January 2, 2007

The Emerging IT Ecosystem

by Andrew Parker and Tom Pohlmann

Helping Business Thrive On Technology Change

MARKET OVERVIEW

MA RK E T O V E R VIE W
The Emerging IT Ecosystem
January 2, 2007

The Line Between Technology And Service Will Blur At A Faster Pace
by Andrew Parker and Tom Pohlmann with Christopher Mines, Heidi Lo, Caroline Hoekendijk, Pascal Matzke, Paul Roehrig, Ph.D.

EXECUT I V E S U M MA RY
Market forces of commoditization, miniaturization, industrialization, and globalization, along with changing buyer sentiments, will accelerate a shift in the dominant form of IT delivery by 2012 from buyers self-integrating technology to having it assembled and managed by outside providers. These four underlying drivers arent new, but their convergence will accelerate this market shift and make it stick: stable operations farmed out to third parties, new IP sourced from open communities and solution brokers, emerging technologies going to market wrapped in process bundles, and new software investments based on subscription rather than ownership. The resulting IT ecosystem structure will place those technology suppliers with the strongest delivery capabilities at the hubs. But in order to stay in the game, todays vendors and service providers will need to overcome their own inertia around the development and management of IP, their rigid engagement models, and their dated partnering strategies.

TABLE O F CO N T E N TS
2 The Heralds Of A Reshaped IT Industry 4 Four Trends Will Converge, Accelerating A Shift In IT From Product To Service 12 Buyer Segments Will Advance These Trends At Dierent Speeds 15 The Pressure Is On Todays Ecosystem Hubs To Respond
RECOMMENDATIONS

N OT E S & R E S O U R C E S
Forrester surveyed more than 200 CIOs. We also interviewed 17 technology and service providers: Accenture, BMC Software, British Telecom, Capgemini, Computer Sciences Corporation, Getronics, Hewlett-Packard, IBM Software Group, Infosys, Keane, McKinsey, Microsoft, TPI, Oracle, SAP, salesforce.com, and Wipro. In addition, we interviewed numerous Forrester analysts, as well as subject matter experts like Nicholas Carr.

17 All Suppliers In The IT Ecosystem Must Learn New Rules

WHAT IT MEANS

19 A Couple Of Todays Giants Become Tomorrows M&A Plays 20 Supplemental Material

Related Research Documents The Future Of Enterprise Software June 29, 2006, Market Overview
SOA Will Shape The Future Of BPO Delivery June 26, 2006, Trends Adaptive Sourcing: Outsourcings New Paradigm January 12, 2006, Forrester Big Idea

2007, Forrester Research, Inc. All rights reserved. Forrester, Forrester Wave, WholeView 2, Technographics, and Total Economic Impact are trademarks of Forrester Research, Inc. All other trademarks are the property of their respective companies. Forrester clients may make one attributed copy or slide of each gure contained herein. Additional reproduction is strictly prohibited. For additional reproduction rights and usage information, go to www.forrester.com. Information is based on best available resources. Opinions reect judgment at the time and are subject to change. To purchase reprints of this document, please email resourcecenter@forrester.com.

Market Overview | The Emerging IT Ecosystem

TARGET AUDIENCE Strategy professional, technology marketing professional, IT sourcing and vendor management professional THE HERALDS OF A RESHAPED IT INDUSTRY Four major market forces continue to change the rules of the game in enterprise IT. These pressures continue to mount on buyers and sellers of IT, presenting challenges and opportunities to both:

Commoditization pushes more work beneath the water line. Using the iceberg metaphor,

the large mass beneath the water line is undierentiated IT spend, and its growing. PCs and servers are increasingly purchased on price, as are services like managed desktop and help desk oerings. Even business processes such as nance and HR are increasingly generic across industries, even though they are critical to business operations (see Figure 1). Low-cost delivery options accelerate this trend and threaten atypical activities with commodity status. Take Indian providers as an example: Theyre not stopping at application development and maintenance work. Instead, they are aggressively pursuing infrastructure deals and higher-end consulting work.1

Figure 1 A Rising Water Line For Processes And Technology

High Supply chain optimization Channel optimization Enterprise marketing platforms Perceived impact on competitive advantage Server consolidation Accounts payable Merchandising Procurement Manufacturing resource planning

HR information systems IT operations

Low Low
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Variation by industry

High
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Miniaturization makes whats left more complex. As stable technologies and processes are

sinking beneath the water line, newer component technologies are emerging. This is not a nanotechnology form of miniaturization; it is more computing power making its way into billions of distributed devices like appliances, smart cards, and future generations of RFID, and it is the assembly of component applications using SOA principles. IT is increasingly architected around smaller pieces, yet the business potential and deployment strategies for these ubiquitous computing technologies are more dicult for CIOs and CEOs to make sense of and justify, which hinders their adoption.

Industrialization makes both buyer and seller more savvy. More CEOs consider IT just

another business function and thus expect manufacturing-like quality and productivity from IT. Managers have homogenized their server and desktop software platforms to reduce costs and increase the ease of maintenance and support. And although tools and frameworks like IT Infrastructure Library (ITIL), control objectives for information and related technology (COBIT), and Capability Maturity Model Integration (CMMI) arent silver bullets, the recent group of contracts signed by General Motors shows how such methods guide billions of dollars of technology spend.2 Execs now question the value of customization in favor of standardized IT environments that they can benchmark against alternatives. This line of thinking forces vendors to perform.

Globalization drives market and relationship consolidation. In the context of IT, many

associate globalization with oshore delivery, but global business operations and processes feel an equal impact. One result is that vendor opportunities are shrinking. Mitsui collapsed 800 operating units down to 13 global P&Ls in a short timeframe. Schneider Electric moved from 160 P&Ls each with its own process to ve regional P&Ls and 11 global processes managed centrally. These regional groups all run on one instance of SAP eectively shifting from 160 application buyers down to one.

