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Makings Of A Revolution
After mainframes and the internet, the IT industry is brewing up a storm with a new model. Here’s a look at the third major computing revolution taking place – Variabilization
BY ANAND SANKARAN, Senior Vice President and Business Head, India and Middle East, Global Business Head, Infrastructure and Services Wipro Limited
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The IT industry is undergoing a major disruption in a bid to meet the new challenges that confront the CIOs in an increasingly competitive global business environment. On one side, businesses are facing unprecedented cost pressures owing to global economic imbalances. On the other, they are called upon to become more agile and responsive to the changing market dynamics. IT has a key role in helping these organizations cope with the new business challenges. And in meeting these challenges, leading technology players are evangelizing the idea of variabilization of IT. Variabilization of IT enables firms to move from a fixed technology cost model to a variable cost model for greater business agility and competitiveness. Variabilized technology uses tenets like scale, standardization and simplification to drive efficiency, optimize delivery and lower unit costs that give firms the competitive edge in global markets. It enables firms to use computing infrastructure on a pay-as-you-go basis, very similar to electricity, gas and water. For example, when we need to use electricity, we do not build power plants in our backyards, we simply use the power from the local utility company. The concept of variabilization of IT has been around since the late 1990s, but only now has it caught the interest of companies. As a case in point, a global financial major has opted to access a common infrastructure for processing power, storage and bandwidth instead of paying a substantial amount for captive IT infrastructure, resulting in significant cost savings. Similarly, an airline managed to save Euros 75 million in just two years by moving to a centralized IT model. Variabilization also allows firms to standardize their backend IT functions while at the front-end they are able to meet the differentiated needs of their customers.
The Pillars of Variabilization There are three primary ways through which variabilization can be realized. Internal Variabilization: Building a consolidated IT infrastructure from scratch often requires a significant up-front investment and that does not always pay off in the short run. As organizations become more informationintensive, the costs associated with IT infrastructure and its maintenance increase. By leveraging a shared infrastructure model, firms can tackle the cost pressures more efficiently
1. WInsights, September 2011 2. A Peep Into Data Center Economics – Analyzing Challenges & Opportunities, Wipro,http://www.wipro.com/Documents/Wipro_ Alsbridge_Outsourcing_Survey_Report.pdf
and focus upon their core business by outsourcing the support functions to external service providers. For instance, in a fast-changing industry like telecom, massive infrastructure investments can burden balance sheets and cut flexibility. To become lean and agile, telecom firms are increasingly moving their non-core activities and assets to be managed by capable third parties. This way, they can off-load the burden of non-core network ownership (maintenance, repair, and replacement of infrastructure), pay only for the services that they and their customers consume, reserve more enterprise capital for investment in core activities, and liberate management bandwidth to focus on highest-value strategies. To cite a case, Sprint Nextel has signed a seven-year deal to outsource its network operations to Ericsson, a contract worth about $5 billion. When such deals occur, a snowball effect typically produces greater economies of scale for both clients and providers.1 Telecom firms are also outsourcing their network, infrastructure management and other services like call centers to third parties—a trend seen in both the developed and emerging markets. Rapid growth of cloud-based data centers too illustrates the variabilization trend. Large organizations tend to maintain multiple data centers across geographies. These data centers typically have disparate technologies, including a wide range of servers, some of which are old, obsolete. Many of these organizations are now variabilizing their data center costs by accessing cloud based services.2 Customer Variabilization: Enterprises are also developing variabilization solutions for their customers in the effort to deliver highly differentiated services to stay ahead of the growth curve. This model requires a transfer of ownership of the assets from different data centers to a consolidated central structure that delivers utilities. This would allow the services to be assembled into a single, flexible infrastructure that more organizations can share and adapt to their specific needs. At the basic level, we have seen how telecom players like AT&T in the US offer almost free handsets, but charge for the telecom services they provide. Similarly, Xerox has been able to variabilize the customer cost by charging on a per photocopy basis rather than getting customers to buy the machine, and then pay for cartridge and maintenance. Even in the technology space, we see large technology companies transforming fixed costs by offering software
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packages on pay-per-use model instead of investing in large fixed assets. The pay-per-use model propagated by Software as a Service (Saas) providers is a case-in-point. The Saas model reduces the cost of upgrading from one version of the software to another considerably compared with on-premise costs. Since the model is a multi-tenant architecture, the cost of all software, infrastructure and expertise is shared by a large number of customers. Scale Variabilization: Today, firms can variabilize their scale of operation to suit the business dynamics and cycles, making them more agile and competitive. In a business which is vulnerable to the wrath of business cycles, the organization’s fixed scale can be a big impediment. Organizations can now use the lease model to transform this hurdle into an advantage. Infrastructure-as-a-service (IaaS) facilitates this. Major sports and e-commerce websites are seen to efficiently manage their peak hours and lean periods by accessing IaaS. For example, the Futbol Club Barcelona (FCBarcelona) maintain its FCBarcelona website—which boasts over 6,000 pages available in six languages and over 12,000 digitized photos—by using Amazon Web Services (AWS). Likewise, Brazilian IT Company Concrete Solutions uses AWS to optimize its Casa & Video’s e-commerce infrastructure. Casa & Video is one of Brazil’s largest providers of electronics and home products, and its infrastructure needs to be versatile enough to handle large traffic spikes during the holiday shopping season, while also supporting an immense inventory and supply chain.3
THE OUTLOOK The variabilization model is in its infancy but is fast becoming a foundational element for growth and capability. It will increasingly simplify IT by reducing and masking complexity and allow IT operating expenses to vary with the expansion and contraction of the business that it supports. Variabilization when extended beyond the infrastructure layer could become the “Next Big Thing” in the technology industry. Enterprises would do well to map their fixed costs and draw up a variabilization strategy that ensures greater business agility and competitiveness. Firms that become orchestrators than owners of their operations will see higher growth in the coming days. The competitive advantage will come from a sharp focus on business agility, risk management and coordination of businesses for value chain.
3. http://aws.amazon.com/solutions/case-studies/#ecommerce Other References 1. Variabilization, BCG Report by Nicholas Kachaner, 2009 2. IT in Both Aspects: Standardized Utility and Strategic Asset, Cristian Micliuc and Ömer Furkan Tercan, 2011 3. Unregulated IT - Beyond Utility Computing, Nagesh V. Anupindi, 2005
