Tuesday, November 10, 2009

Through the Lens of a CIO: Transformation-Oriented Industry Segment

I promised to share a snapshot of how I think CIOs are looking at the IT Services & Outsourcing industry.  It's a three-part story, and I want to start with the tip of the proverbial iceburg.

Today's summation will feel like old news, but I think it is best considered in the conext of the next two chapters.

On those occasions when the senior leadership of a business concludes that "transformation" is required - that is, fundamental and substantial restructuring of the business support functions, typically driven by specified changes to the top-line characteristics of the business (like markets, product offerings, customers, etc.) - a CIO looks into the IT Services market for service providers that carry distinct attributes.

Transformation agendas demand solutions that blend technology and business process changes. Commonly, they require deep industry expertise. They are complex initiatives that draw upon the most mature of industry leaders. To some observers, the relationships formed around a transformationally-oriented agenda are the increasingly rare contracts valued at hundreds of millions of dollars. To me, the contract values are of lesser significance than the long-term implications of "managed change" and shared risk implied by this sort of relationship.

The buyers of transformation sourcing tend to be companies at the larger end of the complexity spectrum, and those that perceive the magnitude of change to be greatest. Sometimes the change is driven by relatively significant declines in traditional business volumes, sometimes its driven by the need to reinvent the business in a fundamental manner, and sometimes it's motivated by the anticipation of great growth. Alas, the latter has not been a prominent instigator of transformation for most companies lately.

So, the providers that are transformation-worthy are actually relatively few in number.  I count five in the top echelon of technology-enabled change agents.  (No, Perot and ACS are not, and would not have been, among the top four.) My universe excludes any providers that are focused on discrete functions, like networks, because their reach is constrained. My top 5 are the providers that can step up to the magnitude of holistic restructuring of technology-oriented business operations.

The market for transformation-oriented relationships can be described as somewhat stable in the sense that there is a realtively steady flow of new business opportunities entering the market each year. These new relationships tend to introduce the greatest impact on the costs/capabilities of the buying Client, but there just aren't an abundance of opportunities each year.

And, while the contract values can garner great attention for their size, it's my impression that the percentage of dollars spent for transformational sourcing inititives pales in comparison to that spent for other IT Services & Outsourcing solutions.

Further, you might be asking about all of the other providers in the wild IT Services & Outsourcing marketplace?  They fit in the two remaining categories of solutions. Those segments, which I will describe in a future posting, carry very different characteristics than the transformation-oriented universe I just described.

The real "so what" comes from the fact that CIOs are buying solutions in very different ways today, and this fact is fueling some of the industry M&A we're seeing. More to come.


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