IT Executive Insight June 11, 2010

On-Demand Sourcing: Driving Costs Down and Value Up

in a Period of Increased Business Volatility
Management Issue For Current Members of Hackett Executive Advisory Programs

By Tony Chauhan and Honorio J. Padrón III

Executive Summary
A recent study by The Hackett Group reveals that a new type of IT organization is
emerging in the wake of the recession: one that has minimized fixed-cost compo-
nents in favor of on-demand strategies and processes that enable cost variability.
The objective is to position businesses to both capitalize on opportunities and
minimize risks inherent in today’s high-volatility economic environment. This
can be accomplished by exploiting new Service Delivery Models that help increase
business capability (e.g., faster response time). Effective strategies link business
performance with IT-driven initiatives, responsiveness and the costs of service
delivery, transforming the IT function into a valued business partner. This con-
trasts sharply with traditional, one-dimensional strategies focused mostly on just
cutting IT costs.

The Case for Creating Core Capability in Today’s Volatile

Business Conditions
IT costs have traditionally been fixed and capital-intensive. This characteristic
frustrates capacity changes, both in labor and assets, when business demand var-
ies but service quality needs to remain consistent. Unfortunately, the fragile eco-
nomic recovery underway makes efforts to predict business demand riskier than
ever. The situation is compounded by the increasing competitiveness of emerging
economies, which are projected to have higher growth rates than Western coun-
tries in the recession’s aftermath (Fig. 1). As a result, there is a great deal of uncer-
tainty as to whether customer and service demand will ever return to pre-recession
levels in the West.
FIG. 1 Average estimated annual GDP growth projection by region, 2010-2012

7.9%

3.2%
2.5%
1.7%

North America Latin America EMEA Asia-Pacific

Source: IMF, World Economic Outlook, November 2009

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© 2010 The Hackett Group, Inc.; All Rights Reserved
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 Translated, this means that fluctuations in IT costs and capacity are here to stay,
and that the old capital-intensive, long-cycle approach does not fit today’s volatile
environment. Therefore companies must exploit emerging flexible IT Service
Delivery Models to fully exploit the benefits of globalization, gain market share
and decrease time-to-market. On the expense side, companies must inject stabil-
ity into their operations to give stakeholders confidence about their ability to
maintain margins and performance. On the revenue side, volatility will benefit
those who can deliver on their promises in rising as well as falling markets.
Findings from The Hackett Group’s 2009 IT Agility Performance Study reveal a
new class of IT organization. Top performers in this group (that is, those whose
results place them in the top quartile of study participants) are embracing game-
changing practices that allow greater capacity and cost variability in an effort to
deal with today’s “new normal” conditions.
Hackett defines IT agility as the capability of IT organizations to anticipate and
respond to business change and maintain the IT cost within 15% of the revenue
change. Whether the change is predictable or not (i.e., a planned product launch or
environmental disaster), the ability to support the enterprise in meeting challenges
is the hallmark of agile IT organizations. To achieve this state, IT organizations must
consider using all commercially available strategies.
One option involves the maturing “cloud computing” landscape, which is facili-
tating the growing importance of “on-demand” sourcing. It is becoming very clear
that this cloud strategy needs to be a key component in any holistic IT service
delivery capability.

On-demand sourcing facilitates scalability

On-demand sourcing is quickly becoming the most important technology and
sourcing-related agility enabler. In addition, it allows companies to increase the
pace of consolidation or divestiture, modernization and standardization of pro-
cesses and systems (Fig. 2).

FIG. 2 Percent of companies that always achieve agility targets for

acquisitions and divestitures, 2009
80%

60%

25%

0%

Acquired technology platforms and Divested or spin-off technology

IT organization integration performance migration performance

PEER GROUP TOP PERFORMERS

Source: The Hackett Group IT Agility Study, 2009

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 Creating Effective Strategies for Managing Business
Volatility
The most successful strategies for improving IT flexibility involve combining ini-
tiatives that holistically consider all aspects of the Service Delivery Model (SDM)
for IT: service placement, process sourcing, process design, enabling technology,
skills and talent, organization, and governance.
On-demand services offer increased flexibility in process sourcing by allowing
IT organizations to make scalable a significant proportion of the technology that
underpins services and potentially move it onto a cost-per-unit basis. Various silo
strategies are currently being pursued (Fig. 3). However, by combining technology
virtualization with service oriented architecture (SOA), for example, to deliver a
more agile IT service stack, IT can better link its SDM improvement initiatives
to business performance improvement and make the most of investments and
resources.

FIG. 3 Percent of companies ranking technology strategies as “highly effective,” 2009

77% 80%

40%
33%
30%
25%
20% 20%

Adoption of open Application architecture Software infrastructure Technical infrastructure

technology standards innovation (e.g., SOA, innovation (e.g., BPM engines, virtualization
Web-based architecture) integration middleware) (e.g., storage, servers)

PEER GROUP TOP PERFORMERS

Source: The Hackett Group IT Agility Study, 2009

In addition, this service objective implies that organizations can decide which
strategies best suit the needs of individual services, rather than applying the same
solution to all IT operations. Regulation, demand volumes, number of end-users
and upgrade frequency can all be factored in when deciding how agile a service
needs to be and therefore what combination of strategies to use.
The study results suggest that achieving IT agility requires organizations to reduce
the constraints that large, fixed-cost asset bases impose by improving IT sourcing
capability. In the same vein, inflexible contracts that make it difficult or impos-
sible to adjust capacity and work scope are detrimental to IT agility.

