26-09-2011

Industrialised Low-Cost IT Services to Transform the IT Services Market

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Chief information officers (CIOs) should consider adopting industrialised, low-cost IT services (ILCS) to reduce the cost of “running the business”, while controlling the risk, integration and customisation issues, to increase the business value of IT and enhance its perception by the business, according to Gartner, Inc. CIOs said that delivering differentiation and additional business value, while reducing the cost of IT will be their business and IT priorities in 2011, according to the Gartner Executive Program (EXP) 2011 CIO agenda survey*.
 
“While there are multiple ways to reduce the cost of IT delivery, as well as to increase the value of IT, the trend towards ILCS will become paramount for end users to trade nonessential customisation for better and less expensive services,” said Claudio Da Rold, vice president and distinguished analyst at Gartner. Gartner predicts that despite being an embryonic market, by 2015 industrialised services will represent more than 30 per cent of the IT services market and cloud services are expected to become a $177 billion market by 2015, of which $77 billion is based on advertising business models.
 
ILCS as managed, multitenant, ready-to-use IT services (infrastructure, applications or business processes). They are designed and offered as no-frills services with optional add-ons. Implemented as standardised, automated, configurable and scalable services, their entry-level price — expressed as price per user per month or price per unit per month (PUPM) — is very low and attracts a high number of prospects. The combination of industrialisation and cloud computing has significant potential to deliver ILCS.
 
A historical analysis of IT services pricing showed that organisations tolerate high IT usage costs, for an activity, capability, deliverable or outcome, only if there are no alternatives. Now, thanks to new delivery models, industrialised services and cloud computing, Gartner analysts see increasing numbers of low-cost offerings in which the price of specific unit of function (such as email or software as a service) is instead measured in PUPM (per user or per unit, per month).
 
Gartner has evaluated clients’ cost levels and estimated prices for industrialised low-cost services. It found that an email configured as ILCS should realistically be about $6 PUPM and is today approximately $8 to $10 PUPM, and entry-level offerings are advertised today at $3 to $4. With the email market in flux and the price of traditional in-house/hosted/outsourced mail under pressure by the lower price of cloud email available in the market, the email service is an area in which clear signals of industrialisation and low price points are emerging. Another example includes the use of the infrastructure utility for SAP (IU4SAP). IU4SAP is an outsourced platform that runs often highly customised clients in SAP application environments. Built on industrial principles (standardisation, virtualisation, automation) these offerings provide good service quality at low price points as companies like Areva, Oxea, Keiper, Rio Tinto and around 500 others have already discovered. This represents one of the earlier, and, so far, the most important cases of ILCS for business-critical and core functions and should realistically be delivered for around $17 PUPM.
 
Infrastructure utility services (IUS) are one aspect of the evolution toward industrialised services, which Gartner predicts will have a compound growth rate of more than 30 per cent for the next three years.
 
While the price of ILCS offerings be can much lower than internal costs, the total cost of ownership of ILCS can be higher, depending on retained costs such as transition, customisation, integration and risk management. Despite this, there are some early IUS and cloud-based solutions that were successfully evaluated, selected and implemented and promise much for the future of ILCS solutions.
 
EasyJet is a good example of an end-user company that is using cloud computing first as a way to minimise costs and then exploiting cloud services to extend and complement its internal systems. EasyJet wanted to extend its existing reservation and departure control system to agents using mobile devices and built cloud-based solutions using Microsoft Azure. Azure managed the connectivity to the myriad endpoint devices in a manner that was less expensive and less complex than what would be required if EasyJet created it in its existing internal systems.
 
“Not all corporate IT will be delivered through ILCS and many “good-enough” services will remain in-house,” said Frank Ridder, research vice president at Gartner. “However, industrialised services represent the destiny of the IT services industry. They are, in fact, the next step in outsourcing and managed-service provision, and they span all layers of the IT services value chain: infrastructure, applications and business processes. Overall, we believe that, from a pricing perspective, the IT services industry is where the airline industry was in 2000. It is ready to be transformed — and disrupted — by an ILCS model.”