Buying Services not Servers:

A way forward in the Recession

There are signs that the recession in the UK is beginning to end. Demand for products and services seems to be increasing, albeit from a very low point. Confidence is increasing, but cash remains a big problem. Short term borrowing is not easy to obtain and the cost is extraordinary. So the double whammy of having to keep costs to a minimum while trying to grow the revenue profitably is a substantial business problem.

In times of growth, change management teams are working on expanding capacity and getting into new lines of business. In these times, firms are looking for ways to maintain revenues and cut operational costs; decisions have to be made rapidly and mistakes can be disproportionately costly. To be successful, a good understanding of the realities of the business activities is essential. Probably the changes companies routinely make at times like these, such as cutting travel & training, have already been done. So now is the time to examine cuts in other areas – probably described with the euphemism of Lean (Lean processes, Lean organisation, etc.). But Lean architecture takes time to achieve – ask the Toyota Motor Company, around 20 years into the project and still working at it. Right now, most smaller companies are looking to cut costs without losing performance, and without losing the opportunity to be agile so that when demand increases, which the optimists always say is next month, the company can respond.

One approach is outsourcing, and one type that has recently gained significance is the outsourcing of business processes that can be highly automated. Cloud Computing is the current term for IT services delivered via the internet on a subscription basis. It is a mature technology that can offer rapid operational improvements and cost savings, and works by delivering business applications that are accessed by web browsers, with the software and data residing on remote servers. Cloud Computing users avoid capital expenditure on IT, and only pay for what they use. Cost matches activity, and it's a truly flexible cost. It is also a known cost. Most vendors enter into a Service Agreement lasting 3 to 5 years. Therefore finance teams can budget accurately. Set up costs are minimal and the time to deploy is very fast.

As the Cloud Computing delivery model matures, vendors naturally achieve a consolidation of knowledge in the market place and not only become the centre of excellence but also the arbiters of best practice. This is achieved in a very democratic way with each customer influencing the vendor. This works most clearly in the horizontal applications such as Accounting, Payroll and HR Management. An organisation really does not want a different payroll process to its competitor. It wants the job done accurately with enough management information to run the business well, and it would like the activity to cost less, because that is where competitive advantage arises. By subscribing to the best of Business Process Management (BPM) for common commercial tasks such as customer relationship management, purchase order processing, or employee case management, organisations can quickly improve their operations and strip out considerable costs. There has hardly been a better time to examine outsourcing the 'must-do' work that adds no value.

Outsourcing is worth considering right now, because:

• The technology to spread the work load is widely available and can be made secure.
• Domain experts can now offer 'Best-Practice,' and have available capacity
• Services are available for deployment that reduce ongoing costs without the need for capital investment
• Service providers can offer substantial economies of scale.

Salesforce.com (SFDC) has been supplying CRM services for over a decade now. Although they might deny it, theirs is now a mature business model. Instead of having to buy equipment and run it to provide applications to the workforce, SFDC customers just buy a subscription for their team. It was launched as Software as a Service (SaaS), but now the term Cloud Computing is the more accepted description. Customers save on capital expenditure and interest costs, and reduce their dependence on internal IT. The majority of SFDC users have no idea where their data is stored, and why should they? They just want the defined service available to them wherever they are! Each SFDC customer can request customisation of 'their' service, but the changes are limited so each customer can enjoy what the vendor defines as 'Best-Practice' for CRM.

Since SaaS was first adopted, internet connectivity and security has improved dramatically. Firewalls, spyware detectors, encryption, Virtual Private Networks (VPN), have had a substantial effect in safeguarding traffic. The covert presence of hackers on the internet, who caused more fear than harm and were popularly represented as gaunt bearded young men in the 90's Hollywood movies, have been largely superseded by an impressive body of ethical hackers who police all major computer installations. TechTrek has these skills on the workforce to protect clients moving sensitive data around the internet. There is now substantially more risk with moving paper documents around than sending e-documents across the web.