Technology Inuencers Increasingly Look Outside For IT Delivery Are these new phenomena? No: The quartet of -zations didnt just arrive on the scene. For instance, technology vendors of all stripes have tried to counter commoditization with solutions and ofthyped ROI models, and theyve tried to take advantage of industrialization using CMMI and the International Organization for Standardization (ISO). What is new is that IT buyer behavior is also changing. We surveyed more than 100 CIOs of North American enterprises on two occasions to nd out how their views on IT delivery are changing.3 The survey revealed that:

IT is increasingly driven by the business, which in turn wants services and not assets. Sixty-

three percent of respondents report that compared with two years ago, their IT strategy is more inuenced by business leaders outside of the IT organization. A similar number (64%) feel that two years from now, business leaders will have even more control over IT. Furthermore,

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Market Overview | The Emerging IT Ecosystem

nontechnologists are even involved in purchases like servers and software infrastructure, and an increasing number of IT executives consider themselves business managers rst and technology asset managers second.4 Services rms, especially those with consulting arms, historically have had the closest ties to the business, and thus closer proximity to client pain points and business needs.

Balancing best-of-breed against fewer vendors requires an intermediary. Buyers want the

reduced hassle of dealing with fewer suppliers, but at the same time they want to keep their technology options open and their technology advances owing.5 CIOs cant have both unless a trusted intermediary is added to the mix, whether its for brokering deals, managing providers, or informing the resulting architecture.

The desire of IT shops to do-it-themselves is waning. SAP and Oracle increasingly position

themselves more as software platforms than packaged apps, but a component- or SOA-based world wont t together neatly on its own.6 In our latest survey, 43% of CIOs professed a preference for service providers to assemble best-of-breed solutions for them, up from 32% last year.7 Adding edge technologies like RFID, mobility, and business rules software creates a pace of change too great for most IT shops to keep up with.8

Outsourcing is now viewed as more than just an available tactic. Outsourcing used to be

seen as a salve for failing organizations, but now 53% of respondents consider business process outsourcing or IT outsourcing as key to their companys strategy.9 Even among those who dont outsource, one in four feel that outsourcing will increase in importance for their business during the next two years. Why the changing mindset? Sixty-eight percent tell us that the cost-eectiveness of outsourcing will improve, and 57% feel that providers nally have better technology skills, controls, and security than IT can provide on its own. Also lurking in the background are fears of IT retirements and lack of qualied talent to ll the pipeline.10

FOUR TRENDS WILL CONVERGE, ACCELERATING A SHIFT IN IT FROM PRODUCT TO SERVICE There will always be clusters of enterprise IT shops that want to own IT and that view the deployment of technology as their craft, never to be touched by a third party. A look at enterprise spending on IT services shows that even though it has kept pace or outpaced growth in overall IT spending, the industry maintains a preponderance of do-it-yourselfers (DIYers) (see Figure 2).11 But although product-touting vendors will line up to capitalize on this group, the -zations are too strong, as is the mindset of business-oriented buyers who increasingly want quality IT for less. Four key trends will converge to accelerate a change in the dominant delivery model for enterprise IT from one of buyers self-integrating products and platforms to one of IT delivered as a service by external providers (see Figure 3). This is not an outsource everything story, but one of:

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Figure 2 Services Spending Keeps Pace In The US

IT services spending, US$ billions

IT salary and benets IT services Software Computers and telecom

$199

$206

$219

$232

$245

$248

$258

$123 $126 $216

$122 $121 $193

$134 $118 $190

$143 $121 $205

$150 $128 $225

$153 $136 $238

$164 $143 $250

% change from prior year IT salary and benets IT services Overall IT

2002

2003
3.5% -0.8% 1.9%

2004
6.3% 9.8% 7.6%

2005
5.9% 6.7% 6.2%

2006*
5.6% 4.9% 5.3%

2007*
1.2% 2.0% 1.5%

2008*
4.0% 7.2% 5.2%

*Forrester forecast
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Figure 3 A Conuence Of Trends Accelerates The Notion Of IT As A Service

Providers roll their own SOA-based IP into subscription-based oerings. Source of IP From product vendors to communities and brokers Providers broker hardware and software vendors into process bundles.

Technology ownership From owning to subscribing Stable operations From managed in-house to provided externally

Edge technologies From self-integrating to buying process bundles

Providers parlay advanced infrastructures and global networks into subscription capabilities.
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Providers can proactively introduce innovations into outsourced environments.

Source: Forrester Research, Inc.

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Market Overview | The Emerging IT Ecosystem

1. Shifting stable operations to providers who do it better and for less. The outsourcing industry faces major changes, from shrinking contracts to multisourcing. Underpinning them all is a relentless focus on cost reduction.12 For nonstrategic work, if a third party can do it cheaper and at least maintain quality, buyers will continue to bite. PCs, help desk support, and apps maintenance as well as pieces of HR and nance and accounting (F&A) are leading this shift. Adoption will only quicken on the strengths of providers global networks their bandwidth and their people. The infrastructures of rms like IBM and HP are nally outpacing those of all but the largest enterprises. 2. Sourcing IP from more open communities. Major independent software vendors (ISVs) are opening themselves up as platforms, securing more IP from their ecosystems. Oracle is building 72 repeatable design wins with major integrators, while SAP pursues its Industry Value Network strategy.13 But the future will be based more on ecosystems in which clients, not ISVs, judge winners and losers. Today, Eclipse and AppExchange fall into those categories. And although systems integrators (SIs) already play a pivotal role in IT ecosystems today, theyll contribute more IP to these communities. In some cases, they will lead these communities, as is Keanes intention with its Healthcare Payer Platform initiative.14 3. Wrapping emerging technologies within process bundles. Rather than defend their R&D budgets and dabble with emerging technologies on their own, many rms will look to engage managed services that have tested, and are based on, innovative technologies as is the case in the IBM and Maersk partnership, which oers an end-to-end goods tracking service to the shippers customers.15 In processes like supply chain management, where both the pace of change and complexity are high, service providers will be best suited to insulate business leaders from the complexities of underlying technology. This is especially true if the process spans multiple rms. 4. Subscribing to, more than owning, new investments. Despite some glitches along the way, salesforce.com has lent credibility to a subscription model and has goaded bigger ISVs to roll out their own software-as-a-service (SaaS) oerings, albeit without much enthusiasm. Microsoft is also investing substantially, although until recently very quietly, in a subscription model.16 The future will take SaaS beyond nervous pilots and midmarket clients to oer enterprises a choice of on-premise versus subscription. Firms will give increasing consideration to subscriptions for new investments especially as communities like AppExchange materialize to oer the verticalization and quasi-customization that clients need.17 Also, its not just software assets that customers want to experiment with subscribing to; theyre also interested in utility-based infrastructure. Successful Providers Will Lead These Trends The market forces and changing buyer sentiment are strong, but inertia persists in all corners of todays IT ecosystem. Independent software vendors (ISVs) are loath to consider anything that

