As in the Chinese proverb, we inhabit interesting times. Disruptive changes in client expectations and the accelerating evolution of technology are remaking the IT services industry. It is a time of long change, bringing challenge and possibility and opportunity. Let’s see why.
Results of the Quarter: Mixed Performance in Outsourcing, New Growth in Consulting
Most of my career has been spent in providing tech services, so I watched the cycle of summer 2014 earnings announcements from the big IT services companies with much interest.
One stand out set of results came from the giant India-based outsourcer TCS. It managed quarter on quarter revenue growth that almost matched the annual growth of some of its major competitors. A headline from the India Business Standard said “TCS Q1 results prove elephants can dance”.
But overall the mood across the sector was muted as the multi-national and major Indian players reported. Other providers did not do so well. There was greater variability in results than in previous quarters. Total cost of ownership and pricing remained major factors for clients of big IT and BPO services. It is a tough market.
Conversely, the feedback I get from speaking to leaders of classic consultancy firms is straightforwardly positive. Many of the traditional players have seen annual consulting growth around 10%, and some upstart new entrants are doing much better than that. There is demand for classic, high-end systems integration skills coupled with new digital capability. There is new energy in onshore recruiting markets and raw competition for the most modern skills.
Given that consulting and system integration have often been seen as traditional and declining business areas, what’s happening? Let’s start by looking at outsourcing and Application Development and Management (ADM) services.
Outsourcing Under Pressure
Classic outsourcing –primarily a global delivery/offshore business these days – remains a huge market. It is also one under considerable pressure, and long-term pressure at that. This partly originates from clients. In recent conversations with board members of client organisations, I have been told often of dissatisfaction with the true value of much of modern outsourcing.
As a result, the market is deconstructing and transforming the offerings it wants from suppliers. Many clients want more control and more value. So, many contracts continue to become smaller and shorter. Other clients seek the ultimate cost solution. There are now a small number of very large, broad and long-term engagements – covering infrastructure, applications, BPO and consultancy, where suppliers are offering intensely competitive rates, and simultaneously buying the client’s assets, or paying a price for the existing IT department.
A Cycle of Renewals and a Battle for Market Share
Importantly, the outsourcing sales cycle is now one largely based on renewals, where clients put out existing contracts for rebid. The result is a ruthless battle for market share – red in tooth and claw. It is a classic commodity market. There will be winners, but the likely long-term outcome is a smaller number of larger players.
I’ve led teams that built market leading cost structures, and that introduced global delivery and productivity innovation at large scale, But any company with strong interests in this market will need to continuously and radically hone its on and offshore cost base, and seek new innovation to drive productivity. There will be times when capital will need to be used boldly to win deals.
Acceleration in Technology
The new activity in consulting on the other hand is part fuelled by shifts and disruption in technology, and the creation of new business model possibilities.
The code word for this is “Digital” of course. It works well as shorthand, and all the major global players have a digital strategy and vision, looking for new growth in what a constrained total services market.
But any supply-side player or CIO also needs to make sure they aren’t simply painting speed stripes on the side of their 10-year old SUV and then stenciling a large ‘D’ on the hood. Digital shouldn’t just be a re-branding of old e-Commerce models. We need to be much more specific about the disruptions, opportunities and challenges.
One of the simplest and best visions of the new world comes from Microsoft, and was summarised in CEO Satya Nadella’s recent email to all his employees. He talks of a mobile-first and cloud-first world, made up of billions of PCs, tablets, mobile devices and sensors that run “cloud service-based apps spanning work and life”. The implication is that we should see this world, and its opportunities, as based on the integration of mobile, cloud and applications. The recent tie-up between Apple and IBM also underlines this pattern. Other digital definitions include data, analytics and social tech – vital disciplines – but for me “mobile-first/cloud-first” is the essence of the current tech wave.
Mobile usage already dominates Internet access in some parts of the world. It will everywhere. Cloud moves increasingly to mainstream use. One simple example: There are still teams that take 3 months to provision development and production environments, sometimes because of market regulation. One UK based start-up team I know automatically create their dev environments under Amazon Web Services every morning and shut them down every evening to avoid paying overnight costs. That is a vast difference in productivity.
Indeed, one of the reasons that there is so much enthusiastic start-up activity is the ease of creating the environments to build and run apps. Young entrepreneurs assume the cloud – in fact they live and breathe the cloud. It gives them instant potential reach, and instant visibility,
Software as a Service and the Changing World of Applications
As a concept, cloud starts with reasonably cost competitive and elastic access to infrastructure and platforms. It is also increasingly about access to a rich and developing market of apps and services, under the banner of SaaS or Software as a Service. It is this that will make cloud of fundamental importance. Indeed, the fastest growing skill needs I’ve seen over the last two years are precisely around the configuration of SaaS apps like Salesforce and similar.
And the use of SaaS gets bolder, larger and more complex. High-end system integration skills are increasingly needed for cloud integration.
