The title of this article was initially penned in response to a number of discussions I have been having recently on what IT themes are going to be important to businesses in 2009/10. I firmly believe that the credit crisis represents a Black Swan event that will fundamentally change the way we view and manage our IT investments. Many of the focus areas below are likely to continue to drive company strategy well beyond 2010.
In a recession, most businesses focus on aggressive cost reductions, essentially measures to help them survive. Now, as the first signs of a recovery are becoming apparent decisions have to be taken in respect of capital investment in a risk adverse market place. Research on previous downturns indicates that the successful businesses invest heavily in preparing for a growth market at exactly this point.
CFO’s and CTO’s will be looking for expert guidance on which IT investments are key to both leverage opportunities in a downturned market and preparing the foundations for growth as the market recovers. The discussion areas will be around business and not IT transformation. IT service providers will need to transform their approach to their clients or be replaced by competitors better prepared to provide strategic advice.
The credit crisis challenged many long held assumptions on how IT should be managed and the fall-out is likely to be a more exhaustive and far reaching analysis of what fits the company needs best from a commercial perspective. IT service providers needs to be attentive and innovative in helping their clients to address these new challenges
In previous market downturns better prepared companies made divestments and intelligent acquisitions at rock bottom prices to outpace weaker competitors. IT service providers need to provide support to their clients in preparing and executing cost effective separation and integration strategies.
I have outlined below the key areas where IT investment are likely to be focused in 2009 and 2010. I would welcome any feedback
1. Managed Services
2. Professional Services
3. Virtualization
4. Business Intelligence
5. Cloud Computing
6. Green IT / Energy reduction
7. Unified Communications
1. Managed Services
The recession has created a unique set of conditions in the IT marketplace that the IT services businesses will recognize and use to catalyse growth. The first of these is in Managed Services where the increasing need to reduce operational costs is encouraging the outsourcing of many services.
Ovum recently released a study recently projecting that the global market for managed services will deliver revenues of $66 billion by 2012. The study, which collected data from more than 1,300 enterprise managed service users in 14 countries, projects that managed IP-based services will see a compound annual growth rate of 18% over the next four years.
According to IDC research there is a growing acceptance that a managed services engagement not only results in cost savings, but also provides access to technology that enables a transformation of IT infrastructure to drive productivity and boost competitiveness.
Forrester believes that a perfect storm is brewing. Technological change, the technology investment cycle, and difficult economics are combining to push some types of managed services over the chasm. While the very largest firms may be able to afford the investment needed in the coming decade, small and medium-size businesses will not, making them a prime market for managed service offerings that minimise initial capital cost and do not require an investment in IT staff.
IP VPN services are the largest global managed services market, with revenues of $17 billion. VPN services are projected to remain the most widely deployed managed service in 2012. VoIP is projected to experience the fastest growth over the next four years with a 39% CAGR.
There is a demand for service providers and managed service specialists to deploy and manage client networks to reduce costs and improve efficiency hence significant opportunities for those able to meet those needs.
Data published by business research and consulting firm Frost & Sullivan forecasts that the managed security services will exceed $6 billion by 2011. A poll conducted recently by CompTIA showed that nearly one-third of 322 organizations surveyed planned to make new investments or increase spending on managed security services.
Software-as-a-service (SaaS) model is predicted by Gartner to grow at 22% this year with SaaS revenues totalling $9.6 billion €7.05 billion) in 2009, a 21.9% increase from 2008 revenues of $6.6 billion (€4.8 billion), and reach a staggering $16 billion (€11.7 billion) by 2013.
It is also projected that North America will overtake Europe as the largest overall market for managed services by 2010, and that the Asia-Pacific managed services market will see 27% CAGR that the study says will be driven mostly by growth in India and China.
2. Professional Services
In ‘What’s happening to our workforce’ (see below) I talked about the transformation that has been taking place in the way we think about our internal and contracted workforce. The recession has certainly helped to catalyse a lot of change here by encouraging companies to look closely at their resource costs and consider what needs to be retained in-house, typically those activities that are deemed business critical.
Rather than move all IT outside in terms of an outsourcing arrangement and losing a degree of control and flexibility companies are looking at new hybrid resourcing strategies to reduce costs and increase capabilities. These comprise selected out-tasking and off-shoring for cost reduction supported by contracted resource where a higher degree of control is required. Off-shoring requires highly structured and well defined work elements and is less well suited to complex change requirements where a degree of agility may be required.
Alongside fully contracted project work companies will also look for unbundled service elements that can be used to help them either bridge resource shortages or provide expertise in specific areas. The client retains full responsibility for the delivery process and treats the service provider’s resource as part of the client team for the duration of the work. Whereas a contracted employee has to be paid a set amount for an agreed number of hours, this new model allows a utility based charging mechanism (i.e. you pay for what you use). It also provides a degree of re-assurance re skills levels, behaviour and availability (e.g. the service provider can provide holiday cover).
3. Virtualization.
In the IT arena, fads come and fads go, but when the concept makes bottom-line sense, then it stays and becomes part of our infrastructure. This is what has happened with virtualization.
Much of the current buzz is focused on server virtualization, but virtualization in storage and client devices is also moving rapidly. Virtualization to eliminate duplicate copies of data on the real storage devices while maintaining the illusion to the accessing systems that the files are as originally stored (data de-duplication) can significantly decrease the cost of storage devices and media to hold information. Hosted virtual images deliver a near-identical result to blade-based PCs. But, instead of the motherboard function being located in the data centre as hardware, it is located there as a virtual machine bubble. Various virtualization approaches have significant potential to reduce IT costs
Virtualizing allows companies to simplify the management of their infrastructure and decrease downtime. This is a money saving step. There are several different virtualization vendors on the market. They range from basic free to a cost-based full management environment. Microsoft Hyper-V, Citrix/Novell Xen, and VMware all offer free virtualization platforms.
