In part one I started to discuss some of the changes occurring in the business environment that will have an impact on IT organisations and service providers. In particular I considered the need for greater modularity in business architecture – to support greater adaptability – and our trajectory towards the emergence of increasingly specialised service providers driven by the Internet and rapidly consolidating standards. In this post I’ll look at how these trends will drive a change in the value proposition for technology.
The Shift From Products to Services
If we consider the implications of the changes that I discussed in part one we can see two major, parallel shifts:
- Increased understanding within enterprises of the modular business capabilities needed to deliver value to stakeholders along with clear metrics about their performance; and
- The emergence of specialised service providers who can be used to provide those capabilities that we do not wish to focus on.
As increasingly powerful abstractions allow us to modularise our capabilities, we can consider our operations from a service viewpoint without worrying about implementation. This will give organisations greater clarity in terms of what they do and help them to raise their horizon from the complexities of non-metricised implementation issues – whether organisational or technological – within which they find themselves mired today. As a result of this shift companies will increasingly want to talk about the business services that they need rather than procure base technology or products – they will no longer want to buy the products that they would need to deliver non-core value themselves (as they do today) but would rather place expectations on partners for the delivery of the desired results with no concern for the way in which the value was delivered (Figure 1 – Commoditisation of Technology).
Such capabilities may be small and wholly automated – such as access to valuable data or specialised algorithms and calculations – or as complex as whole BPO propositions. They are going to be services rather than applications, however, since they are firstly going to represent the delivery of discrete value to the consuming organisation rather than just the tools that they would need to use to generate value for themselves and secondly they will need to be supportive of composition into more complex value chains.
The Easy 80%
One of the interesting implications of such a shift is that such specialised partners may end up delivering the 80% of non-core capabilities that an enterprise requires, leaving them to implement and execute the remaining 20%. Such a shift would represent a large flight away from the purchase of the technology and products needed to support the implementation of this 80% towards the procurement of the actual capabilities themselves.
As a result I believe that these changes will ultimately move the focus of a large chunk of enterprise procurement away from technologies and products and onto service provision from partners. Such a move would reflect the changing nature of organisations, since – as discussed in the previous post – their role would be to source and orchestrate specialised capabilities rather than minimise transaction costs by running them internally.
The Other 20%
Whilst organisations will increasingly look to leverage partners for 80% of their needs in place of buying products – along with implementation and maintenance services – there still remains the 20% of services that represent their core differentiation (given that this is primarily an IT skewed blog I’m going to concentrate on that aspect). The question is how these organisations will choose to implement the systems that underpin the services that they offer to other people – both their own discrete capabilities and those that pull together value chains across internal and external capabilities – especially as they will now have a taste for buying ‘outputs’. I feel that there are three major points to consider:
- The increased understanding of the business capabilities required by the organisation to deliver value means that the enterprise can state what services they need to be realised. Rather than source products and technology to realise them, however, organisations are going to increasingly look to external IT service providers to deliver these realisations more quickly, more cheaply and more reliably through leveraging architectures, patterns and infrastructures across customers in order to deliver the economies of scale that are beyond the reach of the common enterprise IT department – essentially they are going to procure the desired outputs (i.e. services) delivered with service level guarantees rather than the vague potential of implementation using some inert product(s). I strongly believe, therefore, that IT service organisations need to invest in Industrialisation – bullet proof platforms (preferably shared SaaS style platforms) with strong service realisation factories that facilitate the rapid construction or composition of services with outstanding quality of service attributes targeted specifically at the chosen platform. Essentially as providers are judged on outputs so the characteristics of delivered services come to dominate the procurement process in place of the technologies used in their implementation – i.e. cost, timeliness, payment models, reliability, reporting etc.;
- The need for lower costs and greater repeatability/reliability will drive the consolidation of platform providers to a small number of commoditised technologies wrapped into service platforms that support the realisation needs of many organisations – essentially IT platforms will become commoditised utilities in the same way that electricity generation was unbundled from individual companies and focused in large, infrastructural providers. Such a shift leaves IT service providers with greater repeatability through industrialised and consistent target platforms around which they can innovate in terms of service realisation and composition factories whilst simultaneously giving end-user enterprises the benefits of choice in service provision (because of interoperability), reliability, and economies of scale. Essentially such platforms enable end organisations to be specialised in terms of the services that they offer whilst eliminating the need to expend the time, attention or money needed to design service and technology architectures or run a scalable, always-on platform with strong billing, service management, reporting etc. as a way of delivering and monetising the services that they execute. This consolidation also becomes critical given that such platforms will provide discoverability for service providers as well as visibility and tracking of capability performance; and
- Enterprise IT breaks down in the face of this disaggregation of the technical environment; essentially each capability owner is free to choose an IT service provider who best meets their needs in terms of service characteristics, from basic service platforms all the way up to Internet scale platforms. No longer does a drive by IT to limit technology costs force homogeneity across business units irrespective of fit; rather each external IT service provider competes on their ability to deliver services for the capability owner at the cost and service levels appropriate to the requirements and absorbs a large part of the costs of doing so by sharing resources and solutions across customers. This is much easier where external providers concentrate on providing infrastructural capabilities in this way – the issue for internal IT departments is that they can only afford to support one set of technical capabilities whilst remaining cost effective; where external providers have to compete for service realisation business, however, a marketplace of people providing different levels of service and cost will naturally grow out to cater for the needs of many different kinds of service providers, thereby supporting the different needs of different capability owners within the organisation.
