The Cloud and Services

Reflection of clouds on Soap Lake
Yesterday, IBM put its cloud services under its Services arm. It will be sold by IBM Global Services. From the FT:

In its latest revamp, IBM said it would sell cloud computing through its services division, which generates nearly 60 per cent of its revenues.

This could be a defensive move to shore up IBM Global Services. IBM’s latest quarter was a good one with the sole exception of contract signings, which were down. IBM waved it away as something caused once in a while by lumpy contracts. But the fact is that customers aren’t doing big, long-term contracts the way they used to. They like smaller, flexible contracts. Applications outsourcing is definitely going that way. Ask TPI.

On the other hand, this doesn’t have to be a defensive move. It could be a brilliant, strategic move that gives them the edge in selling cloud services in a rapidly commoditizing market.

From offshore services companies, I hear a similar equivocation about cloud services. Some think that it is a threat, some think its an opportunity.

Cloud services are a long-term threat to ERP implementation revenues. Compare the implementation revenues from a implementation with a Siebel implementation. Revenues from implementation and ongoing support (what’s that?) are tiny in comparison. Companies are willing to greatly simplify their own processes to fit the box that gives them. If that happened to all ERP implementations and support services, that won’t be good news for IT Services companies. This may take a decade to play out, but the trend has begun.

On the other hand moving a company’s infrastructure to the cloud, public and private, is a pretty interesting services opportunity.

But this threat/opportunity picture misses the woods for the trees. In the long-term, the cloud is going to be the biggest thing that happens to Services. Not IT Services specifically but outsourcing of services in general.

Outsourcing of services was enabled by enterprise IT and the internet. Before that, you couldn’t take the accounts payable guy away from the accounts payable office where he would cut checks based on paper invoices. Accounts payable and workflow systems and then networking and the internet allowed someone to perform the same function remotely. Today broadband is cheap and ubiquitous and the same job can be done offshore. In a way, enterprise IT systems and the internet started loosening internal services performed by employees from their moorings within the company.

The shift to the cloud is going to wrench them loose and finish the job. If companies can put their accounts payable system on multi-tenant SaaS, what reason could they have for performing the accounts payable function themselves?

The opportunity for Services companies will move from IT Services to business process platforms – a system and the service on top to perform a business function with standardized, well defined inputs and outputs. Much like how payroll services work today. The process will be fairly standardized, and the reason why companies will “settle” for a standardized process will be that the cycle time and cost of doing so will be so, so low that they would be stupid not to.

Why will the cost be so, so low? Because of multi-tenant SaaS, efficient, standardized processes and offshore wages.

The opportunity is massive, but business as usual won’t deliver the goods for services companies. Not this time, because they will face a new competitor – software companies. Today SaaS companies are essentially software companies, that rent software instead of selling it. Soon they’ll wise up and see the opportunity in providing a full solution. Or they’ll create an ecosystem of small service providers around them like Intuit has done in the small business market.

It’s going to be a brave new world for Services companies. But only the innovative will thrive.

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