THINK IT Services

GM’s recent decision to initiate a ‘multisourcing’ strategy that will result in it parceling out its IT outsourcing responsibilities to multiple solution providers has gained a lot of attention within the IT industry, as well as among corporate management and business publications.

Maybe I’ve been in the IT industry too long, but I don’t get what all the commotion is about.

‘Multisourcing’ has been a part of the IT industry since the landmark Eastman Kodak outsourcing agreement in 1989. For anyone who doesn’t go back that far, the Eastman Kodak deal was the first mega-outsourcing contract to generate headlines inside and outside the IT industry. The company decided to outsource its data center operations to IBM, its network operations to Digital Equipment Corporation–remember them?–and outsource its desktop operations to BusinessLand–remember them also?

Not only did the Eastman Kodak deal represent a multisourcing arrangement, but nearly every major outsourcing agreement since has included multiple solution providers, albeit they often work under a primary vendor who serves as the prime contractor.

So, multisourcing isn’t a new sourcing strategy. Then why is it getting so much attention?

GM’s new outsourcing approach is considered by many as a bellweather for the outsourcing business, as well as a key component of GM’s turnaround efforts. Industry-wide, outsourcing deals are shrinking in size and scope. And, GM’s new outsourcing strategy has been speculated about since GM decided to spin off EDS a few years back, and more recently as its financial performance has declined.

GM’s new outsourcing approach is also viewed as an endorsement of a recent book authored by two Gartner analysts entitled, “Multisourcing: Moving Beyond Outsourcing to Achieve Growth And Agility.” Gartner’s PR engine has made sure that the correlation between GM’s new outsourcing strategy and its analysts’ book isn’t lost on the business and trade press.

Given the poor track record of most mega-outsourcing agreements (even the Eastman Kodak arrangement was substantially restructured after the first round), it isn’t surprising that major corporations are searching for better methods to offload their IT and business operations.

While I agree that multisourcing makes sense in most cases, it doesn’t guarantee better outsourcing results. Multisourcing makes enterprises less dependent on a single vendor for all their IT or business needs. But, it also eliminates the “one throat to choke” accountability that can come from a ’sole-source’ arrangement.

Although multisourcing can enable an enterprise to select ‘best-in-class’ providers to address specific IT/business requirements, it also compounds and complicates the coordination necessary between the enterprise and its multiple providers. As a result, multisourcing requires greater vendor management skills and resources to ensure the providers meet their service level objectives (SLOs).

In the end, it doesn’t matter how many outsourcers an enterprise engages to handle its IT/business requirements. Instead, it is the quality of the enterprise’s needs assessment, goal-setting, vendor selection, contracting, reporting and problem resolution processes that will determine the success of its outsourcing strategies.

According to most of the IT market research firms, managed services is one of the fastest growing segments of the IT/networking industry. THINKstrategies’ own research and consulting engagements also confirm greater interest and receptivity to managed services among enterprise decision-makers in both large-scale organizations and small/mid-size businesses (SMBs).

Yet, every managed service provider (MSP) that I talk to admits that the business is a lot harder than they expected. They are struggling with longer sales-cycles, smaller scale contracts and less up-selling opportunities than they anticipated.

The struggles of the MSPs to gain broad-based market penetration is also obvious when you compare the customer lists of the Software-as-a-Service (SaaS) providers vs. the MSPs listed on THINKstrategies’ SaaS Showplace and Managed Service Showplace online directories. Many of the SaaS providers boast an impressive assortment of Fortune 500 and other brand-name companies among their customers, while most of the MSPs have a limited number of more modest local or regional customers.

Although I’ve been a proponent of managed services for many years, I’ve also written numerous articles and commentaries on the barriers to success in the managed services business. My most recent column is in last week’s Channel Insider which identifies three primary problems facing most MSPs—

1. They must rebuild their corporate cultures… Rather than focusing on selling and servicing products, MSPs must become comfortable selling and managing their customers’ IT and network operations.
2. They must swap out their traditional sales teams… Most traditional salespeople are skilled at selling the technical features of packaged products, but not the business benefits of managed services.
3. They must restructure their revenue models…Rather than depend on the upfront revenue that comes from traditional product and maintenance contract sales, MSPs must become acclimated to the incremental revenue flow of subscription oriented managed services.

Yet, these internal issues are only a small subset of a longer list of challenges facing MSPs. The full list includes competitive challenges that I outlined in a CNet commentary almost two years ago. The most important of the competitive challenges that I identified then still plagues the managed services market today—a proliferation of managed service players defining managed services differently to serve their proprietary interests rather than their potential customers’ needs.

There is also an underlying customer perception issue facing MSPs. Most large-scale enterprise and SMB decision-makers are still uncomfortable “out-tasking” part of their IT/network management responsibilities to an outside vendor/provider, especially one that performs the management function remotely. The need for MSPs to gain the trust of potential customers was the primary theme of one of my NetworkWorld commentaries nearly a year ago and still is a major barrier to success today.