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might erode high margins, while service rms describe themselves as being in the projects business or the outsourcing business. These parties face signicant risks during the change software vendors face reduced license revenues, hardware manufacturers will see even more margin squeeze on their boxes, and service providers face radical changes in the way they dene their work and relationships with clients. The downside of standing still, as well as threats to the status quo from the likes of a Google or Wipro, will be signicant perils as the new ecosystem emerges. Smart technology suppliers service providers in particular will recognize these perils and be the rst to hurdle the remaining barriers (see Figure 4):

Outsourcing deals will require more exible terms and conditions. Outsourcers receive

criticism for only being able to take on already-stable environments. But transformation capabilities stabilizing an environment with standard processes and tools and running it more eciently have improved in providers like Computer Sciences Corporation (CSC) and IBM.18 Still, the structure and success of sourcing deals too often depend on a xed end state for technology, deterring providers from introducing new technology. Recognizing that even the most stable of IT or business process operations are subject to change over time, providers and clients will need to engage in what Forrester calls Adaptive Sourcing, a model that exes contractual commitments to meet client needs over time.19 More exible engagement models will only quicken the shift from product to service.

Providers need service-oriented architecture (SOA) leadership to prot from the IP game.

Service rms have traditionally focused the creation of software IP on reuse as a means to protect margins. But as the terms package and app divorce one another, service experts must build out capabilities and an end vision for SOA that enables the creation, sale, and support of their own IP. Why? Clients want new spending to go to new ideas, or they cant nd packaged solutions in niche markets like mass transit ticketing and loyalty. Integrators that avoid the IP business will be especially susceptible to low-cost threats from India, and theyll be the same rms accused of suboptimizing the work they do in order to preserve project margins. Providers will need to sharpen their alliance skills so that they can more easily cocreate IP with clients or connect clients to smaller ISVs.

Process bundles will require providers to source innovation externally. Managed service

providers rarely invest in emerging capabilities until the market has accepted those capabilities. But that mindset will stie growth for these rms when the tech economy hits its next phase of innovation, where clients want to test the waters of innovative technologies but this time in safer, trial environments.20 Firms should follow Procter & Gambles example and assign leaders to source innovative devices, software, or business process from the outside and bundle them into oerings like the Maersk example. Suppliers like IBM, with an intense business process focus, are well positioned here but must strike more exible deals around these bundles such as limiting service-level guarantees in exchange for allowing the customer to opt out with little notice.

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Market Overview | The Emerging IT Ecosystem

Figure 4 Successful Service Providers Will Lead These Trends

Product vendors and ISVs Source of IP Communities and brokers

Progress to date The platform ecosystem strategies of major ISVs have matured to ll functionality/capability gaps. Open communities like Eclipse (Java IDE) are gaining traction. Major SIs like Accenture appoint heads of assets; others are placing more emphasis on their own IP.
Firms integrate point products on their own

Work remaining Providers must harness SOA to move their asset work beyond just reuse to include an end-state vision for the creation and maintenance of IP. Structures and processes are needed for facilitating communities. Service providers must open up IP to partners.
Firms buy process bundles

Edge technologies

Progress to date The bundling of business process, apps, and infrastructure is already the norm in BPO. Providers are adept at packaging the experiences of leading-edge clients with reuse in mind.

Work remaining Providers must keep the lead on clients when it comes to innovation and cant wait for market acceptance before oering process bundles. Providers must sharpen their alliance skills to bring product innovators into these bundles. Providers must oer shorter, more exible pilot contracts, allowing clients to leave if theyre unhappy.

Managed in-house

Stable operations

Sourced externally

Progress to date Providers are more adept at the co-opetition and multisourcing brought on by commoditization. Provider networks and global labor pools are outpacing those of all but the largest enterprises. Vendor management is a maturing capability at user companies.
Own

Work remaining Transformation capabilities must improve, with clear road maps and distinctions from transition. Asset ownership must decrease in frequency on outsourcing deals. Providers must develop and pilot Adaptive Sourcing models to align contracts with client needs over time.
Subscribe

Technology ownership

Progress to date Major ISVs validate subscription models with investments and oerings. Ecosystems like AppExchange emerge to lend more functionality to SaaS oerings. Infrastructure vendors tout utility models, although the opportunity is at the application layer.
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Work remaining Providers combine SOA and integration expertise, plus single tenant models, to address key SaaS fears of security, limited customization, and back-oce integration. Providers must develop outward-in replacement strategies to move more of the client environment into subscriptions over time.
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Market Overview | The Emerging IT Ecosystem

Providers must learn from past lessons to make app subscriptions work. The economics of

the application service provider (ASP) model caused it to op, as providers struggled to manage the gap between standardization and customization. But the costs and inexibility of heavily custom software are making buyers more open-minded about subscription models. Now, two barriers remain: the challenge of integrating SaaS deployments with in-house systems and the perceived risk of multitenant deployments. Smart service providers will plug both holes by combining: 1) single-tenant expertise; 2) SOA (to support customization without completely eroding reusability); and 3) integration with back-oce apps. A tier one Indian rm like Tata Consultancy Services (TCS) is a candidate for leadership here, as its low costs might more easily convince clients to forego complex customization.

