My August column (blog!) was my 60th – five years of hopefully helpful commentary and an occasional insight? The year 2013 also marks the 20th anniversary of my arrival in the IT industry when ICI (who remembers ICI?) appointed me as Global Group vice president of IT. I was in Japan implementing a £55 million manufacturing investment when the summons came – and since I retired from ICI six years later in 1999, I have continued on in the IT industry.
In this blog I will draw on these years of experience to warn of a fundamental conflict of interest that I see emerging in the long established modi operandi of the IT outsourcing (ITO) industry. Those of my readers who plan to attend the 2013 CIO Summit on September 25 may want to corner me and debate the issues I raise here – I will be very interested to have your insights.
Fundamental? The capabilities and business models of the ITO vendor community are under immense competitive strain. New market entrants are redefining the whole basis of competition in sourcing. In infrastructural services the leading new entrant is Amazon Web Services – and the 2013 Gartner IaaS Report (published late August) sets out just how strong a lead Amazon has established. As highlighted by the excellent Richard Waters in the FT and also in CIO magazine on August 21, Amazon now has five times as much cloud capacity in use for its customers as its next 14 rivals combined.
This is clearly about public cloud, not private cloud. But, as Waters observes in the FT, "according to what was, until recently, received wisdom, big companies would never trust their most valuable data and important processes to a ‘public cloud’ service like this – it now turns out that the rest of the business tech world was wrong – the convenience and cost advantages are so great that even big companies have overcome their qualms".
Conflicted? Well - consider what the long established pattern of the typical outsourcing deal is. The bidding process selects a vendor who offers to simultaneously finance, ‘lift and shift’, transform and then provide ongong operational services for the remaining years of the contract.
As is well recognised, the financing, by shifting the costs of the ‘lift, shift and transform’ on to the cost of the services provided in the later years makes direct comparision of the competitiveness of the future provision of services very difficult to measure. And by having the single vendor control all aspects of the ‘lift, shft, transform and ongoing service provision’ under a tightly worded contract ensures the ability of that vendor to expoit the client’s change requirements to the benefiot of the vendor’s bottom line.
But the Amazon story points to a now additional dimension of conflict of interest. The vendor will seek to ‘lift and shift’ the client onto its own operational platforms (or data centres) – even though, as the Gartner Report makes amply clear, its own operations will in no way come close to matching the competitiveness of the Amazon platform.
This, I suggest, is the nub of the issue. If it is true that the capabilities and business models of the established ITO vendors are under immense competitive threat, with new market entrants redefining the whole basis of competition in sourcing, then these long established ITO vendors are the last people to entrust the sourcing decision process to. They are conflicted!
So I propose that we need to firmly segregate the three key elements of the ITO exercise into distinct and separately managed processes designed to obviate any risk of conflicts of interest.
First, any outsourcing exercise is transformational. This requires financing, and that financing should be vendor neutral. We need to establish sources of finance other than the ITO vendors themselves.
Secondly the scoping, design and management of the intended ’lift, shift, transform and sourcing of services required’ should itself become a service provided by small teams of well experienced but vendor-neutral professionals.
Thirdly, the ITO vendors should now position solely as end-service providers. Stripped of any role in financing or in ‘lift, shift and transform’ they can focus on delivering their core role as competitive service providers.
From the clients’ point of view this approach to ITO should sharply reduce the risk of being trapped by a vendor whose prime purpose is to feather its own nest.
From the ITO vendor’s point of view, the major gain is the freedom to focus totally on competitive excellence in its core business.
How, one must ask, did a whole industry of supposedly competitive compute service ITO vendors allow a mere bookseller such as Amazon achieve such dominance?
"Five times as much cloud capacity in use for its customers as its next 14 rivals combined."
Thank God for competition – but shame on them! They were clearly asleep at the wheel.