Early in the Life-Cycle and the Growth Curve
Another key insight is that we are early in the life cycle of our mobile-first and cloud-first world. Given the histories of Nokia and Blackberry, mobile is a market subject to fast learning and fast change. We should not assume a world dominated by Samsung and Apple devices. For example, high spec, lower cost devices from China are making rapid progress in domestic and international markets. Other examples of evolution in progress include the current vast human experiment with form-factors, or the large number of emerging technologies for handling mobile payments on the hoof.
Many Platforms, Many Choices
Here’s another important symptom of an immature market: the CTO of a significant, world-class B2C company has complained to me of the increasing differences between mobile universes – iOS, Android, Windows – and the effort required to deploy consistent, high-quality apps across them. It eats too much of his dev budget.
We have simultaneously made it easier to run software, and harder to write it.
We all have folk memories of a simpler world of the 1990s and early 21 century. There was a roughly standard market architecture based around Windows PCs, the Web, a limited number of server types and a small number of dev and database choices of significance.
Now is a time much more reminiscent of the 1970s and 80s. There are major choices to be made: iOS, Android, various incarnations of Windows, Google, Amazon Web Services, Tizen, many choices of language and database, and decisions to be made between classic enterprise software and cloud-served enterprise upstarts. Public cloud services can be relatively expensive for some domains – which means careful thinking and prototyping is important – and billing of cloud services can be complex.
A New Dawn for Architects
People are looking for help. One small start-up I like has created tools for enterprises to build very simple cross-platform mobile apps. They get extraordinary senior access to corporates as enterprises grapple with the new choices, and the resulting complexity.
So one great need, and for IT services companies one of the opportunities, is for informed architects – people who can shape integrated solutions across these platforms, across mobile and cloud, and then across business function, data and social tools. Such thought leaders are needed more than ever. And there is also a market premium for developers who are fluent with the new tech.
Faster and Better and Cheaper?
Businesses have also long lost patience with the cult of the large program – a long-term trend of course, but the new technology seems to offer an additional promise of greater agility, and responsiveness.
The software development model is shifting from something akin to building cathedrals to something more like town planning where a good architecture connects a network of small apps teams delivering in Agile sprints or smaller, more traditional releases.
Many companies are creating digital development hubs that are often onshore. The result is new demand for coding skills. The art of programming is fashionable again, and with web development, individual developers can make a huge business difference. It is likely that key, future IT services will be less based on process. They will be more human.
Given the integration of mobile, apps and cloud, teams are being structured around aDevOps model which infrastructure and application are treated as a connected whole. A new science of project as a service is being created.
Masters of Delivery
This will be important to get right as ambition around cloud-served systems grow. There are already a number of large-project failures that have at their core a naïve approach to Agile. So, we will need a new generation of what I call Masters of Delivery, people with leadership and project management skills able to bring and adapt their insights around scale and managing complexity to the new tech.
These new development approaches may increase speed, but at the cost of some complexity. Systems become networks of cloud services. Projects become networks of apps teams.
There is more opportunity here. Another bright start-up team I know is developing new ops tools for instrumenting and managing applications in the Cloud, They gained customers almost from the first day of business, so large is the need. More challenging will be the creation of better, re-usable architectures that are inter-operable across mobile, cloud (private/public), and enterprise/legacy platforms, but both the need and an enormous opportunity are there.
Putting It Together
To summarize and conclude:
Firstly, traditional big IT services – based on outsourcing and ADM models – remain a large market, but one that is highly commoditized, and competitive. The focus on cost will remain fundamental, driven by competition for market-share.
Opportunity – Transforming Outsourcing
But here is also a gigantic opportunity for new types of service, where human effort is replaced and augmented by automation. In fact, as clients switch to cloud-served apps, the outsourcing model as a whole will need radical overhaul. This will likely be a long journey, given the early and evolving nature of relevant technology, and the fact that building complex software to support multiple client organizations requires real investment. The big IT players have many resources. They will need to use them.
Opportunity – New Integration Services
Secondly, we are all embarked on a ten-year transition to that mobile-first and cloud-first universe. This creates new opportunity, and open space for people and new start-ups.
We will need new tools and architectures to manage and integrate networks of teams, devices, infrastructure and apps. We will need world-class architects to make big choices and work across an integrated stack that links infrastructure, application and business. We will need re-engineered and re-vitalized project management and systems integration skills that can create the project-as-a-service and agile delivery models of the future. And the process of building systems will likely be less process-driven, and more based around human-skills and good tools.
Opportunity – Reshaping the Service Model
IT services companies can themselves deliver these capabilities in reshaped ways and at reduced cost. New types of flexible relationships with employees are not only possible, but often desired. There is an opportunity for the brave to re-invent and upgrade global delivery culture around new aspirations. And course, architectural frameworks, SaaS and automation can be used directly to automate, deliver and enable such services. IBM is already providing online “digital service offerings” across social analytics, inspection of SAP and Oracle systems, and more. The possibilities for creativity are immense.
It is a time of long change, and as always that brings challenge and possibility and opportunity – for individuals, established companies and new entrants.
Keith Haviland is a business and technology leader, with a special focus on how to combine big vision and practical execution at the largest scale. Former Partner and Global Senior Managing Director at Accenture, and founder of Accenture’s Global Delivery Network. Published author and active film producer, including Last Man on the Moon. Advisor/investor for web and cloud-based start-ups.