Companies are placing more focus on ensuring software products deliver real impact to business needs and also growth to the business, observes Mohammed Haque, Genpact's Vice President and Head, Enterprise Solutions Service practice. It's more than just acquiring software for operations; the focus is now on getting the most value out of software assets and even extends beyond just supporting those applications. Genpact's prediction is that the company over the next five years will see a shift from ERP implementations (an anticipated 30 percent of the company's services from 2010 forward) to application support or management instead (70 percent of its focus from 2010), representing almost a complete reversal of the focus in service demand to date.
Increased business agility is a big driver of the increase in application management outsourcing (AMO), notes Marc Schwarz, Senior Vice President and leader of the Oracle On Demand business. Businesses want to focus more of their resources on developing new innovations that increase revenue and profits. But he states that reducing business risk is the top priority, followed closely by reducing total cost of ownership.
"Companies are finding it's just not economical to have a 24/7 operation with people who are knowledgeable in each application (CRM, ERP, etc.) and various components, especially at today's accelerated pace of technology development. Without outsourcing, it's expensive for a company to provide coverage for the breadth of applications it uses to operate its business today -- let alone ensure that it manages those applications to a competitive advantage. And not doing so is a risk to the business," says Schwarz.
How AMO services will change in the next five years
Cost. Much of the cost of application management today arises because of modifications to packaged software. Although there will still be some of this type of activity in the future, Schwarz says that software vendors will enhance their application functionalities to a great extent, and this sophistication will reduce the need for so many modifications. "As a result, we'll see a lower run-and-maintain cost in the future." Software management tools used in an AMO model will also drive down the total cost of ownership.
Proactive management and self-healing capability. The aspect that will impact AMO most during the next five years is the quality of the software tools that outsourcing providers use to manage applications. More diagnostic and predictive monitoring tools are becoming available, says Schwarz, which help providers more fully understand how to best manage a customer's environment.
For example, tools in Oracle On Demand's enterprise management suite allow the provider to not only analyze what really happened in an incident, but also proactively apply fixes to all customers' environments with the same configuration.
"Ultimately, that information will go into characteristics in the software, which will make it self-healing," explains Schwarz. "I'm not sure we'll get to industrial-strength self-healing in ERP in the next five years, but we'll have a lot more sophisticated abilities to monitor and predict along those lines in that time frame. Automating as much of that as possible will also bring down the cost for a customer using AMO services.
Integration middleware. Genpact's Haque points out some catalysts for the coming increase in outsourced application management services: the fact that many companies implemented ERP systems in a way that results in suboptimal performance, the significant rise in merger/acquisition (M&A) activity, and buyers moving to reduce the number of providers in their multivendor environment.
Oracle bought 63 companies over the past three years, and Microsoft, IBM, and others are in that same ballpark of acquisitions. As a result of M&A activity, companies can wake up one morning to applications that aren't quite integrated and don't provide the functionality they counted on. Integrating the tech stack, middleware, online applications, etc. requires knowledge and skills that some in-house IT departments and even some outsourcing providers don't possess.
During the next five years, there will be a continued need to integrate legacy systems and integrate multivendor systems under one roof. But Schwarz says there will be more and more pre-packaged integration middleware available during this time frame to make integration easier.
The new middleware will facilitate an AMO service provider's ability to take responsibility for managing all the various pieces of application integration - through an effective governance model the customer establishes. Thus, the AMO firms will take on more of a prime contractor role (the so-called one throat to choke). This aspect will make the AMO model even more attractive to some buyers, as it will reduce their risk in managing several application providers in a multivendor environment.
Risk mitigation advice
Three provider-selection criteria need to be at the top of the list as buyers consider AMO providers over the next five years' horizon: reliability, security, and flexibilty.
Reliability. Buyers outsourcing their application management undertake a risk in selecting the provider - especially when the spectrum of applications outsourced includes mission-critical systems. "There is an amount of risk associated with keeping systems up," states Schwarz. "Companies will need the ability to have a better risk profile of the providers they consider."
Buyers need to ensure the AMO provider has people with deep functional knowledge of the software product to provide the highest reliable service for customers' software products and also to optimize the environment.
Security. A key aspect of an AMO provider's reliability is its ability to prevent security breaches and thus help its customers avoid having to pay severe penalties. This is especially true for organizations in the financial services and healthcare industries as well as government organizations. "Security is paramount, and buyers need to select an AMO provider that addresses this at the most intense level," states Schwarz.
Flexibility. While the AMO model in general gives buyers more business agility, there is a difference in the flexibility of various provider offerings as well as a difference in hosted or on-premise AMO. The ultimate flexibility resides with providers that allow a mix-and-match approach of application management no matter whether the application resides in the customer's data center or the provider's.
Buyers need to select a provider that offers very easy-in/easy-out access to services. As Schwarz points out, the AMO provider offerings should enhance the buyer's ability to meet its business needs at any point in time, "whether that has to do with business expansion or redirecting resources into initiatives that are more business critical."
This agility will be an important factor in companies' ability to recover from the economic recession, as it allows them quick scalability up or down and an easy on-ramp to changing services. Along with competitive pricing, buyers need to select a provider that operates on a flexible contract and gives them the ability to move things around without much of a penalty.
Cloud-delivered infrastructure is on many CIOs' minds these days. There's no question that the ability to provide customers with point solutions that are more economical and solve their business needs will be more available over the next five years from models such as AMO and cloud-delivered services. Schwarz concludes that, while the benefits of cloud computing are very attractive, they come with risks. He states, "I believe that the cloud deployment model will bring much more awareness to alternative deployment models such as Oracle On Demand's hosted application management services, which offers the benefits of the cloud but without many of the risks."
Lessons from the Outsourcing Journal:
- Outsourcing of application management services will increase over the next five years, due to four primary drivers: reducing business risk, increasing business agility, reducing total cost of ownership, and integrating applications (especially in mergers/acquisitions).
- In application management services, the top provider-selection criteria include the provider's reliability for keeping mission-critical systems up, reliability for optimizing software products and the application environment, ensuring no security breaches occur, and allowing the flexibility to meet new business needs by moving application services in and out of scope without much of a penalty.
- More diagnostic and predictive monitoring tools will become available over the next five years, which will help providers better manage a customer's application environment and will also drive down the cost of such services.
- Outsourced on-demand application management services provide the cost and flexibility benefits of cloud-delivered services without many of the risks that cloud-delivered services carry.