Light at the end of the IT tunnel

The need to meet a raft of regulatory compliance requirements, the growing deployment of IT to improve business efficiency and an increasing eye for the bottom line are all helping to drive steady growth in the IT services sector.

This doesn`t mean companies are simply outsourcing everything in sight. On the contrary; while outsourcing has been a major driver of the IT services market in the past few years, it is fast being overtaken by disciplines like IT management and process management, with consulting services and development and integration services close behind.

The latest research from local IT think-tank BMI-TechKnowledge shows that the local IT services market grew by 5.3% in 2004 with revenue of R18.4 billion, up from revenue of R17.4 billion in 2003. The entire South African IT market was worth R45 billion last year, giving IT services a healthy 41% of the pie.

This is forecast to rise to R62 billion in 2009, by which time IT services will comprise close to half the market. BMI-T expects the services sector to grow to R25.6 billion by 2009, reflecting a steady, if unspectacular, compound annual growth rate (CAGR) of 6.8%.

This growth is pretty much in line with the global trend. Depending on whose figures you look at, the combined worldwide market for technology services and business process outsourcing (BPO), in other words, companies farming out tasks such as finance and accounting, rose about 5% last year to about $600 billion.

By 2009, says Gartner, this will be in the region of $800 billion, with the bulk of that going on development and integration ($240 billion), IT management ($200 billion) and process management ($132 billion). This underlines the notion that organisations are willing to invest large sums in technology, but will be searching for ways to maximise the return they get from those investments - the dreaded ROI.

[TABLE]To put this spend into some sort of context, US-based research giant International Data Corporation predicts that worldwide IT spending will increase to $1.3 trillion by the end of 2009, with a CAGR of 5.9% from 2005-2009. If these figures mesh even vaguely, it means technology services will account for two-thirds of all IT spend within the next four years.

There are several reasons for this growth in the technology services market - compliance, efficiency, outsourcing and alignment between business and IT.

Gartner says companies need to transform their business, not only by cutting costs, but also by learning how to better use IT resources and processes to grow their business, which is why IT management and consulting are likely to be among the key thrust areas in the next few years.

Gartner envisages an IT world it calls the "dominance of services everywhere", in which services will wrap around and define not only software, but all aspects of IT and telecommunications. Any vendor will then be judged on how it supports a services concept and how it financially manages the impact on margins by delivering services.

Companies are realising that IT need not only be a cost centre, but a revenue centre, says Charles Osburn, a director at independent consultancy Quintica. More importantly, there is a clear move towards IT being in a position to contribute to corporations at the strategic level.

"There`s a huge awareness in companies around understanding their processes better," says Osburn. "Last year people were talking about it. This year they`re doing it. They`re becoming compliant, and doing the hard work of process training and process consulting that will pay off in the long run."

Atwell Williams, the US-based director of business service management at BMC Software, believes there is still some way to go before most companies start realising the full benefits of modern IT services. He points out that according to Gartner`s maturity model, only 30% of companies are in the services and value stage of IT - which means everyone else is still mired in anything from a reactive state to down right chaos.

"Companies are still not fusing IT with business," said Williams, who was in SA recently to preach the gospel of processes and service management. "If you walk up and down your typical data centre, there are still things there that don`t have any clear purpose. So it`s fair to say that the opportunities of IT service providers are huge."

That`s music to the ears of Danie Nel, CEO of the Cape-based tech consultancy Nebula, who says a clear trend emerging is a drive by organisations to reduce their internal IT component. "You have to have a very good sourcing strategy to manage vendors, but companies are also being far more selective in their sourcing decisions than in the past. They`re more savvy themselves."

One of the most obvious drivers of IT services is simply that IT is mission-critical to most businesses today, says BMI-T analyst Roy Blume. Companies are happy to pay for reliability and the ability to use IT to grow the bottom line.

"There`s no doubt that the South African IT environment is becoming more mature," says Blume. "People want to sweat as much as they can from their current IT environment, and do more with what they have. That`s where vendors are finding they can add real value. It is a very fragmented market, which is why there are a lot of opportunities for growth."

The "wake up and smell the coffee" moment for the IT industry came on the heels of a fundamental change in the market`s attitude to IT. Quite simply, the world is no longer ruled by technology, but hard-eyed business needs. Those vendors and consultants who can best meet those needs will cash in, while the box-droppers will eventually wither and die as margins plummet in a commodotised environment.

Today you need to come to the table with a full value-add solution, or you`re out of the game.

Gordon Christie, client services manager, Sun Microsystems SA

This is forcing vendors to rethink their approach and strategies, says Gordon Christie, client services manager at Sun Microsystems SA. "Today you need to come to the table with a full value-add solution, or you`re out of game. The industry`s way of approaching customers is changing dramatically: every sale we make is based on some tangible business benefit."

Amen to that, says Kamal Ramsingh, chief operating officer at Xantium Technology Holdings. "One of the biggest changes, especially in the private sector, has been the level of sophistication of the buyer has increased. The people who procure IT services have a better sense of how to use external service providers, and are generally managing their projects better and deriving greater benefits."

