Next-generation IT procurement

I’ve blogged several times recently about the impact of ‘disruptive’ technology on the world and on the IT industry, and with good reason; disruptors are the new trends and practices which re-define the ways in which we work, communicate and pretty much conduct our daily lives.

One of the latest disruptive developments in the IT world is in consumption – how we acquire and utilizeIT products and services. And as with so much else just now, it is being disrupted and driven forward by cloud computing.

a shift in procurement thinking

Traditionally IT procurement has been driven by the CAPEX model, whereby vendors agree deals with customers for products or services which see the customer pay around 70 per cent of the project cost up front. Great business for product vendors, guaranteed money up front and happy vendor CEOs. This has meant that the risk and the responsibility lie with the customer to leverage the product capabilities.

The industry is now fast headed in the direction of the OPEX consumption model – essentially pay-per-use – which puts things very much more in favour of the customer who is buying the technology, rather than the vendor.

As with all things in IT, the shift in thinking and evolution of business practices faces a number of key barriers to implementation – in this instance, cost, complexity, adoption and risk. And it is in addressing these barriers where success in next generation IT procurement lies.

changing the model

What this OPEX consumption approach does is to change the game from a vendor perspective and make services more important than product sales. The saying was always that ‘the customer is king’, but that has become ever more true today thanks to cloud computing and services empowering customers and end-users like never before.

This new subscription model, powered by the cloud, has transformed IT provision into a service versus product approach. The OPEX model reduces both customers’ costs and risk, and allows them to experiment in a more risk bounded environment. They can start small and try solutions and services out, and if they gain business benefit, then they can and will expand their usage of that technology. This is the beauty and attraction of the cloud computing and managed services approach – simplicity. In the age of the iPhone, IT mobility and personal empowerment, end-users just love simplicity.

So vendors need to change their thinking in response to this shift in procurement mentality. There are examples in the market now of vendors offering a ‘try before you buy’ approach to encourage potential customers in. Customers no longer want huge implementation costs – smartphones for example don’t come with a thick user manual – and simplicity is key. The simpler the user engagement, the more managed the service such as SaaS or IaaS, the lower the risk from the customer perspective, the more likely the increase in adoption.

the consumption gap

Much of this new procurement thinking has been driven by the consumption gap. Customers grew tired of wasting money on products and services features they simply never used, or in fact, ever really needed in the first place.

Under the CAPEX model, all the challenges and the risk were placed on the customer. They had tointegrate the solution into their operation, maintain it and so on. They were forced to buy separate layers of systems and applications for a premium price and then only used a small percentage of their capabilities, since many of its functions might not be necessary to their business. The move to the cloud-based model, or try before you buy, reduces the impact of this and gives organizations much more agility. In effect, the iPhone apps model has been duplicated within enterprise IT. So customers find that they have more choice – and they are responding to that.

The demand is undoubtedly there; IDC recently surveyed organizations in Australia and found that 86 per cent of Australian enterprises are now using cloud computing, up from 71 per cent the previous year. The global cloud market will be worth $240 billion by 2020. As IDC called it, cloud is now “business as usual.”

staying at the cutting edge

The old adoption model also meant engaging in a long procurement cycle – often several years – to specify, commission, build and integrate an IT solution into operations. The consumption model enables organizations to circumvent this. If they spot a trend they have the agility to respond to it immediately and get systems in place more quickly.

This is one of the key benefits to customers under the managed services and cloud delivery model; they can enjoy fast adoption based around mobility and rapid roll-outs. Companies can always enjoy the most up to date models and versions – for example many organizations remain locked in to out of date email applications. The cloud enables them to always be in a state of upgrading, always enjoying the benefits of the latest and greatest version.

customer simplicity, vendor complexity

So the next generation procurement model makes life easier and more predictable for the customer – but for product vendors, there are challenges to overcome. Under this service versus product approach, customers are able to keep things as simple or as complex as they choose. They can procure and use a device or technology at the top level and enjoy value from it, or delve further down into its capabilities and enjoy much greater benefits. Vendors will need to adapt to this.

Similarly, the managed services approach also gives customers simplicity in support terms; end-users don’t like complexity and prefer simplicity in IT support. Under the subscription model, their provider can use in-depth analytics and Big Data to provide them with the quality of service and support that they demand. The cloud even means that IT support has moved online, and all these new provisions are being powered by end-user demand. The consumer is making the decisions now. And cloud delivery and the subscription or pay-for-use model is how they want their IT.

Original Publication

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