Emerging Ecosystem Roles Will Dominate The Vendor Landscape Circa 2012 Through its research on Innovation Networks, Forrester has documented the shakeout in the software industry from innovation around apps to innovation around platforms. Software networks contain Inventors that create IP, Transformers that assemble IP into oerings, Financiers that fund innovation, and Brokers that connect dierent members.21 These roles will persist, but the next step in that evolution will be the formation of four vendor business models that will fuel a services-led industry (see Figure 5). Most of todays enterprise IT vendors will sort into one or more of the following roles:
Figure 5 Four Roles Dominate The New IT Ecosystem
1. Operations consortia Apps management
Infrastructure management

Global service labor pool

Service aggregation

Back-oce and IT operations

2. Component communities Global manufacturing labor pool

OEMs Platform ISVs
3. Process transformers
Front- and middleoce business operations 4. Solution brokers

Niche apps

Venture capitalists
Financier
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R&D labs

Transformer

Inventor

Broker
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Market Overview | The Emerging IT Ecosystem

Operations consortia. Operational outsourcers will form consortia around IT and mature

business process families. Members increasingly partner in one deal while continuing to compete for other business what we call a co-opetition model. One such example would be Dell, which contracts with rival Unisys for eld support at several clients (see Figure 6). The co-opetition model ourishes in stable, cost-driven areas of outsourcing like desktop and IT help desk services a true sign that a technology family has become a commodity. Firms like BP engage consortia as a means to drive competition up and prices down, making the increased overhead of managing multiple providers bearable. Others will appoint one consortium member to coordinate the actions of others, as seen in the recent deal signed by Dutch giant ING for desktop services. In this case, Accenture plays an aggregator role, coordinating delivery across a group that includes Atos Origin, Getronics, and KPN.

Whats new in this picture? The state of mind and state of preparedness of consortium members. In the past, service providers partnered actively with software and hardware vendors, but only reluctantly with each other. Thats all set to change. Firms like Aliated Computer Services (ACS), Capgemini, CGI Group, T-Systems, and others will become masters in specialized areas of IT service delivery. Witness how Getronics has narrowed its focus back to its core business in desktop services and related areas. To prosper with clients, these more specialized providers will need to partner with other service rms as a matter of policy, and they will need to create the internal teams, processes, and infrastructure to build, manage, and retire such partnerships in a purposeful, proactive manner not just at the occasional insistence of a single client.
Figure 6 Success Factors For The New IT Ecosystem
Business model Operations consortia members Success factors Be able to play bit parts or the service aggregator role on multisourced deals. Develop transition, transformation, and global delivery capabilities. Co-invest in platforms or wrapper technologies for BPO. Component communities Focus on targeted, niche functionality or the core, but not both. Allow the community and customers to judge winners and losers. Process transformers Domain expertise and partnerships that span hardware, software, and processes. Willingness to invest in R&D for emerging technologies. Flexible nancial models to support subscription-based oerings. As deep, if not deeper, knowledge of applying platforms than ISVs. Equal focus on IP assets and delivery eciency.
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Future members EDS, Dell, CSC, ACS, Perot, Hewitt, HP, ADP, IBM, Accenture

SAP Industry Value Network, Microsoft, Google, Eclipse, IBM, salesforce.com (AppExchange) Accenture, IBM, Capgemini, Oracle, Microsoft

Solution brokers

Accenture, salesforce.com, Oracle, Infosys, TCS, Keane

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11

Component communities. Major ISVs will continue to cultivate partners that contribute

functional or vertical complements to the ISVs technology. In the future, this area of the ecosystem will operate more as open communities with facilitators that aim to drive quality additions into the core product set on behalf of end customers, as is the case with Eclipse and AppExchange. Systems integrators that get serious about IP in the future will contribute even more to these communities such as services that create a unied partner portal from the disparate Web environments of a highly distributed music business. In the UK, BT started down this road by opening up the APIs for several of its internal platforms, obtaining new value from external contributors and delivering software innovation to its clients and partners. In this example, the community consists of more than just software development specialists and implementers. Whats new in this picture? ISVs and others have used development communities for years. But the establishment of functional platforms based on mixed ownership of IP, facilitation of the communities by and for the communities, and the sheer acceleration of activity in this domain (due to the growing maturity of SOA) mark this out as a dramatic trend in the IT ecosystem.

Process transformers. The transformation label will cease to apply to operational outsourcing,

instead redirected to rms that specialize in innovation around processes that span companies. Transformers like Capgemini will create the bundles that embed emerging technologies and concepts into a managed oering. Their consulting expertise will enable them to decompose broad processes, and rebuild them in other clients as Accenture did for a music industry client by re-engineering its Web portals to support consistent data sharing with business partners and between business units along the way taking out 30% of the cost of data entry and updating activities. Process Transformers heritage in outsourcing and integration will enable them to deliver managed services with the economics of SaaS but with the security, customization, and back-oce integration that SaaS cant always provide today. As such, the future of subscription-based apps lies more with these rms than with pure-play ISVs.22

Whats new in this picture? IBM shows the new angle that process transformers will pursue in the future. Its new approach to service delivery sees the giant retiring its business transformation outsourcing group, along with a number of traditional outsourcing service lines. In their place, the company will oer a number of pure technology outsourcing services, and it will address the process issues of its clients through a business services group that will aim to take over whole functions from clients, running and enhancing them in parallel.

Solution brokers. Take todays best project-centric integrators, increase their focus on IP and
assets, and deepen their partnerships with ISVs and other component community members around innovation and reuse, and you have tomorrows solution broker. These providers will be smarter at applying technology to business issues than any product vendor. Not only will solution brokers assemble IP from those communities, theyll contribute as well. In some

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Market Overview | The Emerging IT Ecosystem

cases, they will facilitate or lead the community altogether, as Keane is looking to do with its healthcare initiative. These brokers will often assemble the IP of platforms, apps, and devices into bundles sold directly to the marketplace or to other process transformers. Solution brokers will need to set up two distinct business units: one with a project-based nancial model, the other with an asset-based model. Whats new in this picture? SIs have always been adept at pulling together solution components from various noncompetitive sources. That wont change. But SIs will nd themselves more open-minded contributing their own components to other rms solutions, taking over more of the leadership of communities from ISVs, and taking ownership and IP more seriously in industries or functions that lack packaged solutions. BUYER SEGMENTS WILL ADVANCE THESE TRENDS AT DIFFERENT SPEEDS The shift toward IT as a service will occur generally, but the market for enterprise IT is fragmented and adopts new trends at dierent speeds. A companys size, as well as the complexity of the business models and processes in its industry marketing in industrial chemicals is very dierent than marketing in retail nancial services will aect how it sources and deploys technology. Company culture and the perceived importance of IT to the business also have a major eect on the uptake of these shifts. For instance, although IT vendors and industry watchers alike often paint a single picture of the IT organization, there is no single model for IT that is right for all enterprises. Instead, Forrester has identied three archetypes for successful IT, each of which will engage and push along the services-led ecosystem at dierent rates (see Figure 7):23

Solid Utilities will lead the shift of stable work over to service providers. These organizations
demand a cost-eective IT infrastructure thats always available. They take a cost-conscious approach to IT, due in part to the stability of their business processes. Holding companies and industries like utilities, consulting, and insurance live here.

