IT Cost Optimization, Digital Transformation and Nearshore in 2020

[See webinar recap: Aikido Approach to Digital Transformation]

IT budgets are expected to be reduced by about 8% due to Covid-19, however cloud computing budgets are expected to grow during the year 2020. Is this a confirmable trend, and are cloud investments linked to cost-cutting initiatives or business growth?

Azim: “IT budgets will in fact be reduced, however not just cloud, but the entire ‘as a service’ market is expected to grow rapidly, continuing a 25% trend YOY. Cloud investments are not just cost cutting, rather many ISG clients do so as part of a strategic decision to “lift and shift” a percentage of their workload. “The benefits of cloud come through scalability, enabling a new way of working.”

Anja: “Most people are not just continuing their cloud computing projects, but actually starting new ones,” and on a somewhat related note, “you would think right now would be a bad time to change jobs, but in the cloud computing space, [the pandemic] hasn’t stopped anybody from moving around or accepting new jobs. This is not an area that has been impacted by cost cutting.”

What will IT vendors need to do to be more innovative in their proposal, to share in the risks and the benefits coming out of digital transformation investments? What does this client/vendor co-investment look like?

Anja: “There has always been some push for service providers to bring a bigger value proposition to their shared service arrangement and in other projects, however Covid-19 has really been powerful in raising the conversation about “value.” As a result, vendors are creating more out-of-the-box offers (for example, offering a cloud migration service for free in exchange for an extended contract). However, it’s a two-way road, as clients must be more open to such arrangements rather than looking solely at the bottom line.”

“If you are asking for concessions, be ready that you might be asked for something in return” – Anja A. Allen

Azim: “One of the bigger underlying questions is, “Are the clients able to quantify the benefits in a manner that can be used for gain sharing?” Out of the 550+ clients who went through the Digital Value Assessment, almost 80% didn’t have a framework to capture the value from digital investments. On top of that, legacy organizations compete with digitally born enterprises who allocate a lot more money to constantly disrupting their own value chain. Azim predicts that in a couple years, more organizations will be better at measuring the value in digital investments, sparking a large shift towards a gain-sharing model.”

Somewhat related to the above question, how are pricing models changing?

Beni: “In some ways, the previously mentioned idea of client and vendor co-investment is already happening, often in the form of different pricing models. In Softtek’s case, the past 3 weeks have seen the approval of 10 different investments, the majority of which having to do with converting or easing CapEx into OpEx arrangements. Other co-investments and new pricing models are also being seen with IoT and ERP, charging per signed-up client or offering a mutually advantageous pricing model for the upgrade to S/4HANA, respectively.”

When you work with an outsourcer, you often have staff onsite, as well as staff offshore or nearshore. With everybody working from home, how is that impacting the desire to pay extra for onsite staff? Is onsite staff still necessary to make an offshore global engagement successful?

Azim: “While onsite staff has always been highly desirable, this pandemic has taught us that it’s not critical for survival or delivery of capabilities. Yes, there are certain processes that require close engagement with the client, but “it doesn’t have to be sitting across the table from you.” Organizations who made the cultural shift from onsite to remote engagement saw an initial dip in productivity (from 4.5 to about 3.3-3.4 on ISG’s scale) but are now learning how to engage more effectively. Furthermore, it will drive new business models for service providers, as staff that would typically be dedicated to one client site could be leveraged across more than one client project.”