From Outsourcing To Multi-Sourcing

From Outsourcing To Multi-Sourcing

Ed Sperling, 12.28.09, 06:00 AM EST

Much has changed since outsourcing was introduced.

IT outsourcing has been around for decades, but in the past it was a one-for-one handoff. Either a company ran the IT department or an outsourcing contractor did it for them.

Much has changed. Companies are choosing from a menu of options and a list of competitive offerings, with results that still aren't fully understood. To help shed light on what's changing, Forbes caught up with Jamie Erbes, chief technology officer for Hewlett-Packard ( HPQ - news - people ) Software and Solutions.
Forbes: Outsourcing IT is hardly a new concept. What's different this time?

Erbes: We've certainly seen this outsourcing trend in the past, but what we're seeing now is uptake of more selective sourcing. The CIO and IT organization are looking at sourcing some of their operation to cloud providers, but not all of it. They're also looking at ways to keep tabs on the integrity of IT as it all blends back together into the business services that they need to offer back to the business units.

What's driving that change?

A lot of conversations I've had recently with customers is how they can capitalize on the resources from various providers including the Amazons and Rackspaces of the world or enterprise services from companies like HP. How can they take advantage of that sourcing model and put an effective framework above it--one that comprehends IT financial management, for example, or service-level aggregation and management? Those are the questions we're starting to hear.

So there's more CIO involvement in the outsourcing?

Yes. If you go back 20 years, the message behind outsourcing was, "Come and take over my IT." The IT organization handed over responsibility for everything including interaction with the business units. It was not just a portion of IT or a piece of the data center. It was all of IT, and in some cases that included the CIO. The change that we've seen is there's a step toward multi-sourcing. There may be a line cut, for example, between infrastructure outsourcing and applications development. Some of these services are best-of-breed outsourcing selections and a lot of analysts are encouraging clients to do multi-sourcing. But when they outsourced to a sole provider, the management level on top and the reporting and transparency was intact. With multi-sourcing you have silos of management and reporting, limited visibility and service-level agreements in silos.

What's the best way to deal with that?

The next step will be to pull all of that together into business services. There's a layer of service management at the enterprise level that is necessary to do all of the translation from the intricate specific detail around service levels, availability and outages, for example.

What does the corporate IT department do in the future?

Before we used to counsel the client on how to be the best they could be at planning, designing, building and running IT. There's still some of that activity, but they need more of a skill set for sourcing, integrating and managing. That's an evolutionary need now within IT.

And it's no longer just about data, right?

That's correct. The whole concept of portfolio management is taking on a new life in these organizations. It's almost like a product manager role that's evolving within IT. One CIO told me he needs a sales and marketing team--and a product management team. They have to understand what they're crafting in terms of cost models and pricing models back to their business. If you look at the aptitude of the type of person that takes, it is like a product manager. You have to be able to talk about the IT capabilities you have and what you can offer to the business because now the business has choice. The last thing you want is for them to avoid IT. If IT is a hidden-cost overhead that's a pain to deal with, it's going to be avoided. The IT organization has to draw the client in with products and services their business wants to consume. That mitigates the desire for businesses to go out and directly obtain these cloud services or software-as-a-service--basically an end-run around IT.

It used to be a matter of assessing technological capabilities and applying them to a business. Now it appears to be less about the technology.

IT always will have to have a competency for understanding the technology, but it's unlikely they'll have to be the expert on server technology in the future. If they do a smart sourcing strategy, they don't need the server experts. But they will need the platform expert to blend the server and storage and the application types to make sure the outsourcing decision they make around the infrastructure-as-a-service fits well with their application strategy.

Who are you selling this stuff to? Is it the companies or the cloud providers?

Our strategy has three prongs. The first is we are a cloud service provider. The other two are in terms of aligning products and consulting and enablement services for the service provider. We helped Verizon ( VZ - news - people ) craft their compute-as-a-service strategy set, for example. We also help the enterprise business to be a better and wiser consumer of services, and to be a better provider of services internally.

Will the software in a cloud be customized, and if not, what is the penalty?

We think the question should be, "What is the cost of all that choice and heterogeneity in the data center?" The penalty you pay is one of the concerns. Customers need to understand application or workload characteristics and to be able to construct private clouds or pooled infrastructure within their own data centers. They need to manage workload against that target, as well as provision applications out to other cloud providers such as Amazon. If you have several choices, each with different compute styles, that should give you the right granularity so you can run them where they should be run. But too much choice and variety is a bad thing. There are some specialized applications such as airline systems where that's required, but for most it is not.

Aside from those specialized cases, is there a difference from one organization to the next?

Some of the mature organizations--those with a concept of ruthless standardization--have normalized their hardware platforms and their networks and their compute styles. They have a handful of compute styles. That's compared to the immature organizations, which may have grown by acquisition or decisions that were made without a clear sense of architecture. Those are very messy environments. Our challenge is to span both environments and hide some of the complexity.

Ed Sperling is the editor of several technology trade publications and has covered technology for more than 20 years. Contact him at esperlin@yahoo.com.

The Cloudy IT Landscape

The Cloudy IT Landscape
Ed Sperling, 12.28.09, 06:00 AM EST
The shift to a utility-based computing model has massive implications for everything we've ever known about IT.
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Ed Sperling

Gartner's outlook for the next few years shows a steady migration toward cloud computing, driven at first by cost and then by quality of service. But the bigger issue that emerges from the research house's new report on the effects of cost-cutting and utility-based computing is who's going to be offering what to whom?