Firms with Solid Utilities compartmentalize and simplify IT to reduce costs without sacricing performance. As such, theyll lead the uptake of multisourced IT operations deals. Solid Utilities are also the most likely IT archetype to have a penchant for a shared services approach such as Procter & Gamble, which manages corporate IT and the HR and nance functions in one organization. Because its apps portfolio is mostly decentralized, SaaS may take root here as business units buy smaller chunks of functionality via subscription.

Trusted Suppliers will more aggressively seek out advice and implementation help. These

companies want everything that a Solid Utility has to oer, plus centrally managed application software delivered on time and within budget. These rms have active business units plus sales, marketing, and nance functions that believe in softwares importance to process eciency. Pharmaceuticals, consumer goods rms, and technology rms tend to live here.

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13

These rms feel that they have the cross-function enterprise apps down pat, but theyre willing to work with providers that oer distinctive domain expertise and vertical industry knowhow. With these providers, Trusted Suppliers will lead the charge toward joint creation of new, customized IP. As for core apps that support stable functions, Trusted Suppliers used to debate Oracle versus SAP. Now, theyll debate whether or not to give the process and application to someone else to run.24

Partner Players will continue to self-integrate but engage services at the edge. These rms

rely on IT for competitive dierentiation. The IT organization, always centralized in the Partner Player model, needs everything that the prior two archetypes aim to deliver. But itfocuses more externally on customers, suppliers, and revenue-creating solutions from IT. Financial services, consumer electronics, and other Web-intensive rms live here.

Technology is too vital to this segment to turn over en masse to external providers. But Partner Players will invest in the process bundles around emerging or edge technologies where they feel less in control. Because theyre out in front of the SOA curve, they too will dabble in customized, component-based oerings from hybrids of integrators and ISVs. But rather than accept loosely supported systems, Partner Players will demand that the collection of solution developers stand collectively behind what they build. Partner Players will treat these collections of developers as sustainable assets. Ultimately, The Pendulum Will Swing Toward IT As A Service For All Segments The archetype that denes an IT organization will shape its sourcing strategy to a point. Yet some tactics like selective sourcing in areas like BPO, applications maintenance, or IT operations will remain options employed by all three segments. Meanwhile, rms across all three segments will pilot new delivery models like SaaS. One size wont t all. But as the -zation forces deepen their roots, the uncertainty surrounding IT will diminish, making it more appropriate for delivery as a service. Take FedEx, no doubt a Partner Player based on the vital role that IT plays in the companys go-to-market strategy. But even for FedEx, todays dierentiation becomes tomorrows table stakes, as what was once considered strategic will be more eciently delivered by third parties. Ultimately, companies will treat IT even more like a business function, and IT will therefore align with service providers more than product vendors. The three archetypes will persist, but over time Solid Utilities will control the majority of IT spend (see Figure 8).

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Market Overview | The Emerging IT Ecosystem

Figure 7 IT Archetypes Engage A Services-Led Model At Dierent Speeds

Enterprise IT archetypes Solid Utility Operations Strong, stable consortia adoption.
Large multisourced deals, usually relying on an aggregator.

Trusted Supplier
Moderate, growing adoption. Selective multi sourced deals, usually relying on an aggregator.

Partner Player
Low but growing adoption. Selective multisourcing of the stable and nonstrategic, internally managing providers.

Component Low, stable communities adoption.

Component solutions mostly sourced indirectly through outsourcers.

Moderate, slowly Strong adoption, slowly diminishing adoption. diminishing over time. Component solutions sourced directly and indirectly. Engage component communities directly; component solutions slowly begin to get sourced indirectly through outsourcers. Strong, growing adoption. Invest in project and managed services for edge technologies. Critical software always kept on-premise.

Vendor business models

Process Low, but growing transformers adoption.

Emerging process bundles feed shared services activity. Subscription software deployed selectively by business units.

Moderate, growing adoption. Emerging process bundles take root, but subscription models are adopted more slowly. Will consider more work for oshore.

Solution Low, diminishing brokers adoption.

Application development work kept in-house or with an onshore partner.

Moderate, diminishing Strong, stable adoption. adoption. Engage vertical integration expertise. Work with ISVs and their SIs for new IP. Global delivery is the norm. Engage tier one service providers on new, custom IP, but demand that they stand behind those products.

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Figure 8 A Shift To Solid Utility Means More Reliance On External Services

Today Future

Partner Player Trusted Supplier

Perceived criticality of IT to the business

Solid Utility

Internally self-integrate products

Seek implementation help Method for sourcing IT

Seek a managed service

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THE PRESSURE IS ON TODAYS ECOSYSTEM HUBS TO RESPOND Traditional hardware and software vendors will see their business models increasingly threatened by the changing patterns of competition and buyer behavior. The new roles emerging in the IT ecosystem arent just simple variation of systems integrators and outsourcing providers theyre the prototypes for engagement that all technology vendors will need to embrace. Each of todays most dominant hub vendors IBM, Microsoft, Oracle, and SAP will have to follow a distinctive (and in some cases, very challenging) strategy to thrive in a more service-driven IT ecosystem.25

IBM needs to balance heft with specialization. As one rm that could play a lead role right

now across all four emerging business models, IBM has an unrivaled opportunity to be the hub of hubs. But it must follow its own component business model philosophy and make bold calls about which areas of the market to pursue and which to divest. Advancing on all fronts may look compelling, but in a world of increasing specialization, IBM may founder if it spreads its resources too thin. Another issue is IBMs ability to execute on its strategy. Always a political organization, the company risks slow death from the inertia generated by internal ghting and conicting interests if its leadership fails to bring all stakeholders in line.

