In the ebb and flow of technology trends, procurement models have generally been among the less volatile elements. However, extraordinary forces have emerged with the potential to seriously disrupt sourcing models.
What impact has the global recession had on ICT budgets, and is the rise of offshoring and cloud computing creating viable new sourcing options for cost-constrained CIOs? Or are these alternatives too risky to contemplate?
We talk to a number of ICT decision makers and discover that a new wave of sourcing is not yet sweeping across the nation.
Coping with changesFor Auckland-based Turners Auctions, responding to the effects of the recession has been secondary to moving ahead with crucial transformations to the business. "In the past two years the IT budget has gone up instead of come down due to the business changing," reports Tofigh Alizadeh, CIO and general manager of business strategy and planning.
Since 2008, Turners' IT team has near doubled in size from eight to 14, as the company reduced its reliance on outsourcing from 80 to 60 percent in a move to stabilise systems, reduce costs, deliver more value to customers and increase its focus on online technologies.
Although these changes have been cost-effective for Turners, this was not the ultimate goal. "We have evolved because of business needs rather than being totally cost focussed. It is mostly about delivering more value to the business really quickly."
The ICT team was bolstered last year when website development was brought in-house, boosting internal technical capabilities, says Alizadeh. "We have brought in a lot of core competencies we needed."
Turners wanted to shore-up its in-house development skills to support its online auction site, Turners Live -- a burgeoning sales channel.
With Turners Live customers can view, bid on and buy vehicles online in real-time as auctions are being held at any of the company's 16 branches. Turners Live now accounts for 35 percent of bids and 25 percent of the company's sales, says Alizadeh.
Having web development in-house means what is delivered better meets the business' needs. "It puts [the developers] right into the business. They can interact with end-users directly and it still doesn't push the costs out."
Using fixed-term contractors for development work also gives Alizadeh the flexibility to mix and match competencies as required. "Having that control and ability to change things, gives me flexibility around what I need to deliver to the business."
Even though development of the site happens in-house, Turners Live is a standalone component, provided on the cloud by LiveBlock Auctions.
For Alizadeh this is exactly the kind of application where outsourcing makes perfect sense. "Why would you invest millions of dollars in a product that is already there and needs to be changed very little to deliver results -- there is no competitive advantage for us to develop that ourselves. The best model is to outsource that."
Outsourcing becomes favourable for technology that does not change very often, or where little additional development is needed, says Alizadeh. "But when you've got a changing business, then bringing some of that in-house is definitely something I would consider."
In the past year, Turners has virtualised 90 percent of its server environment, and while Gen-i provided expertise and consulting for the project, the actual work was done by Turners' own infrastructure team. The virtualised servers are hosted on premise, but Alizadeh does not rule out outsourcing this environment once the system is stabilised. "We now have the opportunity to outsource that if we need to."
However, Alizadeh still has some reservations about moving too much infrastructure to the cloud, saying the model is not yet mature enough. "There is a lot of hype around the cloud and software-as-a-service, but you need to have flexibility and partners who understand the business and are responsive. SLAs need to be bulletproof and your environment needs to be stable."
Nevertheless, once the model matures there is nothing that Alizadeh would not consider outsourcing to the cloud. "I'm not someone who needs to see the lights on the machines -- it doesn't matter where they sit, as long as they do the job."
Core valuesOne organisation for which outsourcing its core systems is a definite no-go zone is St John Ambulance.
St John manages an emergency ambulance communications centre and medical alarm monitoring system and the stakes for keeping these systems running is a matter of life or death, explains ICT director Peter McDowall. "For many organisations, outages can have a significant impact but the impact of problem in [those systems] is literally life and death."
A lot of time and effort go into making sure these systems are robust, says McDowall. "By having dedicated management, we make sure we can maintain a quality service for Kiwis."
At the same time, as a not-for-profit organisation, St John operates in a different budgetary environment than most other businesses. "We're trying to squeeze everything we can out of the charitable dollar," says McDowall.
The recession has put extra pressure on finances. "We are significantly dependent on the goodwill of New Zealanders and financial circumstances have not helped people's potential to give. We are definitely paying more attention to cost-effectiveness of our partnerships."
It is not surprising then that St John follows a very considered approach in deciding what it manages in-house and what is outsourced. "Most core capabilities -- anything that we require on a daily basis -- we source in-house," says McDowall.
For more one-off or intermittent work, St John relies on a range of service providers ranging from large ICT providers such as Gen-i, to more boutique players.
Keeping skills in-house also enables McDowall to drive his vision for the ICT team to change its focus from maintenance to adding value to the organisation. "The ratio is now 70/30 in favour of maintenance -- we want to flip that on its head."
One of the ways McDowall plans to achieve this is to leverage cloud technology to bring new solutions to St John without increasing the demand on the ICT operations team.
With its constrained budget, taking advantage of cloud solutions is a "no-brainer" for St John, says McDowall.
As is dealing with vendors like Salesforce that offer specific deals for not-for profit organisations. St John is currently working with Divante to move its CRM system to the cloud with Salesforce.com. "Salesforce has developed some specific solutions to support organisations like St John. It certainly makes my job easier if you have vendors like that."
Show me the value
It is not only not-for-profit organisations where ICT teams are working hard to deliver more value to the business. This is also the focus for the team at Christchurch-based radio product manufacturer Tait Electronics.
IT manager Frank Gebhardt says his team of 25 is increasingly focusing on activities that provide direct value to the organisation. "If it is core to ICT development and deemed mission critical, we want to keep that knowledge in-house."
Projects requiring a high level of business processes knowledge and an understanding of data flows and security levels within the company are generally kept in-house, sometimes with specialist support, adds Gebhardt. "Those aspects drive quite heavily if outsourcing is appropriate."