The immediate driver for cloud computing on the IT side comes from the economic downturn and the need to cut costs, says Frances Karamouzis, a Gartner research vice president. It's cheaper to outsource some operations to places like India, where labor costs are lower. But over the next couple years, those deals will be renegotiated or revisited as risk-management becomes the big issue.
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This shift is massive, both in physical scale and economic impact, and it's tough to make sweeping generalizations. Some CIOs already have a firm grip on risk-management. Others will never care because of their specific business models. But the push toward utility-based outsourcing, which allows companies to turn on and off servers, storage and software, has profound implications for the companies that have provided IT hardware, software and services for decades.

"The competition gets blurred about who buys what from whom," Karamouzis says. "Everyone's business model gets squeezed."

So where is this new competition coming from? First, it's open-source software. Gartner says about 15% to 25% of all software costs is for product support in the way of patches and updates. That has made open source particularly popular in some markets, and the appeal will only grow as IT departments get a firm grip on how they spend money and where those dollars actually go.

The second area of competition is caused by the convergence of software, hardware and services with the emergence of the cloud model and software-as-a-service. That helps explain why large systems vendors have been buying up service companies. IBM ( IBM - news - people ) bought PricewaterhouseCooper's consulting arm, Hewlett-Packard ( HPQ - news - people ) bought EDS and Dell ( DELL - news - people ) bought Perot Systems ( PER - news - people ). But it also shakes up the image of what each company really provides.

"The value is shifting to a relationship-based model that is inherent in the services world," Karamouzis says. "As a result, you could see a company like Accenture ( ACN - news - people ) competing head-to-head with a software company."

But if the real value comes from utility-like service, then how do these companies differentiate themselves from a software company like Oracle, which will also provide service and hardware, or a services company like Accenture, which can establish partnerships to provide everything it doesn't have? And what's to stop service giants from places like India--TaTa Group and WiPro, for example--from moving into the market where they barely had a toehold?

Big changes are coming and so far it's uncertain who will emerge stronger from these shifts. While CIOs enjoy the short-term benefits of pricing benefits and, in many cases, increased service for every dollar spent, the longer-term effects may not be quite so kind to the smaller utility-based service consumers.

Ed Sperling is the editor of several technology trade publications and has covered technology for more than 20 years. Contact him at esperlin@yahoo.com.

Banks set for more belt-tightening in 2010

By David Ellis, staff writerDecember 28, 2009: 5:53 AM ET

NEW YORK (CNNMoney.com) -- Diminutive expense accounts. Flying coach. The lingering threat of layoffs.

That seems to be the new normal in banking these days. And it's unlikely to change in 2010.

Faced with a flurry of new regulations out of Washington and sluggish loan activity that's hurting revenue, lenders are expected to have little choice but to continue tightening their belts next year.

"I think that focus is already starting," said Blake Howells, director of equity research for Becker Capital Management, an investment firm with about $2 billion in assets.

In some instances, budget cuts could be downright severe.

Southeastern powerhouse SunTrust (STI, Fortune 500), for example, is expected to cut its operating expenses, including staffing and advertising, by $1.15 billion next year, or 17%, based on estimates by research firm SNL Financial.

Banking giant Citigroup (C, Fortune 500), which has already managed to find nearly $20 billion in savings over the past year partly through the sale of some of its businesses, is expected to trim almost another $5 billion from its budget by the end of next year, according to SNL.

Such cutbacks, of course, are hardly a surprise given the turmoil banks have endured over the past year, namely the billions of dollars lost to bad loans.

What's even more troubling however, note experts, is that banks now face a whole new set of fees and rules next year that pose a big threat to their bottom line.

One of the biggest problems is the $45 billion in insurance premiums that banks had to pay to the Federal Deposit Insurance Corp. this year, to help prop up the dwindling fund used to cover bank failures. Banks will have to account for a third of that money in fiscal 2010.

At the same time, banks face a whole new set of new restrictions aimed at protecting the American consumer, including one imposed by the Federal Reserve on overdraft fees. Starting next July, banks will no longer be able to automatically enroll customers in overdraft protection programs, which charge fees when consumers spend more than they have.

Overdraft and non-sufficient fund fees have been a big business for the banking industry. Current projections suggest that lenders will rake in $38.5 billion from those two areas in 2009, according to Moebs Services, an economic research firm.

A big drop in those fees will likely leave most lenders feeling the pinch, note experts.

"I think you are looking at a fairly sizeable blow to revenues," said Seamus McMahon, a long-time industry consultant who runs his own firm McMahon Advisors LLC.

Banks certainly have any number of ways they could save a buck or two, including selling off parts of their business, trimming marketing budgets or telling external consulting firms to take a hike.

But industry experts argue that some lenders may have little choice but to take aim at their biggest source of costs -- employees. On average, salary and benefit expenses tend to make up about half of their operating expenses.

"Over the last year there has been a concerted effort by most financial institutions to bring in expenses through headcount reduction," said Frank Barkocy, director of research at Mendon Capital Advisors, a money manager that invests primarily in bank stocks.

"I think that will be a continued theme as we go forward."

Wall Street firms alone are expected to trim another 32,400 jobs over the next two years, according to estimates published by New York City's Independent Budget Office, a non-partisan agency that reviews the annual city budget.

One problem in all this, note experts, is that lenders have already drastically cut staff levels, and implemented other cost-cutting measures in recent years in an effort to stay ahead of the recession.

Citigroup, for example, has trimmed its worldwide staff by 100,000, or approximately a quarter, over the past two years, partly through the sale of some of its businesses.

The embattled lender also moved to ban off-site meetings late last year, in addition to telling employees to scale back on their use of color copies.

"It's not like these guys have been sitting on their hands for the last couple years," said McMahon.
By cutting too much further, lenders run the risk of going too far and hurting their performance.

And in the face of so many headwinds, don't be surprised if lenders try to cook up a whole new set of fees aimed at revitalizing their business.

"Banks tend to be creative," said Mendon Capital's Barkocy.