Outsourcing and utility computing a focus at TechXNYC

Business technology solutions trade show TechXNY officially kicked off this week in New York City with a variety of sessions and exhibitors, including some with a heavy emphasis on outsourcing and on-demand computing.

Manhasset, N.Y.-based high-tech business-to-business multimedia company CMP Media hosted the show, formerly known as PC Expo. The event was divided into several major focus areas, including TechXNY, focusing on the IT essentials for the enterprise as well as small and medium businesses; Cetex, which covered the convergence of IT and consumer electronics; and OutsourceWorld, which showcased services from outsourcing services providers around the world and offered sessions on the benefits and pitfalls of outsourcing.

At one panel discussion, analysts, an application service provider (ASP) and a customer debated the alternatives to offshore outsourcing. The discussion focused on how enterprises can embrace the “applications on demand” model — purchasing an integrated suite of professional services, applications management and infrastructure services based on a pay-as-you-go, utility-like cost model from an ASP — as one option to offshoring.

George Kadifa, CEO of San Carlos, Calif.-based enterprise ASP Corio Inc. said that as enterprises are getting ready to enter 2005, they are faced with three core challenges for implementing and managing software: rising cost, increased complexity of IT systems, and meeting regulatory compliance requirements.

The classic enterprise software system has 10 to 20 million lines of code from the vendor, two to four million lines of code for “bolt-ons, integration and customization,” and 50 to 70 sub-modules for the whole thing to be assembled and work right, Kadifa said. “There are thousands of users to be supported, and 100 to 200 business processes affected.” In some cases, he said, there are 50 core IT processes to manage an application – and many companies have several applications in just one business unit.

Building software is “more complex than building a Boeing 747 Jumbo Jet,” Kadifa said, adding that for the jet, there are only two million parts to be assembled, tested, certified and supported. Plus, the company that assembles the jet doesn’t actually make all the components that go into it – that’s the job of the suppliers.

However, the IT department is often charged with the task of building the components as well as the system, he said.

Compliance requirements for Sarbanes-Oxley, HIPAA and other regulations add to the complexity, and all the while enterprises are faced with a cost crunch, he said. Some companies have been turning to offshoring their software development to save costs, but there is another way to cut spending while avoiding sending work overseas, Kadifa said.

ASPs like Corio offer a more “operational model” where systems management is achieved “in an almost scientific, industrialized way” through automation. “We have a series of pre-configured solutions that we have developed, that are pre-integrated into a coherent framework.” Customers can select from standard software options – storage, connectivity, and standard add-on modules — and pay for what they use.

Ben Pring, research vice-president at Gartner Research’s IT Management sector, said there is a combination of trends in the outsourcing and ASP marketplace driving customers to adopt applications on demand. “The big picture is that there is an increasing acceptance of outsourcing and the underlying catalyst is focusing on core competencies.” Pring said. With the broad universe of outsourcing, the application layer has “perhaps been a little overlooked in the last years” but now management decisions are being made about how to cut costs in this area of IT.

Meanwhile, software utilization has become the “guilty secret of the IT industry” because “companies are paying for what they are not using,” Pring said. “The industry has been found out…and customers are putting their foot down, saying they want to pay for (only) what they use.” The other trend is that of the migration away from client-server software to more of a Web-based model. “You get the picture of an online, componentized, externally managed software. It’s a different world than it was the last 15 years, and it’s going to upset a lot of apple carts.”

Amy Konary, a program director at IDC in Framingham, Mass., focusing on software pricing and licensing, said that at face value, the on-demand idea makes sense, but there were a number of forces that needed to come together for software as a service to really come together. Before, companies knew they needed to reduce costs but not everyone considered on-demand, opting for complex apps and in-house installation.

Two triggers that might move the applications-on-demand concept forward are a tangible cost reduction strategy and regulatory compliance, Konary said. In addition, many enterprises installed several pieces of software in the ’90s. “They are looking for major application upgrades now, and they’re faced with going through it all over again. It cause a company to pause and ask, ‘Is there a better way?”

Although he didn’t have specific Canadian statistics, Pring said that on a North American level, as part of the total number of outsourcing contracts, the percentage of companies opting for applications on demand is currently between eight and 10 per cent. He said he expects those numbers to increase, however.

“That will be 18 to 20 per cent within the next five years.” Kadifa claimed enterprises can use automation instead of offshoring to cut their costs. “You can let automation run the system instead of having human error touch it.” He added that Corio believes it can cut the cost of running the system in half.

In some ways, said Lance Travis, vice-president of research for AMR Research in the outsourcing space, talking about applications on demand versus outsourcing is like “comparing apples to oranges.” The on-demand world, Travis said, could be compared to taking a taxi — it gets you where you want to go, but at the end of the day, “the cab company maintains the cars and knows where the best routes are.” With on-demand applications, a company uses services, technology and software to deliver the results it needs. “You keep the responsibility for success in-house but you use lower-cost resources to get there.”

Offshoring, on the other hand, is like owning your own car and being responsible for maintenance, he said. “You go offshore to acquire bodies and control what those bodies do.”

Randy Miller, vice-president of technology at Toshiba America Business Solutions, said his firm opted for Corio’s on-demand model because it wanted to focus on making IT costs predictable to minimize spending. “IT spending throughout the fiscal year is not always a straight line. IT doesn’t have a crystal ball and it can’t see what’s coming, so sometimes it’s caught with surprises.”

Toshiba’s strategy, he said, was to minimize its fixed costs and keep the variable costs flexible. For example, the firm wanted the ability to staff up in periods of demand for IT services – applications on demand has helped the company run with a very lean IT staff. There were times when it was going through “100-plus hours of patching, or in the middle of rolling Oracle out. We had one DBA (database administrator) and no resources to do it.” On those occasions it would lean on Corio to help deal with those things. “It has allowed us to focus on real business issues and not worry about technical issues like hardware and patching,” Miller said. “We don’t want to focus on the back end stuff, but on meeting customer needs.”

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