Consultants and system integrators are used for more specific tasks and new systems or services where Tait does not have the expertise internally.
And if contractors need to be brought in for core projects because internal resources are unavailable, Tait ensures knowledge is transferred to appropriate in-house staff on completion of the project.
Projects or tasks that do not provide direct value to the Tait business are more likely to be considered for outsourcing, says Gebhardt. "For example we have moved our anti-virus and spam protection service to the cloud [with MessageLabs]. This frees up time for highly qualified people who don't have to look after such mundane tasks."
While the recession has seen Tait reprioritise some of its projects, it has not had a principle impact on its sourcing strategy, says Gebhardt. "It has changed our strategy on whether we need additional help to meet deadlines, [but] has not in terms of whether we use internal staff or consultants, or whether we outsource."
Overall, Tait has adopted a more selective sourcing strategy using different providers for different services. "It is important that providers have strength in a particular area."
But the company does not select partners solely on the basis of their technical expertise -- it also concentrates on how they can directly add value to Tait's business, adds Gebhardt. "What we look for when we talk to vendors is if their attitude and the way they work fit into Tait's culture."
The company is meanwhile actively considering how it can make more use of cloud services. Its time sheet management system is already on the cloud, as is its CRM system -- also with Salesforce.com, while a project is underway to move email and calendaring onto the cloud. Such commoditised applications are ideal for the cloud, says Gebhardt. "By having partners for commoditised services, we can concentrate on things that help the business."
Battle of the cloudsIn spite of all the hype surrounding software-as-as-service and cloud computing, it will not be the biggest trend in local sourcing strategies this year, according to Tim Sheedy, Sydney-based senior analyst for IT sourcing and vendor management at Forrester Research.
This honour will belong to offshoring, which grew substantially in New Zealand last year with organisations, as operating costs have increased, says Sheedy.
Deals with offshore providers are also being used to keep larger outsourcing vendors honest, adds Sheedy.
Instead of moving systems to the public cloud en masse this year, organisations will focus on preparing for the cloud, says Sheedy. "You can't just jump into the cloud. Everything has to change. The next 12 months will really be about what that change will look like and how it will impact the IT business before we see major cloud deals being signed."
The fastest growing cloud services will be ERP offerings, alongside CRM and performance management systems, as well as any functions that are only needed once-off or intermittently, such as testing or disaster recovery. "Why would you have a perpetual licence when you can just pay for it on demand when needed?"
ICT teams will also need to consider how moving to the cloud will impact their sourcing models and ability to negotiate with vendors. "Avoiding vendor lock in will be a major focus. How to create a competitive sourcing environment in the cloud world will be one of the major challenges this year." This points to another big change Sheedy expects to see in sourcing models over the year -- a reduction in the overall value of spending on outsourcing, as ICT teams exert pressure on vendors to reduce costs. "The major change this year will be in people trying to negotiate better deals with suppliers."
At the same time, New Zealand organisations are moving away from having multiple vendors toward a more selective sourcing model, says Sheedy -- a trend in which New Zealand, along with Australia, is leading the rest of the world. "There is definitely consolidation back from perhaps 10 infrastructure providers to two or three."
But this does not indicate a move to single sourcing, he adds.
In addition, sourcing teams are facing having to take ownership of cloud applications, which were previously procured by other departments in the organisation, says Sheedy. "How to bring Saas or cloud applications into traditional models is a challenge, especially where there are specific mandates such as in government."
As the number of cloud-based vendors balloon, so too will concerns over their viability, says Sheedy. "People will ask what it would mean to them if a provider shuts its doors. How will they get their data back? Because there are a lot of new and different vendors in this space, a lot of due diligence needs to be done."
However, conducting in-depth due diligence on new suppliers may be an unfamiliar task for many sourcing departments, as it may be years since they last had to do this for their existing partners, he says.
Meanwhile, Sheedy expects a new model of IT sourcing to emerge, driven by vendors developing complete end-to-end systems, called "machines", that perform particular tasks, but which can be accessorised for a user's specific requirements.
This model will be spearheaded by Oracle, which last September released its first Sun Oracle Database Machine -- a data warehousing and online transaction processing system, says Sheedy, who uses a car manufacturing analogy to describe the concept. "The business wants to go from A to B and IT builds them a car. But at the moment, they can't buy the car -- they have to build it, or rent it by outsourcing."
Under the machine model, organisations will be able to "buy the car" in the form of a machine. Like car manufacturers, ICT vendors will have a range of machine models that perform particular functions. And like individual cars can be customised through different colours, trims and engine varieties, so machines will be accessorised to meet an organisation's needs.
And similarly to a car dealership, the vendor will be the single point of service for any issues with the machine.
Machines will start to emerge from the middle to latter part of the year, says Sheedy. "These machines will be easier to manage and implement because complete integration comes out of the box."
A useful frameworkHowever as organisations choose to source their ICT services, it is crucial that partners understand the business, strategic and cultural requirements of the organisation, says Brett Hodgson, managing director of Unisys New Zealand.
"Organisations need to begin by understanding their own culture, and then selecting providers with the right cultural fit, and not simply base their decision on the best price and the provider's technical abilities and experience," he says.
Unisys advocates developing a collaborative governance framework and responsibilities matrix for all providers. Such frameworks should encompass business strategy, processes, applications and the technology that would support these, says Hodgson.
"Developing a framework allows a company to start describing their business to us. If the relationship starts on the wrong premise, or the supplier and customers have competing or divergent objectives in terms of what they are trying to achieve, the agreement won't work."
Hodgson acknowledges this is a mature model. "There are groups in New Zealand thinking that way, especially where IT is forced to be integrated with the business and where the role of CIO is much more about meeting business demand rather than delivering IT."
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