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Microsoft needs to nd that services bone in its body. Cash and a rm desktop grip give

Microsoft a unique platform for launching an assault on the enterprise something that would require a commensurate services strategy. After all, large businesses will look for services from the real expert to help drive down cost of ownership and open up more advanced features of Oce and Vista. But getting there will require that Microsoft go beyond being leader of the worlds largest component community to play the process transformer (with its subscription strategy) and solution broker (by rejuvenating Avanade) roles. With limited desktop and collaboration options in the marketplace, big providers like Accenture and Deloitte will be forced to compete and cooperate with Redmond a task theyre already accustomed to.

Oracle and SAP need to look beyond component communities. Whether its building

platform ecosystems, professing allegiance to an SI-led distribution model, or pursuing white space, these competitors say similar things. Both will continue leading massive component communities, but future competitive threats may come from the very ecosystems they create. SAP, with some 30,000 enterprise services in the works, can increasingly act as a solution broker for its own ecosystem as it does with Versa, a compliance systems house turned ISV that SAP now includes on its price list. But this will require a ramp in professional services sta. Oracle, with its proximity to infrastructure, is more suited for managed services and a process transformer role, as evidenced by it pulling IBM out of the Siebel customer relationship management (CRM) On Demand oering.26

New Hub Candidates: Accenture, Cisco, AppExchange, And India Based on their loyal and extensive customer bases alone, IBM, Microsoft, Oracle, and SAP will stay as hubs of the enterprise IT ecosystem for some time. But the importance of hardware and software vendors that underpin corporate IT will be surpassed by those vendors that can provide high levels of service for the right price and then replicate that service protably and eciently across their customer bases. Those who control as much of the new business models as possible will inuence technology R&D and innovation the most. Who might encroach upon the current Big Four software platforms at the centers of the IT ecosystem?

Accenture, if it can truly industrialize. Like IBM, Accenture has a presence across all of the

business models we describe. It transitioned from project-centric integrator to a leader in outsourcing relatively quickly. But the rms strengths today client focus and the ability to create from scratch around client needs could get in the way of IP creation and maintenance. Although the rm has no aspiration to be what it calls a class A software vendor, it recently appointed a senior partner to head a global assets organization, in order to improve reuse across clients in a protable manner strengthening the rms approach to IP creation.27 And although Accenture played it close to the vest when interviewed for this report, it admitted a high degree of excitement about the role the rm could play in a subscription world.

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Cisco Systems, if service-oriented network architecture and a managed services story emerge.

Acquisitions of Sheer Networks and Topspin Communications position Cisco as a more holistic provider of applications and network management technology, and build upon its service-oriented network architecture (SONA) strategy. Placing more functionality on the network could steal share from existing middleware players; next up would be for the vendor to bolt these onto the capabilities of the large service providers and operations consortia. Cisco has acquisition and partnering in its DNA, so even though the company has no interest today in a services business, dont be surprised if its forced to buy some delivery capabilities in the future.

AppExchange, if it sheds the sales force automation shackles. AppExchange is salesforce.

coms own platform, which is increasingly open to functionality not related to sales force automation. For example, the community includes a real estate industry ISV that is building on the AppExchange platform even though theres no logical link to customer relationship management (CRM) processes. If salesforce.com can gure out enterprise resource planning (ERP) functionality, as well as nd a strategy to fend o Microsoft, it could be very strong in the midmarket and be poised to take a big chunk of the enterprise market when SaaS matures. But before going much further, it will have to shed the self-limiting salesforce.com moniker.

A new hybrid rm from India, if it weathers market consolidation. Asia could produce a

new software and services powerhouse, leveraging its software development expertise and fastgrowing local markets. Tier one Indian rms like Infosys, Satyam Computer Services, TCS, and Wipro could t this bill based on their track record of working with major ISVs like SAP and Oracle and their aggressive pursuits of IT work, ranging from remote managed infrastructure to strategy consulting. But dont expect more than one Indian rm to t the label of hub, as the stressed Indian provider market is poised for consolidation.28

R E C O M M E N D AT I O N S

ALL SUPPLIERS IN THE IT ECOSYSTEM MUST LEARN NEW RULES

While some vendors and service providers will focus on just one of the four roles described, others will attempt to master more. And the very largest, like IBM and Accenture, may seek to ll all the roles in parallel. Meanwhile, end users must learn the new engagement methods that capture the value of these new forms of service specialization learning to marry the spectrum of services availability with their own preferred approach to extracting value from IT. Forrester identies four principles that dictate the behavior of some or all of the participants in the new ecosystem:

Global resource availability becomes a prerequisite for success. Low-cost oshore

service delivery has been a phenomenon in IT markets for years starting in the US and spreading to Europe and Asia. But the linear client/provider relationships spanning from the US to India or Japan to China will soon appear obsolete. All large service providers and

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many product vendors too will require a genuine global service delivery capability to match expertise, industry knowledge, cost, and availability to the expectations of each large client. For example, when looking for a service provider to deliver a global data center rationalization program, Schneider Electric was keen to identify partners that could deliver consistent service across the globe not just the cheapest option for one component.

Product vendors nd new services channels to market the four business models.
Increasingly threatened by end users drive for rationalization of suppliers and commoditization of infrastructure, product vendors actively seek new value propositions in the enterprise market to bolster their future protability. Cisco seeks a radical reinvention of its business model, which is based on supporting applications in the network, and Microsoft, SAP, and Oracle all experiment with SaaS. Vendors like these will readily grasp the opportunities oered by the new service-led business models identied by Forrester whether to sell directly to enterprise clients or to build service delivery partnerships with specialist services rms. Case in point: Look at how Cisco drives for a new franchise model of service delivery, pushing its partners to master business value delivery as well as hardware sales impact and IT skills.