Unlike the software-as-a-service (SaaS) market that is soaring because a growing number of customers can easily recognize the value and believe they can mitigate the risks, most customers are still apprehensive about the threat that MSPs may pose to their jobs or the impact a managed service failure could have on their IT/network and business operations. The way many decision-makers see it, they can withstand a specific application being unavailable due to outages like Salesforce.com has recently suffered, but they cannot risk having an entire IT/network or business function fail that was being handled by a MSP.

The truth is that many MSPs have better performance records than SaaS providers like Salesforce.com. But, MSPs have done a terrible job quantifying and promoting their success. They’ve also failed to develop free samples of their services like many SaaS providers offer that enable potential customers to test their managed service capabilities and get a taste of their potential benefits.

There are many challenges MSPs face in order to succeed, never mind survive as I suggested in a CRN column entitled “Crossing the Managed Services Chasm.” Ultimately, as I stated in my NetworkWorld commentary in September, independent MSPs that fail to overcome these challenges will join the growing list of providers that have folded or been acquired by bigger players.

SAP’s decision to enter the software-as-a-service (SaaS) is a victory for the SaaS industry and enterprises of all sizes that are fed up with the frustrations of traditional, ’shrink-wrapped’, software applications.

Prior to today’s much-anticipated announcement, SAP had publicly questioned the long-term value of SaaS and the viability of the SaaS business model. By adding its name to the growing list of SaaS providers, SAP has acknowledged that its customers deserve an SaaS option and the SaaS market is more than just another over-hyped, short-term fad.

SAP’s entry into the SaaS market will certainly accelerate industry growth and maturation. SAP refers to its new offering as the beginning of a third generation of SaaS solutions. The first generation was the ’single-tenancy’ hosting model that emerged during the dot.com era and was pioneered by Corio and USinternetworking. The second generation has been the multi-tenancy solutions offered by Salesforce.com and other independent software vendors (ISVs).

SAP characterized its “third-generation” SaaS solution as a hybrid approach that bridges the gap between the on-demand and on-premise models.

In THINKstrategies’ view, SAP’s “isolated tenancy” approach represents a new and improved version of the traditional hosting model by giving each customer equal access to a common set of applications, but supports them with a dedicated set of resources to meet their individual needs.

Bill McDermott, President and CEO of SAP Americas, said during today’s press conference that the goal of SAP’s new CRM On-Demand solution is to allow mid-size and large-scale organizations to “act immediately, but grow strategically.”

SAP is promising that its CRM On-Demand solution can be acquired and deployed on the same day. It is offering a simple pricing model of $75/user/month. It also promises users will not be locked into long-term contracts.

SAP’s announcement not only validates the SaaS movement, it also reinforces THINKstrategies’ view that the SaaS movement isn’t restricted to just small- and mid-size businesses (SMBs).

Instead, SAP stated that it is targeting upper mid-size and large-scale organizations. It served up senior executives from American Standard Companies and DuPont to bring this point home, and endorse SAP’s solutions and strategies.

To counteract Salesforce.com’s efforts to make AppExchange pivotal platform and ‘de facto’ SaaS industry standard, SAP invited IBM to participate in its announcement and emphasized the “thousands” of other developers/partners that support SAP applications.

This aspect of the announcement was also aimed at reassuring customers about the ease of integration and ongoing infrastructure reliability of SAP’s On-Demand solution in light of Salesforce.com’s recent service disruptions.

IBM sales and consulting units, along with SAP’s other partners, will also be a key component of the SAP’s go-to-market strategy.

In THINKstrategies’ view, if SAP puts its vast marketing and sales engine fully behind its new On-Demand CRM business, it can not only position SAP as a market leader but also firmly establish SaaS as a legitimate software alternative.

However, SAP still faces three serious challenges winning a meaningful share of the SaaS market,

1. Re-architecting its other applications to provide well-integrated, easy-to-use, web-enabled SaaS solutions,

2. Re-structuring its overall packaging and pricing models to balance the revenue and profitability requirements of its On-Demand and on-premise solutions,

3. Re-castng its corporate culture–from R&D to sales and support–to become more services-oriented.

SAP is promising to continuously expand its On-Demand portfolio with a series of monthly announcements.

Independent SaaS providers should respond to the new SAP competitive challenge by doing more than just boasting about the flexibility or price advantage of their SaaS solutions.

The recent series of service disruptions experienced by Salesforce.com has given enterprise decision-makers another reason to be apprehension about the reliability of SaaS. Those organizations that are already SAP customers, but not active CRM users, may be willing to test SAP’s On-Demand offering because of their confidence in their established software vendor. Independent SaaS providers that want to compete for those SAP customers will need to demonstrate a comparable range of solutions, superior reliability and greater accountability for their offerings.

SAP’s penetration of the SaaS market may be slow, but the impact of today’s announcement on the software industry will be swift and significant.

You can expect SAP’s announcement to be the cover-story of nearly every major trade publication next week, and among the top stories in the major business publications. This will bring even greater attention to SaaS among business as well as IT decision-makers.