Wednesday, July 11, 2007

Outsourcing's dirty little secret

Source: Intergovworld

Outsourcing has been a part of IT for more than 20 years. During that time, outsourcing models have changed dramatically, but the fundamental strategy has always been the same--arbitrage. Arbitrage is basically taking advantage of price differences for similar products available in different markets. You buy low in one market and sell higher in another.

The dirty little secret about these old outsourcing models is that, like all arbitrage activities, the opportunity eventually disappears as markets adjust to changing conditions.

It's time for a New Deal in outsourcing that offers a permanent solution, not a temporary fix, to the most pressing problems CIOs face today--waste, security, flexibility. It's time to fundamentally change the way businesses buy servers, disk drives, networks and desktops.

Operations Arbitrage--Your Mess for LessIt's time for a New Deal in outsourcing that offers a permanent solution, not a temporary fix, to the most pressing problems CIOs face today...Text The early days of outsourcing focused on data center operations. Businesses were competing for scarce skills to run their IT shops. The demand for these skills caused the price to go up. An arbitrage opportunity existed to apply these expensive and underutilized skills across a larger number of businesses.

A similar arbitrage opportunity existed from a data center and equipment perspective. It cost less per data center square foot, server cycle, storage gigabyte and network circuit when you bought in large quantities. But most businesses did not need that amount of IT resource. If businesses could consolidate their demand, they could get a better price for a shared resource.

Employee Arbitrage--A Band-Aid Approach

During the last ten years, powerful networks and a more educated global IT workforce have enabled employee arbitrage where low-cost, highly trained application development resources in one country can be made available to a distant country where similar resources cost more.

While there were many management, cultural, social and political issues associated with this model, the economics were compelling--50 percent to 75 percent savings for the same skills. Companies like Wipro, Infosys and Cognizant emerged to offer U.S. companies deep engineering and application development skills at a fraction of the cost of those skills purchased locally.

IT Utility Services--A New Deal for Business

IT utility services represent a New Deal in outsourcing that's not an arbitrage opportunity, but a fundamentally new way to deliver IT infrastructure. With IT utility services, businesses stop worrying about what "boxes" to buy and start focusing on the applications that drive their operations, generate customer value and create competitive differentiation. All the server, storage and network capacity you need is available as an on-demand service, not as a bunch of boxes.

Why is there such excitement about utility services? Because it solves some of the pressing problems in IT today: Waste How many IT departments congratulate themselves for negotiating a 1 percent higher discount on a server that ends up running at 20 percent capacity? The problem isn't pricing, it's waste. Prices keep dropping on computers and there is more than enough competition to ensure you get the best price on technology. But, pricing cannot fix the waste problem. With utility services, you buy only what you need and pay only for what you use. Utilization is maximized and waste is eliminated.

It's Time to Get Started

Utility services are a New Deal for IT, but luckily it's not an "all or nothing" proposition. You don't have to throw away what you have in order to integrate utility services into your IT architecture. You can start with a single application or business unit and then gradually migrate the rest of your application portfolio and your business units to the utility platform. No changes are required to your application code.