Business and service acumen is key for vendors of all stripes. Ciscos focus on using
services as a mechanism to demonstrate value to enterprise buyers provides a strong cue for the broader market. As enterprises look for answers to business challenges for example, how technology can support more speed of response for business model changes vendors and service providers all need to step up their ability to apply technology to the specic industry-focused issues of their customers. They will also need to oer solutions that customers can monitor, manage, and measure according to business impact metrics, not IT performance service levels. If they dont possess these skills or solutions internally, then they must nd partners for example, within a component community that can front-end their technology-heavy oerings with process functionality and metrics.

User companies need a more adaptive approach to vendor management. End user
companies will face new challenges in eectively harnessing the support and help available from service providers. At the same time, they must adapt to the ever-quickening pace of competitive change and the growing complexity of integrating components of Digital Business Architecture like IP telephony, utility computing, virtualized storage, and business service management tools. To achieve this, they must either master the disciplines of service provider governance and management within their own IT organizations, or they must pass this service aggregation responsibility to a lead service provider, which is what the UKs Department of Work and Pensions (DWP) did in its large-scale outsourcing program with EDS. DWP has contractually designated EDS as the lead provider to orchestrate the contributions of other providers like Capgemini.

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W H AT I T M E A N S

A COUPLE OF TODAYS GIANTS BECOME TOMORROWS M&A PLAYS

With billions of dollars of capital sitting on the sidelines in the IT industry, merger and acquisition activity stands to increase. But it wont be limited to the big sh eating the small as a means of quick innovation. The new ecosystem will result in one or two large product and service rm combinations, despite the usual rebuttals. Service providers will staunchly claim that theyve no desire to be product companies and risk their product independence (although IBM has demonstrated slowly that its services arm isnt designed to always og IBM products), while software vendors have little interest in accepting lower margins and lumpier revenue streams (although the -zation quartet and changing buyer behavior will leave them little choice). Consider the following combinations, and how the dominoes might begin to fall should one of them occur:

IBM acquires SAP. IBM staunchly claims no interest in packaged apps. But merging with
SAP could get IBM even closer to the world of business process, and a merger would get these two rms out of the conundrum of cooperating for implementation services but competing in middleware. Of course, the conundrum would shift, as IBM Global Services would still need the freedom to implement apps from Oracle and others. But since acquiring PricewaterhouseCoopers, IBM has demonstrated the ability to keep its services arm relatively product-independent. IBM has also demonstrated a recent appetite for inorganic growth, with acquisitions of FileNet, MRO Software, and Webify Solutions. Likelihood: highest of the four. If SAP and Microsoft were talking, why not these two?

Oracle and TCS merge. Considering that Oracle wears its inorganic growth strategy as a
badge of honor, its logical that its acquisition sights could fall on a larger target.29 Oracle will aim high and combine with a rm possessing a well-stocked arsenal of apps management, consulting, global delivery, and hosting expertise not to mention the strongest Oracle skill sets. Likelihood: moderate. Oracle is beginning to see the services light, but to what extent will it invest?

Hewlett-Packard develops a services story by acquiring Capgemini or CSC. HP failed in a

past bid to buy PricewaterhouseCoopers, a business that subsequently went to IBM. Now HP has a broader services base to make sense of a more concerted acquisition eort in either the outsourcing or systems integration market.30 Capgemini would add punch to HPs megadeal proposition while simultaneously providing a more intimate connection to smaller clients through the local services model of its Sogeti oshoot. Alternatively, a CSC acquisition would position HP as one of the leading operations consortia members. Likelihood: moderate to low. HP has been clear with Forrester about pulling back on its pursuit of the business process world for now.

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Accenture and Microsoft take Avanade to the next level. Accenture put most of the skin
in this joint venture, but consider the potential of both rms jumping in all the way. Microsoft would have instant credibility in the enterprise market and services spaces a goal that some Microsoft execs are known to embrace. Likelihood: lowest of the four. Client-focused consultants and product innovators dont usually mix, but will the new Microsoft releases sustain shareholder interest during a potential tech slowdown?

SUPPLEMENTAL MATERIAL Companies Interviewed For This Document Accenture BMC Software BT Capgemini Computer Sciences Corporation Getronics Hewlett-Packard IBM Software Group Infosys ENDNOTES
1

Keane McKinsey Microsoft Oracle salesforce.com SAP TPI Wipro

Providers are moving toward a more distributed, process-centric, global delivery model (GDM) that relies on nearshore and oshore facilities to remotely service clients. And as the use of Indian vendors becomes increasingly accepted for applications development, infrastructure management, and business processes outsourcing (BPO) tasks, companies are beginning to look to their Indian providers for IT and business process consulting expertise also. See the December 9, 2005, Tech Choices The Forrester Wave: Global Delivery Infrastructure Management, Q4 2005 and see the December 1, 2005, Tech Choices The Forrester Wave: Indian Vendor Consulting Capabilities, Q4 2005. General Motors announcement of its multivendor sourcing contracts contained no real surprises for the industry. But given the dollar value of the work and GMs heavily documented outsourcing journey, this marks a tipping point in the maturation of services-based delivery of the IT function. See the February 3, 2006, Quick Take GM Drives Multisourcing Through Process Standardization. We elded this survey using two randomly selected groups the rst during November 2005 and another during March 2006. Do not assume any connections or overlap between groups, although we used the same online sample provider.

