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A change in the mix

A change in the mix

Services are the beating heart of the IT industry but a government policy shake-up and cloud computing could leave it barely recognisable.

For a long time, the IT services sector has been seen as the industry's engine room for growth. However there are big changes in store. And these could very well shape the sector we have come to know in new ways. IT services are diverse in nature and largely dominated by outsourcing, systems integration and IT contracting.

Governments around Australia have certainly warmed to IT services in a big way and they now account for a major part of public technology spending.

While the particular service mix may change across jurisdictions, governments have largely accepted the value proposition of delivering increased flexibility while still keeping a lid on staff numbers and capital spend. But all is not plain sailing for the sector as it tries to live up to increasing customer expectations. Now there are new and emerging issues to consider. These could very well drive a fundamental rethink in vendor delivery models.

Below are two examples.

After a shaky start, outsourcing has largely emerged as an IT industry good news story.

Contemporary outsourcing is now a stable service delivery method that serves the market well. Over time, engagement methods have evolved for selective sourcing with stable long-term contracts and well-rehearsed vendor service delivery formulas.

But change is looming thanks to an emerging cloud computing market. This could very well deliver a fundamental shift in the way we think about the procurement of IT services.

The cloud concept is still young, and the market is still debating the real impact for computing at an enterprise level. But outsourcing time frames are long and this presents some serious challenges for government planners. Outsourcing depends on long-term strategic relationships, but unfortunately it is difficult to tell whether the traditional line-up of outsourcers will be the emerging leaders in the cloud market.

Incumbency is a wonderful thing if you are a vendor, so the current enterprise outsourcers have every reason to help guide their customers to reliable answers in the cloud. The real test will be whether existing outsourcers can step up to the mark to demonstrate their strategic credentials, rather than simply rely on the existing well-tested delivery methods.

The IT services industry has been built on a reputation of quickly delivering creative solutions to meet changing needs. There is little doubt that the coming 12 months will indeed produce some changing needs. This is likely to test the resolve and creativity of both government and industry leaders.

In recent times, contractors have come under fire from all directions, driven largely by persistent concerns that the industry's current approach is simply delivering a de facto permanent workforce, but at higher pay rates.

In his federal government IT report tabled in 2008, Peter Gershon recommended a 50 per cent cut in contractor numbers. Other governments around Australia soon followed suit. Australia is not alone in taking this action. In its whole-of-government IT strategic plan, the British government set out a path for sweeping cuts of similar magnitude. But this approach is an unreliable way of achieving any lasting change, especially as markets pick up from the global financial crisis.

Looking behind the cuts, there are some genuine concerns. These will need to be addressed in a fundamental way if we are to avoid an endless cycle of steep market growth followed by savage cuts. At the heart of the problem lies a worrying disconnect between customer expectations and the way the market operates in reality.

Contracting is supposed to be undertaken as a commodity purchase to meet skills shortages or short-term needs.

But in most cases contractor procurement is anything but a commodity. Contracting is a fragmented market with many players, where sales are based on relationship selling at an individual level. All of this makes it difficult for new entrants to enter the market.

Contractors are not really a simple commodity purchase. Good contractors are hard to find and good ones tend to be kept on the books for long periods.

But this negates the original intent of a fixed-term, commodity market.

Any changes to the market are likely to be difficult, and will need strong leadership. In order to achieve real change, government agencies need a better understanding of the market at a whole-of-government level.

Otherwise agencies are just competing with each other in a local bidding war. Agencies also need a reliable mechanism to release a good contractor at the end of a project, without having to compete again for scarce resources as workloads rise.

Kevin Noonan. Kevin Noonan is a research director in Ovum’s government practice. Email comments to kevin.noonan@ovum.com

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