Most local IT services providers seem to be fully aware that the playing field has changed and they will need to change with it.

A trend already starting to emerge in this market is a collaborative business model, where risk and reward are shared between the customer and the service provider, says Peter Dixon, GM of services innovation at Dimension Data.

"Service providers need to find better ways of adding value to the business and not just to the IT," says Dixon. "A lot of service providers are going to have to adapt or merge. You can`t just be a pure IT player anymore."

In a recent research paper on the morphing world of professional business for Epicor, Ross Dawson, CEO of Advanced Human Technologies, reveals how organisations in the business application and professional services arena can successfully transform from being purely a provider of a commodity to a value-added solution provider and professional partner.

He identifies what he calls "seven megatrends of professional services", which drive the transition from product supplier to services provider in today`s world: client sophistication, governance, connectivity, transparency, modularisation, globalisation and commoditisation.

One of the key drivers of growth in the IT services sector is compliance to a variety of standards, from Sarbanes-Oxley to ITIL (the IT Infrastructure Library).

The level of sophistication of the buyer has increased.

Kamal Ramsingh, COO, Xantium Technology Holdings

Helping IT to present a better face to its users is at the heart of ITIL, a collection of procedures and best practices for IT services management and operations. Developed in the late 1980s by the British government and popular in Europe throughout the 90s, ITIL has started catching on in other parts of the world as the tool of choice for standardising, integrating and managing IT service delivery.

According to a survey by Forrester Research, a year ago, 12% of $1 billion companies in the US had adopted some portion of ITIL, and one-third said they were getting started on ITIL or were considering using it.

The big breakthrough for ITIL has been the shift from describing service delivery processes - the "what" - to helping organisations actually implement these processes and measure service quality - the "how". Widespread adoption of ITIL best practices by internal IT departments is bound to follow.

There are 10 ITIL components in all, but new adopters tend to pick the low-hanging fruit like incident management and configuration management before moving on to areas like problem management, change management and help-desk management.

Change management is one of the hardest IT service process to perfect, says Nigel Henderson, GM of Teamsource, the managed services division of DiData. "The challenges of change centre on the level of granularity required in terms of management - and the ability for staff members to distinguish between the need for 'real change` and simple modifications to routine service requests."

While the degree to which companies embrace ITIL varies considerably, any reasonably rigorous adoption of ITIL is no small job. Forrester analyst Jean-Pierre Garbani recommends that companies take a flexible approach to ITIL. Otherwise, he says, ITIL will suffer the same fate as some of the ideas for software development process improvement from the 1980s. "There was the creation in companies of `process police`, and the result was that no one is using those process improvement methodologies anymore," he says.

Instead, "send a couple of guys to get certified and use them as resident experts," says Garbani. "Lead a couple of seminars to initiate the company to ITIL. Make sure people understand that the library is there for reference, and use it as a source of education."

Outsourcing remains a contentious issue within IT services. While there are those who believe SA can create an industry in itself by mopping up the First World`s offshoring deals, the days of companies blindly outsourcing their IT requirements are over.

Quintica`s Osburn dismisses outsourcing as a "dinosaur", preferring to talk about "smart sourcing".

Martin Vergunst, MD of Computer Sciences Corporation`s (CSC`s) operations in SA, refers to the notion of "dynamic outsourcing" - a concept built on agile, business-focused relationships.

Vergunst admits the true value to business of outsourcing has proved elusive and, worldwide, the industry has done some soul-searching as the first step in its future strategy. One thing is clear - outsourcing to cut costs is not good enough in today`s business environment of expanding opportunities and rising challenges.

"As outsourcing providers, we need to improve the ability of our relationships with our customers to systematically add value to their business, just as, traditionally, outsourcing has been used to systematically reduce costs."

In many ways, the business impact of IT outsourcing has proved elusive. Among these is the fact that many companies outsource because they have problems with IT.

This is a recipe for disaster, say people like Nebula`s Danie Nel and CSC`s Vergunst. "Internal and management and decision-making culture cannot be resolved by outsourcing and, unless these are addressed, the outsourcing relationship can suffer from these underlying issues."

A lot of service providers are going to have to adapt or merge. You can`t just be a pure IT player any more.

Peter Dixon, services innovation GM, DiData

Another misconception about what traditional outsourcing can achieve is that, because the business thinks IT is not a core competency, it is not considered central to the business. IT is now so pervasive companies need to have efficient and competent IT operations, irrespective of whether they are core activities, Vergunst says.

"Outsourcing must serve the business, not the IT department`s needs. Contracts must be grounded in a clear sense of where the business is going. This means thinking beyond the tactical concerns and opportunities, and factoring in the full strategic consequences of outsourcing decisions."

New outsourcing relationships must align customer and supplier interests. Nel, Osburn and Vergunst agree that contracts must motivate suppliers to do the right thing and be pro-active in support of the customer`s business. "Close alignment of financial interests is the only way to sustain productive long-term business partnerships."