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In our research, we are seeing an increasing rate of CIOs who are coming from business backgrounds, including those from services rms. Sixty-six percent of respondents consider vendor consolidation to be somewhat or very important, citing direct cost reduction; regulatory compliance; ease of vendor governance; and focusing on building better, more strategic partnerships as among the reasons for their outlook. Source: Business Technographics August 2005 United States Enterprise Governance Survey. If every layer of the software stack is increasingly open, then innovation can come from anywhere. See the June 29, 2006, Market Overview The Future Of Enterprise Software. Even though the majority (53%) still prefer to integrate technologies on their own, were seeing a shift away from the do-it-yourself mindset, especially when compared with past Business Technographics data. See the March 28, 2006, Trends CIO Condence Poll: Q1 2006. These are edge technologies in that they aim to extend either IT shops or the entire enterprise beyond traditional bounds. Even open source, despite its community-based appeal, has spawned a sizeable services market. See the April 5, 2005, Trends Open Sources Impact On IT Services. Of the rms already outsourcing, 89% expect the importance of outsourcing to increase even more during the next two years. Forrester has published statistics and analysis on the looming crisis due to the retiring workforce. See the May 20, 2005, Quick Take The Retiring Workforce Is Creating A Knowledge Void In Government And Regulated Industries and see the July 6, 2005, Trends IT Is Not Going Away But The Worker Prole Changes. Note that these growth rates alone do not indicate a dwindling of the service providers inuence over IT spending. Hardware and software numbers, plus subscription software revenues, are all counted as product spending even though they may have resulted from a system integrators recommendation or an outsourcers contract. Recent studies by sourcing advisory rm TPI indicate that cost savings remains the runaway No. 1 reason why rms outsource. Oracle provided an example of a repeatable design win as a banking initiative that involves multiple solutions put together with a systems integrator partner. Meanwhile, SAP appointed an executive vice president (Zia Yusuf) earlier this year to head the companys platform ecosystem initiatives. Keane is spearheading a consortium of the largest healthcare payer organizations that will enable rapid and dramatic changes in the way these organizations operate and interact, including the development of a common service-oriented reference architecture for healthcare payers. Outsourcing providers have struggled to introduce newer technologies into existing, long-term contracts. The point here is that newly contracted managed services are an attractive option for bringing emerging technology to market.

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Microsoft unveiled Oce Live, signaling its entry into desktop productivity software as a service and later hinted at embracing software as a service across all its product lines. Oce Live is not currently targeted at the enterprise, however, enterprises should consider Oce Live as an indication of things to come from Microsoft and Oce 12. See the November 10, 2005, Quick Take Microsoft Pushes Into Desktop Productivity Software As A Service. AppExchange is an open community platform facilitated by salesforce.com. AppExchange is expanding to source vertical extensions and other targeted functionality into apps besides salesforce.com. Forrester evaluated leading outsourcing vendors on their ability to implement IT sourcing deal transformation management across 55 criteria. See the May 15, 2006, Tech Choices The Forrester Wave: IT Sourcing Deal Transformation Management, Q2 2006. Providers must also convince prospective clients that in order to get the exibility for a low cost, they should take asset transfers o the table. See the January 12, 2006, Forrester Big Idea Adaptive Sourcing: Outsourcings New Paradigm. Forresters IT industry economics research shows that during phases of innovation and above-average IT spending, growth in consulting and advisory services pick up. During phases of innovation and belowaverage IT spending, the services focus shifts to outsourcing. See the October 11, 2005, Market Overview Expect A Tech Slowdown Before The Next Boom. Vertical-specic Software Innovation Networks will become the hotbeds for technology advances, with multiple networks battling it out in each vertical. See the October 21, 2004, Trends Software Innovation Networks Go Vertical. Well see a tug of war between major ISVs and SIs/outsourcers in the near future, as evidenced by Oracle pulling IBM out of the CRM On Demand oering. But as long as ISVs only focus on the platform/app and not a services story, they wont be able to overcome the issues of customization, integration, and security. Understanding the archetypes helps to articulate IT strategy, dictate tradeos, and help IT achieve its goal of running more like a business. See the March 22, 2006, Trends The Three Archetypes Of IT. The app behind the curtain will matter less in the future. See the June 26, 2006, Trends SOA Will Shape The Future Of BPO Delivery. For this analysis, we chose the key application and platform software hubs, because so much of the vendor ecosystems revolve around them. But that doesnt mean that other major infrastructure or telecommunications vendors wont have to adapt as well. Labeling Oracle and not SAP as a candidate for process transformer, doesnt imply that Oracle is more business-process-focused than SAP. Key to our denition of process transformer is a rm with strong managed services and subscription capabilities. We see Oracle heading in that direction. When asked what it meant by class A software vendor, Accenture referenced not having release schedules and road maps. With that in mind, we should make two points: First, release schedules may not be as important in the future of software. And even if thats not the case, Accenture wont have a choice if it wants

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to keep client satisfaction high. Second, Accentures vertical teams take responsibility for assembling those technology assets into business solutions for clients. To take advantage of IP, those vertical practices and the technology assets team need to be joined at the hip.
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Increasingly large deals, the need to deliver services to buyers outside the US and UK, the diverse set of services oered, and the need to build deep vertical/process expertise is going to recast the oshore market during the next 18 to 36 months. See the June 8, 2006, Trends Indias Looming Oshore Midlife Crisis. Recently, Oracle yet again grew through acquisition this time through the acquisition of Portal Software to serve the telecom space. Despite its success in expanding beyond support services, HP still lacks credibility in markets where it does not have products, such as mainframe outsourcing or process consulting. See the February 11, 2005, Quick Take HPs New CEO Should Upgrade Services Strategy.

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H e l p i n g B u s i n e s s T h r i v e O n Te c h n o l o g y C h a n g e
Headquarters Forrester Research, Inc. 400 Technology Square Cambridge, MA 02139 USA Tel: +1 617/613-6000 Fax: +1 617/613-5000 Email: forrester@forrester.com Nasdaq symbol: FORR www.forrester.com Research and Sales Oces Australia Brazil Canada Denmark France Germany Hong Kong India For a complete list of worldwide locations, visit www.forrester.com/about. For information on hard-copy or electronic reprints, please contact the Client Resource Center at +1 866/367-7378, +1 617/617-5730, or resourcecenter@forrester.com. We oer quantity discounts and special pricing for academic and nonprot institutions. Israel Japan Korea The Netherlands Switzerland United Kingdom United States

Forrester Research (Nasdaq: FORR) is an independent technology and market research company that provides pragmatic and forwardthinking advice about technologys impact on business and consumers. For 22 years, Forrester has been a thought leader and trusted advisor, helping global clients lead in their markets through its research, consulting, events, and peer-topeer executive programs. For more information, visit www.forrester.com.

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