Outsourcing Software Services
According to IDC, the market for "software as a service" will reach $24 billion a year by 2005. There is a growing body of evidence that "leaving it to the experts" results in significant IT savings and operational efficiencies. The reasons should be obvious. Independent software vendors (ISVs) do the best job at managing and supporting their own software:
As I discussed earlier, corporate IT resources can be spread fairly thin. DBAs have wide-ranging responsibilities. Let's face it: no one can be an expert in 140 different software programs. This lack of resources slows the deployment of new projects. The goal is simply to keep everything going and provide basic services. Little time is left over for innovation or service improvements. Besides which, upgrades create more work (i.e., system failures, user retraining and debugging).
|"This economy of scale can be achieved only when the ISV manages its own software. One-offs do not support specialization because no two customer environments are alike. Incremental improvements at one customer site cannot be repeated, standardized or shared with other customers."|
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... At least theoretically, they should.
While outsourcing should be judged on service quality and performance, too often the negotiations revolve entirely on price. Some major outsourcers promise significant savings if the company turns over the entire IT operation to them. Although millions if not billions of dollars are at stake no cost breakdowns are provided. And to realize the savings, companies are locked into multi-year contracts with stiff termination penalties. Can you anticipate your company's hardware and software needs in 2012? The analogy that comes to mind is buying a house for the asking price with no appraisal of the physical structure or cost review of the yearly maintenance, property taxes and major renovations (e.g., the roof will need replacing in the next year or two).
This type of outsourcing deal known as one-offs also sets up a conflict of interest. Since each customer environment is unique, we're back to the costly legacy system syndrome in terms of maintenance, support and upgrades. The knowledge and innovations achieved at one customer site do not translate to the next. Therefore, maintaining all of these different set-ups is expensive, and does not bode well for the future. Like the for-profit HMO model, the scope and quality of services can eventually be compromised. Back to the same nagging issue: cost. What are you getting for those annual IT savings?
The above model also reinforces the largest historic reservation about outsourcing: the customer's perceived loss of control. Companies have different needs. Logically, they should have flexibility and a voice in how the outsourcing initiative is structured and administered. By researching their choices, customers will find that they can control as much as they want. Today, you can outsource the entire IT operation, or begin with one key business process, such as supply chain management (SCM) or worldwide human resources (HR).
With hosted services, the software can reside at the customer site, with a trusted third-party or at the vendor's data center. The outsourcer can manage the entire technology stack, including hardware and facility management; or just the software component, covering the applications, database and system management.
Some outsourcers also offer on-demand, or pay-as-you-go services. Like a utility, the customer pays only for actual usage. With this model, companies share the same server, creating tremendous price efficiencies.
Finally, you don't have to enter a multi-year contract. One-year outsourcing contracts are available with a 30-day cancellation clause. And while all outsourcers guarantee availability, the latest trend is to also guarantee software performance.
Modeling and Standardizing Maintenance Costs
Creating a disciplined approach to software maintenance will take an industry-wide effort along the lines of The Capability Maturity Model for Software. The CMM provides a framework for organizations to move from ad hoc, often chaotic, software processes to organized knowledge-based systems that support a continuous loop of learning and innovation.
The CMM is organized into five levels of software process maturity and provides the principles and practices underlying process success.
In conceptualizing a CMM-type standard for software maintenance, I am reminded of what works in certain outsourcing models. Real gains in efficiency and cost-savings come from models that support a process of improvement based on: 1) repetition; 2) specialization; 3) standardization and 4) automation.
As the CMM model shows, the first important step in getting a software process under control is the ability to repeat the process and arrive at consistent results. The next step is specialization. The most effective software solutions are highly granular; that is, they address the specific business needs of discrete groups of users. For instance, with an iProcurement solution, all employees use the same infrastructure and tools to order direct and/or indirect goods. However, for the software to serve a diverse corporate population, it must offer the means to control access (i.e., by title or role) and provide different levels of service. This specialization is achieved by establishing a system of checks and controls: such as pre-authorizations, security codes and/or price caps.
Once a specialized process can be repeated, its use can then be standardized across the general user community. Standardization, in turn, facilitates to automation. Returning to the previous example: if online procurement processes are standardized, the e-business software vendor can automate usage with desktop self-service, automatic invoice approvals and routing, and extranet portals for preferred suppliers and vendors.
However, this economy of scale can be achieved only when the ISV manages its own software. One-offs do not support specialization because no two customer environments are alike. Incremental improvements at one customer site cannot be repeated, standardized or shared with other customers.
In the multi-sourcing model, the primary software vendor partners with other ISVs and systems implementers to meet the customer's full range of needs. While the primary vendor serves as the single point of contact for all customer service requests/problems, each ISV partner transparently manages its own software, typically from independent locations. With direct customer-provider contact, this solution supports the process of specialization, repeatability, standardization and automation. In fact, an improvement at one customer site can be applied to all users through a universal patch. In this way, cost-performance efficiencies are continuously incorporated into the standard software offering.
In the end, the real savings achieved when you do your job better, faster and cheaper reveal the real costs of software.