Arjun Sethi, head of the outsourcing practice at global management consulting firm A.T. Kearney Inc., believes the outsourcing industry is on the cusp of a sea change. In this interview with SearchCIO.com, Sethi describes the momentum building behind a shift in outsourcing projects away from custom work and head-count labor to standardized, vertically integrated outsourcing solutions. Find out what this new world order looks like, the concessions CIOs will have to make, and which outsourcing companies are poised for success -- or failure. Here is a condensed version of the interview.
What are your customers asking for that makes you believe that outsourcing solutions as we
know them are coming to an end?
Sethi: My clients are not just asking for traditional outsourcing solutions, where the offering is a head-for-a-head [labor] situation. [CIOs] are looking for an organization that can take the entire stack, lock, stock and barrel -- the service offering, the function, the underlying application, and the underlying infrastructure and hardware -- take all that away and handle it. So, they want a completely integrated vertical solution.
What is causing this shift in demand?
Sethi: CIOs do not want to set up brick-and-mortar data centers in this day and age if they can avoid it. Capital dollars may be better invested to go acquire new customers; while infrastructure, whether it is hardware assets like data centers, mainframes or servers, or whether it is amortizable assets like software licenses in large-scale platforms, [they think] those would be better maintained through third-party vendors. This is happening to the extent that organizations are willing to move, in the large part, to a standardized way of work. The world is moving away from custom solutions and a high level of customization, to standardization. That is a huge change-management issue for organizations, but the fact of the matter is that it is happening. CIOs are being very strategic, going back to their business counterparts and saying, "Hey, I'm probably not getting two or three different levels of functionality we may want, but by taking a standard solution, we will actually get you better ROI, and the costs of the kind of customization you are looking for are just not worth it." Those kinds of conversations are very actively happening in organizations.
Who are some of the providers moving to vertically integrated and standardized outsourcing
Sethi: There are certain vendors that are acquiring the entire stack of vertically integrated solutions that their clients, CIOs, really need. That's why we call organizations like an IBM, Amazon.com or Google, winners. Amazon and Google, from a public cloud perspective; and IBM from a public [cloud perspective] and its ability to provide private cloud infrastructures, have made tremendous investments to provide a vertically connected suite of offerings.
But even Google and Amazon need to change and make up their minds as to where they will make the next big-bang move. Is Google really going to make a bet on the Android, or are they going to carry on investing in creating that complete stack?
Microsoft is a potential winner. [CEO Steve] Ballmer said that 70% of Microsoft's workforce is going to focus on developing cloud-based software, and in the near future, that will be up to 90%. Those kinds of statements don't come from an executive of his stature if he doesn't believe that is the way to go. But the jury is out. [Microsoft] is very used to license-based sales and revenue. That is a different model, and [their status as a winner] will depend on how fast they adapt that [licensing model].
So, who are the potential losers?
Sethi: Some of the leading Indian vendors have not made significant moves to really acquire the entire stack. They are not necessarily losers, but they potentially have less of an opportunity to move fast and risk being in a stagnant model. To date [labor-based outsourcing] has been very successful; it's a $70 billion to $75 billion industry, so I'm not saying they are going to vanish overnight. But in time, they will face mounting pressure to provide the entire stack. The real losers will be mid-tier offshorers and outsourcers that do not have the balance sheet to acquire an entire stack, to have an offering that is larger than labor arbitrage.
Some might argue that cloud
offerings are too standard, or even cookie cutter. What is your take against that
[CIOs] are looking for an organization that can take the entire stack, lock, stock and barrel . . . take all that away and handle it.
Arjun Sethi, head of the outsourcing practice at consultancy A.T. Kearney Inc.
Sethi: Cookie cutter is a strong word. To say that a hosted SAP solution for a company is cookie cutter is an over-generalization, because each of these vendors who are providing fully hosted solutions are capturing best practices from decades of providing services and software to their customers. These services may not provide the nth degree of customization that every organization needs, or functionality that every organization needs, but indeed, are providing best practices from within the industry. That is one of the value propositions that vendors provide.
The shift, from what I can tell you . . . there is cost to customization. Every additional functionality that I introduce to an off-the-shelf service offering adds cost to an organization, and every CIO who is a leading practitioner is asking, "Is it worth the investment?" The reason why a standard offering would be smart is because it would incorporate best practices and leading practices from other organizations within an industry group. That is the real argument in favor of the trend, and why in fact we are seeing that trend.
How will CIOs have to change their thinking if they move to these outsourced
solutions that live on another provider's infrastructure?
Sethi: I think CIOs need to rethink their overall governance layer. Security is a valid concern, but there is a different governance layer required here to feed through to your entire application portfolio, and services that CIOs are providing back to internal clients. What is critical? What is core to an organization? What are the areas that might be directly in the face of a breach or security risk, and other areas where security risks may not be so high? Once that governance and the processes are in place, the march towards the move becomes much more thoughtful. It is not reactive to "Hey, there's an article that came out today about cloud being the future."
Second is the conundrum around standardization and customization. Every organization will say, "Our processes are very unique." CIOs have traditionally said, "We are service providers. We need to be close to our business counterparts and ours is a high-touch organization." None of that is wrong, but it can't become an excuse for not adopting something that might actually help enhance efficiency and effectiveness. One of the key strategic levels as we go into the future is to find every dollar we can, save it, and plow it back to invest in products or new services or acquire new customers. I think CIOs have to answer to that same [objective], and they can't shy away from that by saying, "Customization and high touch is extremely important, so we will not go down that standardized route."
What else should CIOs keep in mind if they choose to adopt this model?
Sethi: CIOs also need to really embrace open architectures or open paradigms. Applications and/or services that are being built on [these architectures], or hardware that is bought on capital dollars, should be invested across the board, so it can be deployed very flexibly, with any platform. The architecture should be scalable and modular, plug and play.
How do a move to standardized outsourcing solutions or an integrated
stack, and at the same time, the need to have an open and flexible architecture, not counteract
Sethi: When I say, "stack," it's the ability to provide hardware, platforms, networks, software and services, all under one umbrella. It's not about making a commitment to IBM hardware or Dell servers. It could be either. I'm not saying a service can only be provided by Salesforce.com or Siebel. It could be either. It's not about providing only CRM[customer relationship management] or an outsourced accounting service. It's about providing the entire stack of hardware through services, under one roof. You have the infrastructure in place that allows your clients to be light, where you are not signing six- to 10-year deals, but you have the ability to sign on a pay-per-drink basis because you have a one-to-many, scalable infrastructure solution.
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