The idea of using a specialist IT services company is widely accepted in the developing world. Now the urgent need for greater flexibility and cost control is forcing the developed world to wake up to the benefits.
It is one of the paradoxes of commerce that, the more essential a commodity or service becomes, the lower it sinks down the boardroom agenda. Our ancestors were so obsessed with power (motive and calorific, rather than political) that it dictated their location and even their lives. The blast furnace had to be sited near the coal pit, the miller ground corn at midnight if that was when the wind blew strongest. Today, those of us lucky enough to live in the developed world take it for granted that electricity is available at the touch of a switch. It is essential to almost all businesses, but a differentiator for none.
Twenty years ago most corporations valued information technology as the iron smelter and the miller valued power. They owned it, ran it, guarded it jealously, and genuinely believed it to be a source of competitive advantage. Now IT is as ubiquitous as the National Grid. Talk of its becoming a ‘fourth utility’ alongside electricity, telephony and water is nothing new. But a combination of technological advance and economic necessity is finally turning that talk into reality.
Break the routine
The key, says Anubhav Saxena, global head of marketing at global IT infrastructure services provider HCL, is that, despite frequent protestations of uniqueness, most large businesses use much the same IT systems and business processes to do much the same job. The superstructure may still convey competitive advantage: the mesmerising website, the second-tonone customer experience, the ultraslick logistics.
But the infrastructure, although equally vital, is usually pretty routine: the network, the storage, the customer relationship management and enterprise resource planning software, and so on. And since most businesses don’t own a generator or employ water engineers, why should they own a data centre full of commodity (and often outdated) computers, and staff it with expensive and hard-to-find personnel who are largely clones of the equally expensive and hard-to-find personnel working at all their competitors?
If PowerGen can generate electricity more efficiently than you can, it’s increasingly likely that a specialist IT services company can provide less expensive, better, more reliable IT. This concept has long been accepted in the developing world, says Saxena, where the pressures of budget constraints and skills shortages, combined with the opportunities available to greenfield operations with few or no legacy systems, mean that businesses are happy to buy their IT infrastructure as a service – not caring too much where their data is stored or who changes the backup tapes as long as it’s secure and it works. Much of the developed world remained on its high horse until the recession yanked it from the saddle. But the recent imperative to reduce overall costs and, just as importantly, bring those costs into line with the ups and downs of trade, has forced it to change its mind.
HCL alone, with operations in India and 21 other countries around the globe, now numbers more than a third of the Fortune 1000 among its clients, and likens its operations to a factory or industrial plant. When equipment is required at customers’ premises, HCL can supply predesigned, pre-configured, pre-tested systems that are guaranteed to plug together and work first time, at a predictable, off-the-shelf price. When a bank opens a new branch or a retailer a new shop, for example, HCL reckons that predicting and supplying the building’s IT needs should be as simple as ordering the carpets and furniture.
Easy money
A combination of economies of scale and the lower rates of pay demanded by skilled IT professionals in the developing world can make a very significant difference to costs, says Saxena. He reckons that the average large corporation spends between six and seven per cent of revenues on IT, with roughly half of this going on infrastructure. Half of this infrastructure spend is services, while the other half goes on hardware assets such as data centres, networks, storage, PCs etc.
Outsourcing to a globally distributed service provider can cut services spend by 30-50 per cent almost overnight, says Saxena, largely thanks to cheaper labour costs.
Standardisation, automation and rationalisation can reduce the hardware side of the equation by 15-30 per cent. Since services (1.5 per cent) and hardware (1.5 per cent) together represent around 3 per cent of total company revenues, global outsourcing can potentially save organisations a whopping one per cent of their total, pre-tax turnover.
Moreover, says Saxena, the cost savings are so great that the operators of these globally distributed computing services can afford to reinvest part of the profits in superior technology such as automation, storage, servers and server management, plus the very latest versions of all the leading software.
The key is that the computing assets are globally distributed but centrally managed, and provide a flexible resource into which clients can dip almost at will.
New breed
It’s part of the modern trend to view IT as an on-tap service that can be turned up or down as business needs dictate, just like conventional utilities such as electricity or water. Old-style IT outsourcing contracts could last a decade or more, says Saxena, and often involved the service provider simply acquiring the client’s legacy environment and sweating the assets while the client ploughed on with the same old systems and failed to reap the expected benefits. Today every element of a corporate system – processing power, storage, networks, backup, load balancing etc – can be made available on state of the art technologies as a flexible, pay-for-what-you-use service, and contracts can be as short as three to five years.
The effect is to shift a significant slice of capital expenditure to opex, and to make the price paid reflect much more closely the amount of revenue earning business the IT systems support. Saxena cites a publishing giant faced with falling magazine sales and spiralling data storage needs as it coped with the inexorable switch from printed to digital media. It could no longer afford to pay fixed IT costs on fluctuating print sales, so HCL “unitised” the cost of the required IT so that it became effectively a predictable unit cost per magazine sold. Building an in-house infrastructure to cope with the publisher’s runaway storage needs could have taken years, says Saxena, but with an on-demand service model, HCL was able to promise – and deliver – cost savings within three months.
For another client, a major retail and manufacturing conglomerate, HCL created a totally pay-as-you-go service, with a fixed dollar cost per CPU hour, gigabyte of storage used, etc. “They wanted to get their IT off their books, so we unitised their entire infrastructure and made it available as a service,” says Saxena. HCL promised a 15 per cent saving during the first year, with a contractual obligation to save 20 per cent year on year thereafter. The client was enabled to target smaller customers whom it could not have economically served with its previous IT system, thereby broadening its market reach. “This wasn’t just an outsourcing arrangement, we were effectively partners in a new venture,” says Saxena.
Lower price need not mean a reduction in service quality. A fast growing global software company not only reduced its IT infrastructure spend by 28 per cent, but demanded – and got – improved service levels, such as the ability to recover its entire environment within one hour of a major failure, and data recovery within 15 minutes.
“Saving cost was a given,” Saxena says, “but they also wanted to improve service levels and make their IT more efficient for the business on cost neutral terms.”
By Paul Bray
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