By Bob Violino
Will new sourcing models supplant existing contracts?
The decades-old question of whether to keep IT operations and applications in-house or outsource them to service providers has a new twist: CIOs increasingly must factor in emerging options that may supplant their traditional contracts or change them radically.
Some experts view cloud computing and software as a service (SaaS) as just the latest components of the overall sourcing portfolio, while others anticipate a more dramatic impact on the outsourcing market as a whole. “Traditional outsourcing arrangements have generally failed to achieve their business objectives,” says Jeffrey Kaplan, Managing Director of THINKstrategies Inc., a Wellesley, Mass., consulting firm. Many “contracts have been terminated or restructured before the end of their original term, he says, because “organizations don’t fully understand the nature of their needs and outsourcers are in too much of a hurry to win their business.”
Over the past few years, numerous big outsourcing deals were scrapped because of unsatisfactory customer experiences, cost overruns, or poor management and governance.
Kaplan sees cloud computing, SaaS and managed services as more effective “out-tasking” alternatives because they enable organizations to contract for services on an incremental basis to mitigate the financial risks associated with traditional outsourcing and offshoring arrangements.
Cost Savings, Added Value
Many believe that besides the added value, the biggest impact of cloud computing will be on the cost structure of new and renegotiated outsourcing deals. For example, Tom Lang, Partner and Managing Director, Industry Verticals and CIO Services at TPI, a Houston-based sourcing consulting and advisory firm, says his clients want to structure deals that account for cloud computing services and thin client devices.
The standard concept of outsourcing — subcontracting of IT functions such as infrastructure or software development to an external service provider — remains viable, according to Lang. In fact, he is more optimistic about the outlook than Kaplan and says his company data and other industry research shows that up to 85 percent of companies are renewing their outsourcing agreements for all types of IT services.
At the same time, he sees the market transitioning from older contract models and providers to new ones. Customers want service providers that can manage and maintain data center infrastructure and keep costs down, Lang says. Web hosting can offer standardized services with utility-like pricing, rather than customized deals, so they may be simpler to arrange and govern than outsourcing deals of the past, Lang adds.
New License Options
Michael Williams, Senior VP and CIO at Parsons Brinckerhoff, a New York-based provider of engineering and construction management services, is interested in “license-sharing, or pay-as-you-use models.” He is intrigued by the idea of a per-application license, which — much like a library — lets you check out a license for others to use and then check it back in. ”But I think SaaS is where we will generally end up for enterprise or larger-scale operations,” such as externally hosted e-mail, ERP systems or engineering software, he says.
The question is how to rationalize the existing license portfolio,” Williams says. Companies “typically have a large investment in software licenses,” he says, and “the challenge is in leveraging the existing investment when transitioning to a SaaS model. Also, if there is no backout plan, when you enter into a SaaS agreement, you can be vulnerable to changes in pricing and in terms and conditions.”
Parsons Brinckerhoff is negotiating with several software vendors for enterprise software based on a shared-license or SaaS model. “Cost continues to be the key driver for us; management is taking a very near-term perspective in controlling costs, and vendors are trying to maintain revenue in a flat economy, so [that] makes for some interesting, cost-focused negotiations. We’re hoping to get to a true pay-as-you-go model, where if you use more, you pay more, and if you use less, you pay less.”
New Tech Network, Napa, Calif., a subsidiary of KnowledgeWorks Foundation, is also looking for cost-saving outsourcing options. As part of its school development model, the company provides a custom Learning Management System to high schools and recently moved the application from a traditional managed hosting environment to the cloud. “We are a nonprofit organization, so cost is a big driver for us,” says Matt Barcus, CTO.
“Moving the application to the Internet will eliminate capital expenditures in additional servers,” Barcus says, and it will “let us grow our user base by more than 50 percent with just an incremental increase over current managed hosting costs.” Additionally, IT can focus on software development rather than hardware maintenance, he says.
Not every end-user organization is as quick to jump into the cloud. Pacific Coast Building Products, a Rancho Cordova, Calif., provider of building products, has made limited use of outsourcing in the past and is largely taking a wait-and-see approach to SaaS and cloud computing.
The company uses service providers only for application development work when its own resources are unavailable or if it lacks specific expertise, says CIO Mike O’Dell. “We’ve looked long and hard at SaaS and on-demand computing, but they’re just not quite ready,” O’Dell says. He’d like to use SaaS for applications such as Microsoft SharePoint, but is concerned about whether it will tightly integrate with the company’s other applications.
Moreover, Pacific Coast recently invested in new virtualized servers and believes that it is “hard to justify” a move to the cloud. “We like the idea of cloud computing,” O’Dell says, “and in a perfect world we could get rid of everything [and move to the cloud]. But it needs to make financial sense.”
For a growing number of companies, new outsourcing options are already making sense.
Bob Violino is a business and technology writer based in New York.
ASK THE EXPERT
Matthew Barcus, Chief Technology Officer, Knowledge Works Foundation
Matthew Barcus currently serves as CTO for KnowledgeWorks as well as its affiliate, New Tech Network, in Napa, Calif. He oversees the foundationwide technology plan, coordinating technology and information systems and identifying priorities, opportunities and risks. In addition, Barcus coordinates technology-related policies and operational procedures. He previously spent more than 13 years managing teams, systems and networks in the corporate and nonprofit arenas. In particular, he led a team of engineers that managed the design, support and maintenance of network infrastructure and applications for a data center that provided hosting solutions for e-business customers.
Jeffrey Kaplan, Managing Director, THINKstrategies
Jeff Kaplan is the founder and Managing Director of THINKstrategies, a strategic consulting firm that specializes in on-demand services, including SaaS and cloud computing. Prior to forming THINKstrategies, Kaplan served as VP of marketing and business development at InterOPS Management Solutions. Before that, he was dDrector of Strategic Marketing at International Network Services (INS) and subsequently, Lucent Technologies, which acquired INS. He also spent 13 years as a Leading Industry Analyst at IDC, Dataquest and META Group.
Tom Lang, Partner, Managing Director, TPI
As Partner and Managing Director of TPI's Industry Verticals, Tom Lang advises clients in all aspects of sourcing alternatives, including governance models. Prior to joining TPI, Lang worked in senior management positions at AT&T, including VP of Outsourcing and Operations, and VP of Strategic Initiatives. As a governance executive for the AT&T IT Outsourcing Center of Excellence, he managed a multibillion dollar, multivendor application development and infrastructure sourcing environment. He served as the VP of Strategic Initiatives, where he managed a team responsible for designing, developing and delivering large strategic software applications.
Michael O’Dell, CIO, Pacific Coast Building Products
Mike O'Dell is a results-oriented leader who makes IT goals and deliverables an integral, seamless part of business operations and strategies. He has applied the leadership skills he gained in the U.S. Marines with his engineering background to build a skilled team of IT professionals at Pacific Coast companies. The company CFO recently estimated that IT’s achievements resulted in a fourfold annual return on investment. Previously, O’Dell was the Director of IS at Wacker Silicones Corp. He also coordinated information system standards between America and Europe at the company.
Michael Williams, Senior VP and CIO, Parsons Brinckerhoff
Mike Williams is responsible for the firm’s information systems and technologies worldwide. He has extensive experience in the delivery of IT services in the engineering and construction industries, both in the U.S. and in Latin America. Before joining the company, he held several senior management positions including IT Operations Manager and CIO for the Latin America region, where he was based for four years in Santiago, Chile. Previously, he spent five years in Venezuela working as a surveyor and civil superintendent on the construction of large aluminum refineries for Reynolds Aluminum and Alusuisse Servicios.