At least one in four outsourcers and systems integrators will go bust within four years, according to a prominent Australian IT analyst, as end users opt against IT complexity and gravitate towards enterprise applications deployed out of the box.
End user organisations under pressure to beat competitors to market with new digital services have a greater number of standardised, templated software packages to choose from - whether cloud-based or on-premise.
The success of the Software-as-a-Service model demonstrates that end users are usually more prepared to trade flexibility and customisation for speed to market.
“Businesses are moving away from requiring an exact match for their requirements from a software solution," explains Warren Hill, a senior BDM for NTT Data.
"Any time a business asked for a feature in the past, their outsourced software partner would say, that’s a customisation, and charge accordingly. Now customers are saying - we won’t have it, then. We’ll take the vanilla option. If it means saving $60 million, we’ll live with what’s out of the box.
“So we’re now talking about journeys in rolling out CRM that used to take 12-18 months now taking less than a month,” Hill said.
Over the last year, the packaged software vendors have taken note. SAP and IBM are among a handful of large enterprise software vendors offering “rapid deployment” software packages for customers that want speed to market, but still intend to own and control their IT destiny by deploying software on-premise.
“Legacy software providers have had to speed up deployment, to compete with SaaS,” independent analyst Phil Hassey told iTnews.
These templated packages work to the same 80/20 rule as SaaS, he said. If 80 percent of what an average customer requires works out of the box, why pay such a premium for the remaining 20 percent?
“The scope for flexibility is limited, but that’s the price you pay,” Hassey said. “The upside is that you can get things running – in theory – in weeks, rather than months.
"The reality is that eveybody thinks their organisation and requirements are unique. But unless your organisation is genuinely different, your solution will be generic anyhow.”
A taste for the generic
Hassey predicts these shorter deployment timeframes and less customisation will be a challenge for all systems integrators and devastating for cheap 'body shop' outsourcers. The lifeblood of such organisations have been long implementation projects under which software is customised to meet the customer’s business processes to eke out competitive advantage.
In the ‘rapid deployment’ world, it's more often the case that customers adhere to a process developed by a software vendor.
“We’re now looking at a model where you can take out 70-80 percent of the complexity that has driven IT services revenue in the past,” Hill said.
SAP Australia managing director Andrew Barkla told journalists at a recent product launch that there is a “strong realisation in the market that the game has changed.
“No business executive would suggest a two to three year transformation,” he said. “Customers won’t procure SAP today the way they did with R2 or R3. Systems integrators have no choice but to respond to this rapid deployment model.”
One potential response from outsourcers is to invest in infrastructure. Historically, SWITCH providers (Satyam, Wipro, Infosys, Cognizant and HCL) tend to have profited from value-added services around the application, not from capital investment in networks and data centres.
Hill, a former Infosys exec, argues that the likes of NTT, Verizon and BT – all of which have invested in interconnectivity between sizeable data centre assets – are in a far better position to adjust.
Growth in application services at Indian outsourcer HCL, for example, has slowed to around 0.5 percent in its most recent quarter, whilst its infrastructure services business (around one-third the size) continues to grow at around 10 percent.
An outsourcer might look to host solutions on behalf of customers on a utility basis to stem the bleeding in the medium term, but there is no guarantee these opportunities will remain in the long term if they attempt to jump into the game so late.
Packaged software vendors Oracle, Microsoft and IBM all host software solutions for customers. And even the most risk-averse - SAP, for example, aren't far behind. The German software vendor hosts BI and HCM software for customers, and executives told iTnews that its latest on-premise offering - Business Suite on HANA – isn't far behind.
Hill expects it would be more profitable for the SWITCH providers to invest in remote infrastructure management, as opposed to application services.
Differentiation is key
For several years Hassey has advised Australia’s IT services companies of the need to develop their own intellectual property or niche specialty to counter the inevitable change.
Several of these IT services companies have relied on increasing headcount to grow revenues, but those revenues haven’t proven scalable.
“Clearly the current and historical IT services delivery model of pumping low cost human onshore or offshore delivery resources at customer contract delivery is unsustainable,” Hassey wrote in a recent blog post.
“There aren’t enough people in Australia, or in India, or in the world to save them,” he later told iTnews.
“Service providers have been so slow to develop detailed solutions [IP] or industry-based solutions [specialisations].”
Some have adjusted better than others. Infosys, for example, has specialised and developed IP related to point of sale systems, Accenture the same in airline booking systems, Wipro to a lesser degree for the energy and utilities sector.
The services divisions of IBM and HP, meanwhile, have an opportunity to bundle solutions on their hardware platforms as a differentiator.
But what of body shops such as HCL or Mahindra Satyam? Or systems integrators such as Fujitsu and CSC?
“Everyone is in the same boat,” Hassey said. “The ones most likely to survive have set targets around IP and R&D as a percentage of revenue. For the others, most know it’s a problem, but most don’t know how to change.
“Mid-sized SI’s without any differentiating factor will struggle the most. And anyone who is a body shop is in real trouble.
“IT services as we know it is dead – there will be no services without a software component to it.”