Virtualizing will save money; it is how much work you put into it to make it a smooth transition that determines the amount of money being saved. The savings don’t always happen during the process, but over time, the TCO is drastically lower than with physical equipment.
4. Business Intelligence
Business Intelligence (BI), the top technology priority in Gartner’s 2008 CIO survey, can have a direct positive impact on a company’s business performance, dramatically improving its ability to accomplish its mission by making smarter decisions at every level of the business from corporate strategy to operational processes. BI is particularly strategic because it is directed toward business managers and knowledge workers who make up the pool of thinkers and decision makers that are tasked with running, growing and transforming the business. Tools that let these users make faster, better and more-informed decisions are particularly valuable in a difficult business environment.
5. Cloud Computing
Cloud computing is a style of computing that characterizes a model where providers deliver a variety of IT-enabled capabilities to consumers. They key characteristics of cloud computing are 1) delivery of capabilities “as a service,” 2) delivery of services in a highly scalable and elastic fashion, 3) using Internet technologies and techniques to develop and deliver the services, and 4) designing for delivery to external customers.
Although cost is a potential benefit for small companies, the biggest benefits are the built-in elasticity and scalability, which not only reduce barriers to entry, but also enable these companies to grow and absorb acquisitions quickly. As certain IT functions are industrializing and becoming less customized, there are more possibilities for larger organizations to benefit from cloud computing. However, caution is advised since significant privacy and security issues exist. Cloud computing is not appropriate for the full spectrum of enterprise applications.
6. Green IT / Energy Reduction
We’re facing some stark realities. CIO’s are faced with spiralling costs as energy prices rise. Power and cooling costs are projected to exceed infrastructure spend in 2010. Gartner projects that 40% + of UK Data Centres will run out of capacity in 2009-10. In India Data Centre capacity will need to double in the next 2 years!
Governments are also driving change: US Public Law 109-431 and Energy Star Program, new 2008 EU Code of Conduct and UK 2009 Carbon Reduction Commitment scheme will mandate energy reduction targets on UK’s top 5000 organisations.
Migrating to more efficient products (e.g. upgrade to more efficient and intelligent devices that can help to reduce energy consumption) and approaches (e.g. virtualization) can allow for more equipment to fit within an energy footprint, or to fit into a previously filled centre. Regulations are multiplying and have the potential to seriously constrain companies in building Data Centres, as the effect of power grids, carbon emissions from increased use and other environmental impacts are under scrutiny.
Alternative solutions to be evaluated can include co-location to reduce immediate costs along with potentially off-shoring the capacity requirement albeit many companies are still reluctant to move their core data outside of their territories and direct control.
In the near term it’s highly likely that environmental benefits will likely take a back seat to the cost savings from lower energy use!
7. Unified Communications
The expectation is for a merged market between UC and collaboration, even more trial activity, business executives getting more involved with UC selections and deployments, IT managers continuing to demand interoperability based on standards and UC managed service adoption. All these elements support growth which according to Forrester account for a $2.8 billion market by the end of 2009.
Increasingly sophisticated users will realize that they have multiple products and vendors performing the same communications functions, and that this redundancy creates additional expense (both for licenses, operations), makes it more difficult for users to learn, and increases the complexity of integration. They will look for service providers to help simplify their architectures and drive down costs. This is particularly the case where an acquisition has taken place and systems need to be rapidly consolidated and cost savings realized.
According to Gartner in the next five years the number of different communications vendors companies may be reduced by at least 50%. Gartner says this change is driven by increases in the capability of application servers and the general shift of communication applications to common off-the-shelf servers and operating systems. As this occurs, formerly distinct markets, each with distinct vendors will converge and drive massive consolidation in the communications industry.
Companies will look to integrate the matrix of different installed communication types in order to provide a seamless communication system across multiple networks, applications and devices.
Videoconferencing has traditionally been a difficult technology to implement in the enterprise with problems like latency, jitter, poor video equipment, insufficient concern over the videoconferencing environment, lack of business purpose, organizational commitment, and comfort with using this technology all contributing to poor take-up
However video is now considered to be a key tool to help companies reduce costs and all those problems represent challenges and revenue opportunities for IT service providers to address. Most people probably relate ‘telepresence’ to Cisco but Tandberg, Teliris, Polycom and Digital Video Systems all now all provide high end video systems to compete with Cisco.
The whole market, which includes telepresence equipment, network services and managed services, is forecast to grow from a 2007 level of not quite $126 million to nearly $2.5 billion in 2013. Telepresence solutions can cost in the neighbourhood of $300,000, but many telepresence operations are handled as managed services. And less expensive “executive” systems designed for one or two people mean that telepresence technology is now starting to address a wider range of requirements.
The telepresence marketplace now comprises:
- CEO and senior executive travel reduction (whether corporate jet or commercial airline travel),
- Employees working across company locations
- Room rentals for companies unable to afford their own rooms.
In conclusion
The recession and the impending market upturn present real opportunities for growth albeit underpinned by a high level of expenditure controls by CFO’s. IT service providers will need to adapt to a very different set of demands and challenge assumptions that may now no longer be valid. Those that successfully embrace these changes will be rewarded by closer client relationships and stronger revenue streams.
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