution at the fastest way possible.

SIs and IT providers have an opportunity to be an aggregator/broker in the cloud. For this they need new capabilities that enable them to re-sell cloud services from multiple providers, compose solutions and deliver them from a common service catalog or platform. It’s a new business model. It’s a high-volume, relatively lower margin (15-20%) transaction business. For this to work, the SIs need to build new skills, processes and technology capabilities, and importantly their culture, relationships and mindset must also change. It will not be easy. Some will change, others will not make it and new ones will be born.

It is also important for the SIs to understand that this new model will not be driven by them but rather their customers and their enterprise CIO, CFOs and business units. It’s already happening to enterprise IT internally — it’s called shadow IT. And all those capabilities I mentioned earlier need to be a part of that model.

With the global SI business worth more than a trillion dollars annually, SIs, ITO and BPO providers need to quickly figure out how to play in this new IT supply chain or they will be disrupted by a new generation of cloud-based managed service providers.

About the Author

Mohammed Farooq is the chairman and CEO of Gravitant, a cloud services brokerage and management software company. He has over 17 years of experience in the enterprise software field. Prior to starting Gravitant, Mohammed spent seven years as CTO for the Texas Health and Human Services agency, a $4 billion IT organization, assisting in the transformation of business performance and technology architectures and solutions.


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