Slowing growth, loss of momentum, maybe even a mid-life crisis: The IT services industry is showing all the signs of a maturing industry.
For many providers, competitive dynamics have turned for the worse, eating into profits and making it all too easy for customers to recompete existing contracts midstream—that is, put them up for competitive rebidding—or terminate them outright. Offshoring has seen its promise largely realized—and can be limited by political pressure, to boot. Many anticipated efficiencies have not fully materialized. Technology shifts—like the cloud—can make established processes seem dated. What was once a fruitful partnership between providers and customers has become, in numerous cases, a rocky one. And as in any troubled relationship, everyone involved is asking the same question, Where do we go from here?
To be sure, IT services companies can take some tried-and-true steps to alleviate the strain. They can reduce complexity, embrace automation, and ensure standardization. They can champion process excellence so that things get done right the first time. And they can adopt metric-driven operations so that results are easier to measure. All of these levers need to be pulled.
But providers shouldn’t stop there. Instead, they should build on these improvements and take their business, and their prospects, to the next level—by completely transforming their business model.
By now, the traditional “your mess for less” business models for IT services are so well established that it is rare to see a deviation. Yet the old ways are a poor fit with the new realities of the industry. Pricing based on technical drivers, such as the number of servers managed or the total terabytes of storage provided, give providers little incentive to invest in efficiency-boosting technologies such as virtualization and end-to-end provisioning systems. Traditional models also fail to provide a variable cost structure that is better suited to today’s economic climate; instead, customers pay the same whether their business is slow or booming.
Yet if pricing were based on the customer’s business drivers, these problems could be overcome. Customers would see their IT costs align with their business performance, and they’d get better processes, too—since a provider that is no longer being paid by the terabyte or the server has an incentive to do the work as efficiently as possible.
Meanwhile, pricing based on business drivers would enable providers to bundle all the services that relate to those drivers. The services would therefore become stickier because customers would no longer find it so easy to divvy them up among various vendors.
Already, we are seeing a first step toward this new business model. Cloud-based offerings like Amazon Web Services (AWS) offer utility-style pay-as-you-go pricing for storage, database hosting, and other infrastructure-centric services. Giving customers the ability to scale capacity—and costs—according to their needs has proved an attractive value proposition. AWS is estimated by some analysts to be a $1.5 billion annual business, an amount that places it within throwing distance of the top 25 data-center outsourcers.
There is a message in that success: While Amazon’s model works well for infrastructure services, it doesn’t have to end there. Providers of IT services can learn from it, build upon it, and bring a similarly attractive value proposition to customers who outsource complex business applications. The key is transforming normally fixed prices into variable ones—a process called variabilization.
Creating a new business model is never an easy task; transforming one that has been so established for so long is more challenging still. But we see a step-by-step path that can get the IT services industry well on its way. By following the recommendations below, providers not only can tackle the challenges they now face but also build a foundation for success—both for themselves and their customers.