Innovation

Enterprise Efficiencies and The Future of Outsourcing

Corporate IT is in the midst of a transformation that will rip apart today’s long-term outsourcing relationships. Outsourcers have provided essential support for the core systems that make it possible to run a large organisation. But, those core systems are being replaced by SaaS applications, or broken up into cloud services. These new systems based on “Web services” are faster to assemble, more adaptable, and cheaper to maintain.

October 13, 2016

Adaptive and responsive information technology is the nerves and muscle of an adaptive and responsive enterprise. The modern enterprise gathers data about all of its activities and customer interactions, analyses the data, and responds quickly. The best organisations are continuously testing and improving their software in order to improve their products and services.  All of this is possible with an underlying architecture based on Web services, immersive data collection, and continuous delivery.

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In contrast, many enterprise managers do not feel that their IT departments are responsive, and a reliance on outsourcing can make the problem worse. Big outsourcing deals can last for years and cost tens or hundreds of millions of dollars. During that time they are holding costs down, but they aren’t adapting. The same problem crops up with ERP and other big software systems. They take a long time to change, and they make IT functions less responsive.

We don’t need a long term deal to buy Web services from vendors like AWS, which will sell one server for one minute for one cent. Here is a picture of the trend.

time to change

We can compose complex systems out of these smaller services and “microservices”. Marketing departments lead this trend. A typical marketing department uses dozens of SaaS applications, Web services, analytics and information services, and advertising markets.

We can break up existing “monolithic” applications into smaller Web services, and then mix in services from cloud vendors.

Monolithic

This allows us to buy more software and IT infrastructure, and build less. The typical IT system will be a hybrid that includes some important customised components, and a lot of standard cloud and SaaS services. Vendors will handle maintenance and upgrades of the cloud services, which saves customers a lot of money and keeps them close to the state of the art.

Maintenance and upgrades represent 70% of the money spent on a typical enterprise system, and most of the revenue going to outsourcers that maintain that system. If we get maintenance and upgrades from cloud vendors, that will dramatically cut what we pay to outsourcers.

An increasing number of services are available in on-demand packages. A lot of things that were formerly professional services are now packaged into SaaS. Do you need accounting, benefits, or recruiting? There’s an app for that.  SaaS vendors blend human work into the SaaS back office, and then aggressively automate it away, or replace it with AI. This will cut revenue for BPO vendors who can’t put their services into a SaaS package.

We still have to build some of the components. However, we can build and release them faster. Web service components are smaller than the original application, so they require less testing before each release. If we have an automated test system, we can run a continuous delivery process, and release many changes each day. We won’t write requirements, and then send them to a remote outsourced team to be handled by a remote project manager. Software developers will communicate directly in real time, and they will respond to requests and test results in real time.

This continuous delivery process requires specialised skills for devops and automated testing, which some outsourcing vendors are providing. However, this process is also more automated and efficient than older software development processes. If machines are doing much of the testing, and all of the work for building and deploying and monitoring software, we will not need as many programmers and administrators for each software function. Eventually we will find that computers can write their own code.

Not everything will be automated, so clients are learning how to buy human services in smaller chunks.  They use software for “service integration and management” (SIAM) to keep track of the people providing services  like desktop support.  They can then adjust the volume and type of services they purchase, and engage multiple vendors to provide the same type of services. This reduces the pricing power and margins of outsourcing vendors.

So, enterprise clients can get lower costs, faster delivery, and a more responsive IT function. However, they have work for it. All of those services need to be connected together into coherent systems and products. They need to be tested, every day, with continuous integration systems. Integration will become a core skill for big companies, not something to be outsourced. Integration is how they manage the outsourcing. As companies buy more, and integrate more, the “Chief Information Officer” will become the “Chief Integration Officer”.

Software is eating the world. The need for IT services is constantly expanding. However, the packaging of those services is changing and becoming more efficient.

  • Clients will consume less outsourcing, with more SaaS and Web service products. This leads to an approximate 70% savings on maintenance and upgrades.
  • More and more “business process” functions will be available as on-demand SaaS services.
  • Software development is becoming more automated, more productive, and faster.
  • Savvy customers are buying outsourcing in smaller chunks from multiple vendors
  • To assist with this process, new vendors and tools are emerging for service integration and management.
  • Large organisations will need to take responsibility for integration. CIO = Chief Integration Officer.

Outsourcing vendors can adapt to these changes by aggressively automating and packaging their capabilities into Web services. They will need to learn how to do continuous delivery. And, they can help with service integration and management.

This is great news for enterprise clients who seize the opportunity. The original goal of outsourcing is to buy, rather than build, top technical capabilities.  Cloud services deliver even more capabilities in a very efficient package. Far more of what companies do can be externalised, and this will lead to a quite different skill set for executives whose responsibility is to manage the firm.