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Issue #2003 - 13 (April 2003)
(Updated Apr. 16, 2003)


IT & BPR Consolidation - Its Role in Mobile Application Development

We summarize and comment on a few significant points made by McKinsey Quarterly in a Special to CNET with respect to Mobile Application Development.

McKinsey's article made following points:

1. Big Systems Integration and Outsourcing Projects in trouble

Past decade in IT has been marked by huge expenditures in ERP (Enterprise Resource Planning) ,SCM (Supply Chain Management) and CRM (customer Resource Management. Vendors like i2 Technologies, SAP and Siebel Systems benefited from many mega projects involving multi-million dollar expenditures. There was no guarantee when these systems integration projects were undertaken that business benefits would follow. 

Meanwhile outsourcing of operating complex IT infrastructure and applications did result in this market reaching almost $100 billion a year in 2000. After a decade of double-digit gains, the sector suddenly went flat in 2001, as an economic slowdown forced companies to rein in their overall IT spending. Contrary to projections of a near-term return to growth, McKinsey sees indications that IT spending will remain flat or even shrink. Many customers voice dissatisfaction with their large investments in enterprise software and question the value of long-term outsourcing.

Even worse for service providers, an abundance of IT talent is now on the market, to say nothing of competition from low-cost offshore service providers in places such as India and China. The result, our research suggests, will probably be an enduring shift toward reduced spending on IT services, increased pressure on prices, a preference for narrow projects and tough demands for quick and hard economic benefits.

Small wonder the IT services industry faces another shakeout, as flat markets become the battleground for a wide range of providers. The competitors include systems integrators, outsourcers, full-service powerhouses offering both systems integration and outsourcing, offshore competitors and hardware and software providers hoping that services will compensate for lost revenue from flagging core businesses. 
Small wonder the IT services industry faces another shakeout, as flat markets become the battleground for a wide range of providers.

McKinsey forecasts that the winners (vendors) will be companies that reinvent their business models for an era when customers spend less, demand more and have an abundance of IT talent to carry out a larger share of the work in-house.

Many companies are simplifying their IT infrastructures and reducing overcapacity and related labor costs by consolidating heterogeneous systems. Another symptom of the cost cutting is the fact that many companies are automating administrative tasks to increase the workload that each IT staff member manages.

Many CIOs and leaders of business units are dissatisfied with the inconsistent results of large IT investments, especially for hugely expensive ERP, SCM and CRM installations. These executives now realize that many such applications are unlikely to deliver benefits unless companies also make basic and difficult changes in their business processes and in the way they work. 

Many CIOs question the value of long-term outsourcing as well. Some of those McKinsey spoke to believe that their outsourcers, rather than continually reducing operating costs to the best levels in their industries, merely fulfill the letter of contracts. In addition, many companies have learned to consolidate and standardize their infrastructure before outsourcing it, so it is harder for an outsourcer to offer substantial savings and make a profit for itself.

2. Offshore IT Services - Thriving 

Talent is now available offshore at even lower rates and at quality levels higher than those of typical U.S. providers. With low wages, higher productivity than is usual in the United States and task-oriented offers--as opposed to the sweeping large-scope value propositions put forward by many incumbents--offshore competitors are perfectly positioned for the new market. They are thriving. 
By using staff in low-wage countries such as India and China, companies can cut the cost of developing applications by 50 percent to 70 percent, even though roughly one-third of the work must still be done by more expensive domestic, or "onshore," labor at the customer's premises. Of the CIOs we interviewed, 21 percent had already tried offshore providers, with positive results. An additional 45 percent were planning to use offshore support or thinking about doing so. Only a few CIOs reported negative results. We believe that by 2005, more than half of all Fortune 500 enterprises will have some experience with offshore providers whose domestic competitors will thus increasingly be in the unenviable position of having to match offshore prices that don't even cover all of their present labor costs. 

The rocky road to recovery
IT services providers have reacted instinctively to these harsh pressures. Many of them are responding to waning sales by slashing their prices and by pushing all the harder to market their current services. CIOs report receiving offers of dramatic price reductions from longtime service providers and unsolicited offers from their competitors. 

Systems integrators and outsourcers will follow different routes to recovery, with some common elements. To meet the customers' new needs, providers will have to rethink their offers so that they deliver cheaper, more easily measured benefits. And to compete profitably with low-cost offshore providers, incumbent systems integrators and outsourcers will have to trim their costs by expanding offshore themselves.

With dwindling demand for large enterprise software packages and cutthroat competition for the remaining projects, systems integrators must transform their traditional megaproject model into one that customers are willing to pay for. Projects that have a relatively narrow scope, can deliver hard economic benefits quickly and don't require wholesale changes in the customers' business processes are the order of the day. Service providers must also be open to the idea of pricing their contracts in new ways, and sometimes, even, to guaranteeing the results of their work.

One of the most promising approaches may be to offer consolidation services, which help customers clean up their messy mix of applications--usually the result of undisciplined past customization. (One multinational company saved more than $400 million by consolidating upward of 250 slightly different versions of the same ERP application.) Such services could be provided either by systems integrators or by application software companies; customers will have to decide which is more valuable: the systems integrator's neutrality or the software vendor's deeper technical skills. A customer with redundant applications from more than one vendor, for example, may wish to have a neutral third party advise it on which application to choose as a standard.

It's cheaper offshore
For both integrators and outsourcers, keeping up with prevailing market prices for IT services means expanding offshore. Prices for typical systems-integration projects have dropped by 20 percent to 30 percent over the past 18 months and are likely to fall still further. One reason is that customers are getting more comfortable with offshore providers, which, given their low costs and high quality, constitute a serious threat to incumbent systems integrators. In fact, offshore competitors can already compete to install as much as half of all packaged software, and do four-fifths of the work of developing custom applications.

MobileInfo Comments and Advisory: Mobile infrastructure suppliers, application integrators and enterprises using their services could learn from these experiences and draw following conclusions from McKinsey analysis:

  1. Mobile projects must be result in productivity improvements that can be measured. Emphasis must be on ROI that must be quantifiable.
  2. Automating inefficient mobile business processes will produce only small benefits. End-to-end business processes must be reengineered to realize full potential of mobile computing applications based on wireless networks.   
  3. Unique mobile front-end interfaces can be designed for a variety of seemingly different applications by using a common application software. We call this concept VPA (Virtual Private Applications) on the same lines as VPNs. As an example, a municipality had 18 different maintenance systems that got consolidated into a single maintenance application under SAP. Only the front-end forms and backend database tables were different.
  4. Complexity of mobile computing projects can be reduced by retaining the backend applications that receive input from and provide output to both fixed networks and wireless networks by utilizing mobile middleware that acts as a broker between mobile users and the backend. Then we need to worry about developing front-end mobile applications and then connecting these to backend applications.
  5. While hosting of mobile applications through WASPs (wireless Application service providers) did not take off during the past few years, we think that outsourcing of mobile applications is a viable route that will get back into fashion as soon as these companies reach capability maturity model levels (we are talking about CMU's CMM levels) that are acceptable - level 4 or 5.

Do you have comments? Send us an e-mail.

 Note: This news release may contain forward-looking statements within the meaning of section 27A of the Securities Act of 1933 and section 21E of Securities Exchange act of 1934 in USA. Similar provisions exist in other countries. There is no assurance that the stipulated plans of vendors will be implemented. MobileInfo does not warrant the authenticity of the information. Readers should take appropriate caution in developing plans utilizing these products, services and technology architectures.  All trademarks used in this summary are the property of their respective owners.

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