In the last ten years IT has become commoditised. There are only a few organisations in the world that get competitive advantage through IT investment, and if they are not governments then they are specialist giants with revenues in the same order of magnitude as countries. There was a case of two large US investment banks merging, and after the agreements were in place, the two IT teams began to have meetings to see how they could drive efficiencies from the new landscape. It quickly became apparent that the two teams had very different views. One built everything they could themselves and ensured that the hardware was the best they could get. This consumed nearly 20% of corporate gross margin, but had made the bank the success it was. The other team had bought in software and only amended it when necessary. Upgrades were not applied unless there was a business case. The result – IT expenditure was under 10% on the same basis. A huge difference in spend. Under the spotlight of the merger, the new management team could see that both IT teams had contributed about equal value to their respective corporations. This meant that the extra money spent by one team was a waste.

IT is now in the same category as electricity and water which managers buy from the cheapest supplier who can provide a constant supply. Electricity only gets attention when it's not there. It's an important part of any Business Continuity plan, but nobody buys electricity at a premium price because of a quality of the electron stream. Premium pricing is almost impossible to achieve, and discounts are available for requirements scheduling that suit the vendor. Its commodity pricing, and this is where IT has arrived for almost all organisations.

In Nicolas G Carr's highly influential article[1] he suggests three new rules for management

Spend Less

Studies show that companies with the biggest IT investment rarely post the best financial results. In our times of expensive capital and tight margins, there are substantial penalties for extravagant expenditure. IT over-spending is unlikely to provide competitive advantage, but is almost certain to create a cost disadvantage for your firm.

Follow, don't lead

Moore's Law guarantees that the longer you wait, the more you will get for your IT purchase. As soon as a purchase has been made, the hardware and software becomes out of date. The question now is: - why buy servers, if you can meet the business need by buying service?

Focus on vulnerabilities, not opportunities

For most of us, the opportunity to gain substantial competitive edge through IT deployment of any kind has passed. However, we have become so dependent upon IT, that even minor disruptions can cause huge problems. Risk Management is an expensive and specialised activity. Most companies would benefit from buying-in that skill as part of the IT package.

Companies such as SFDC and TechTrek have specific applications, such as CRM and Purchase Invoice Processing, ready for subscribers. Customers just have to join us and agree the Services Contract. This saves time and helps organisations deal with cost reduction issues quickly and without the need for capital investment. In the current climate, cash is king. Companies that can perform with costs stripped out of operations will out-perform their markets.

New innovations benefit from small dedicated organisations that are fleet of foot and mind. Stories of new business ideas being built in dad's garage are legion. However, before long cash requirements increase as capital is required to support revenue growth. This trend favours a larger operation; and finally, the critical success factors become economy of scale and the balance sheet to support the operations. The histories of firms building motor cars, aeroplanes, or computers amply illustrate this fact.

Most companies that run an accounts package on internal hardware and software will never reduce their finance management operating costs through economies of scale. In fact as people costs rise so will the firms' support costs – inexorably. But the way to save considerable cost is to subscribe to a service with thousands of users in order to share the benefit of that economy of scale.

Business Process Outsourcing can provide double digit performance improvements, and most projects deliver returns within months so benefits can be seen within the current fiscal year! Outsourcing with a specialist, such as TechTrek, not only reduces project risk, but also drives performance through:

• Bottom-line performance improvements
• Reduced requirements for cash to fund internal operations
• Increased effectiveness of service delivery
• Enhanced corporate agility through planned change management
• Better utilisation of technology
• Ongoing access to specialised knowledge and expertise

The opportunity for organisations to increase operational capacity AND reduce capital employed is probably one of the most important business opportunities of our time. Improved technology has made it practical to outsource process automation while maintaining control of the work. The set up costs are low and the cash returns high. This type of outsourcing has the effect of increasing the very important business ratio of return on capital employed.
The best way for most companies to move forward in the current economic climate is to purchase services rather than buying servers; to engage in a contract for defined business services rather than upgrading to the latest version of software. As Nick Carr would say 'IT doesn't matter: business performance does.'
Business Process Outsourcing is probably the most important option to growth when recovering from a recession.

Rob Allen is Head of Professional Services for TechTrek Ltd and is based in London. He is a Fellow of the Workflow Management Coalition working on the business rules that XML dialects have to accommodate to enable inter entity business process automation. The TechTrek team are insourcing business services for clients in the private and public sector.

TechTrek Ltd deploys world class business process services accessible from anywhere. The TechTrek team work energetically with its clients to strip out inefficiencies and costs in their operations by optimising the role of out-sourced document and business process management. By creating common methods, entities, standards and rules, TechTrek services reduce capital employed and fixed costs, while increasing agility and providing economies of scale in non-core activities.