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 For maximum effectiveness, the ability to access cloud computing models for
enhancing the overall SDM should underpin combinations, as opposed to one-
dimensional, technology-specific strategies (Fig. 4). This allows organizations to
manage pricing and risk by optimizing application, license and infrastructure own-
ership. Gaining scale and volume-based pricing in application and infrastructure
bundles provides an integrated (and thus lower-risk) approach to enabling IT agility.

FIG. 4 Percent of companies ranking IT sourcing strategies as “highly effective,” 2009

67% 67%

50% 50%
40%
33% 33% 33%
25% 25% 25%
17%
9% 9%

Application Technology On-demand "On-demand" Business Replace Offshoring

management infrastructure infrastructure application process permanent IT
outsourcing outsourcing sourcing sourcing outsourcing staff with
(e.g., cloud (e.g., SaaS) contractors
computing)
PEER GROUP TOP PERFORMERS

Source: The Hackett Group IT Agility Study, 2009

One can reasonably conclude that on-demand solutions should be part of a

wider strategy that allows IT to have a direct impact on business performance.
Individual solutions such as IaaS or PaaS provide technology performance
improvements that benefit the expense line. Implementing a wider strategy
involving bundled solutions capitalizes on the significantly greater benefits avail-
able on the revenue line from successfully supporting business processes that are
continually expanding and contracting.

Strategic Implications
We believe that the highly unsettled conditions that characterize the economic
climate today will never fully abate. Therefore scalable, pay-for-use systems are
favored over inflexible, fixed-cost, capital-intensive technology. Companies would
be wise to redesign their traditional IT environment and embrace on-demand
strategies that support variability in cost and capacity in their services as well as
their technology. The objective should be to increase business capability, such as
accelerating time-to-market or increasing global reach.
IT can play a greater role in margin protection by being able to both downsize the
cost base without harming service quality and scale up quickly to exploit market
opportunities as they arise. As such, creating a core capability of increased operat-
ing flexibility makes a significant contribution that finally lifts IT’s role to that of
a highly valued business partner rather than an inescapable “overhead.”

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About The
Hackett Group
The Hackett Group, a global strate-
gic advisory firm, is a leader in best
practice implementation, advisory,
benchmarking, and transformation
consulting services, including shared
services, offshoring and outsourcing
advice. Utilizing best practices and
implementation insights from more
than 4,000 benchmarking engage-
ments, executives use Hackett’s
empirically based approach to quickly
define and prioritize initiatives to enable
world-class performance. Through
its REL brand, Hackett offers working
capital solutions focused on delivering
significant cash flow improvements.
Through its Hackett Technology Solu-
tions group, Hackett offers business
application consulting services that
helps maximize returns on IT invest-
ments. Hackett has worked with 2,700
major corporations and government
agencies, including 97% of the Dow
Jones Industrials, 73% of the Fortune
100, 73% of the DAX 30 and 45% of
the FTSE 100.
Founded in 1991, The Hackett Group
was acquired by Answerthink, which
was renamed The Hackett Group in
2008. The Hackett Group has global
offices in the United States, Europe,
Australia and India and is publicly
traded on the NASDAQ as HCKT.
The Hackett Group
Email: info@thehackettgroup.com
Atlanta +1 770 225 3600
London +44 20 7398 9100
www.thehackettgroup.com
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Paris • Amsterdam
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© 2010 The Hackett Group, Inc.; All Rights Reserved
Related Hackett Research
“What’s on the CIO’s Mind: IT Key Issues in 2010,” January 2010
“From the CIO’s Office: Dealing with Today’s IT Service Delivery Challenges,”
February 2009
About the Advisors
Tony Chauhan
Senior Research Director, IT Executive Advisory Program, The Hackett Group
Mr. Chauhan has more than a decade of IT strategy and transformation
consulting experience, including business model and value proposi-
tion formulation, product launch, post-merger integration activities
and turnarounds. He has extensive experience working in the life sci-
ences, manufacturing and financial services industries. Before joining The Hackett
Group, he worked for four years at a global financial services company, where he
built and led the strategy team for technology, sourcing, capability and service
development. Mr. Chauhan also spent 10 years with ICI/Zeneca in a variety of
roles ranging from engineer to business operations manager.
Honorio J. Padrón III
Principal and Global Practice Leader, IT Executive Advisory
Mr. Padrón’s career spans 35 years in business and technology manage-
ment, enterprise business transformation, shared services, outsourc-
ing, and customer experience engineering. He is an expert in all facets
of enterprise Service Delivery Strategy, design and implementation.
He has held senior executive positions at a number of Fortune 500 corpora-
tions, including CEO of Exelon’s Business Services Company Inc.; CIO and
SVP at Exelon Corporation; CIO and EVP of CompUSA; CIO and SVP of
PepsiCo Restaurant Group; and Head of Global Reengineering for Burger King
Corporation. His government experience includes various program management
roles at NASA Kennedy Space Center. CIO Magazine named Mr. Padrón as one of
its “Top 100 CIOs” and RetailTech as one of its “Top 10 CIOs.” He is the recipi-
ent of a Computerworld Smithsonian Award for CRM innovation and a Contract
Design Award from the Outsourcing Institute. Mr. Padrón is a contributing
author of e-Enterprise, The Alignment Effect and Winning the 3-Legged Race: When
Business & Technology Run Together.
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