To be clear here I don’t believe that SaaS alone is the answer, rather that there need to be commoditised platforms with similar characteristics (e.g. multi-tenancy, billing, scalability etc.) that support the controlled delivery, hosting and execution of differentiated services and compositions for individual capabilities within enterprises. The big problem with SaaS from my perspective is that it – by definition – provides economies of scale in the provision of software that supports the enactment of some part of a business capability (or capabilities). As companies increasingly specialise, however, there is a major issue with this; SaaS by definition provides commoditised software support for standard business capabilities – if the capability itself is so standardised as to support commoditised software then why would I be interested in enacting that capability? Surely such business capabilities would be provided as a service to me? As an example if I decide that customer relationship management is not a core capability (e.g. I want to concentrate on product development) would I be more likely to outsource the software that would be needed by a capability to manage customers (but still execute the capability in the same way as every one else by using such software and thereby distract myself from my core mission for little or no differentiation) or would I just partner with a specialised provider who can offer economies of scale and scope in the provision of customer management on my behalf? At the end of the day if the business processes that support a particular capability can be codified to the extent that they can be sold to multiple businesses then surely those processes are ripe for consolidation into a specialised service provider who concentrates on such infrastructural capabilities. This is one of the major shifts that is emerging in the provision of repeatable, infrastructural capabilities – where we previously had to replicate commoditised capabilities within each organisation in order to minimise transaction costs we will increasingly be able to centralise these capabilities within specialised providers who deliver better service and lower cost through economies of scale and/or scope. This is in opposition to the current model where repeatable capability is codified within application software that supports the execution of such commoditised processes many times within end organisations.
The upshot of all of these issues is that IT service providers – whether internal or external – need to increasingly understand the capabilities that an organisation needs to deliver and to use this information to be able to engage on a results basis. They need to be able to compete on their ability to implement, deliver, compose and manage the required services using commoditised platforms rather than on selling the benefits or otherwise of individual technologies; in short they must sell meaningful business value. It is up to the IT service provider to ensure that they have standards-based technology that enables them to realise and orchestrate services with competitive characteristics and guarantees, rather than placing the onus on the consuming organisation to understand, select, implement and manage technology – something that is unlikely to be core to their business. Service orientation supports this push by delivering a set of abstractions that allow us to discuss the capabilities to be delivered along with the service levels and costs that they need to support, giving us the framework against which to compete on required outputs instead of implementation technologies.
The Changing Landscape
As a result of these changes I believe that enterprises will increasingly be uninterested in the technical details of implementation, since greater clarity on how value is delivered will enable them to procure or deliver the services that they need to underpin their mission rather than the base technology needed to implement such services themselves. Procured services will thus be delivered using any processes and technology platforms that the IT service provider sees fit to use, since competition will move from how services deliver value to what value they actually deliver. In this environment I believe that competition will move from technology and technology features to the quality and cost attributes that implemented services support (Figure 2 – Competition on Service Attributes).
These cross cutting concerns or quality attributes (such as modifiability, performance, security, etc) will determine whether the service provider can deliver competitive SLAs to meet customers’ demands. One of the implications of this shift is the fact that service providers will need to deliver services on a strong base, with a standardised and well understood set of technologies, patterns and service management practices that are well factored and well integrated, since this is what will allow them to deliver consistent and superior service characteristics. A related example may be that of automotive design, where people buy a car for its ability to get them from A to B but choose the actual implementation (i.e. vehicle) based on its characteristics (e.g. speed, handling, economy). Such characteristics are largely determined by the quality of the technology with which it is constructed, however, (e.g. engine, gearbox etc) along with the design which brings them all together. In this context very few people buy a car because of a particular technical component or insist that one part of an engine is replaced with another; essentially people buy the experience provided by the car and not the individual pieces which comprise it. As a result, I believe that technology in this new model becomes an enabler for differentiation in service provision rather than the main focus of procurement.
In this post I have considered how the shift to service provision impacts the way in which organisations will procure capability in future. In particular we have considered two main aspects:
- As we move towards a market of specialised service providers and unbundling so organisations will be able to procure the 80% of non-differentiating services that they need rather than the technology and people they would need to use to realise such services for themselves. I’ve already discussed the benefits of unbundling in a previous post; and
- For those 20% of services that remain within the organisation we will need a way to realise the supporting IT. In this context we will see increasing consolidation of utility computing (nee SaaS) infrastructures externally to the enterprise and a shift from selling products and technology into organisations towards competition on realising the services most efficiently and cost effectively on such industrialised, utility platforms.
These issues have two different implications for IT departments and for IT service providers.
- CIOs and their staff need to help their business colleagues to understand the benefits of unbundling and prepare the ground for the leverage of external service providers. At the same time – for core capabilities – they need to keep an eye on the emergence of utility computing platforms and take every possible opportunity to offload the delivery, support and management of services onto specialised IT service providers who can deliver new and changed services more quickly, reliably and repeatably and with much greater economies of scale. Such a change will leave IT staff to execute the much more appropriate job of understanding shifts in technology and helping business colleagues take advantage of such shifts by reworking business models appropriately. Although I won’t get into this until the next post I believe that CIOs and their staff will increasingly become ‘consultative’, understanding the enterprise, the services available in the marketplace and how to bring both together for the benefit of the organisation within which they work; and
- IT service providers need to recognise that the shift to service-orientation will change the nature of procurement. As organisations increasingly understand the capabilities they need IT service providers will need to position themselves as more competitive realisers of these services rather than just push technology at the consuming organisation – such behaviour will merely demonstrate an inability to understand the needs of the organisation by surfacing complexity rather than making the procurement of the desired value as painless as possible. Proactive providers will begin to deliver the Industrialised platforms and methods needed to compete in such a market and begin to work with both business and IT people within end organisations in order to educate them and enable them to focus more completely on their core mission.
In my next post on this subject I’ll talk more about the types of companies that I see emerging from these shifts and the shape of the ‘future business ecosystem’.