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Gartner: Industrialized low-cost IT services to transform IT services market

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Chief information officers (CIOs) should consider adopting industrialized, low-cost IT services (ILCS) to reduce the cost of “running the business,” while controlling the risk, integration and customization issues, to increase the business value of IT and enhance its perception by the business, according to Gartner, Inc. CIOs said that delivering differentiation and additional business value, while reducing the cost of IT will be their business and IT priorities, according to the Gartner Executive Program (EXP) 2011 CIO agenda survey.

“While there are multiple ways to reduce the cost of IT delivery, as well as to increase the value of IT, the trend towards ILCS will become paramount for end users to trade nonessential customization for better and less expensive services,” says Claudio Da Rold, vice president and distinguished analyst at Gartner. Gartner predicts that despite being an embryonic market, by 2015 industrialized services will represent more than 30 percent of the IT services market and cloud services are expected to become a $177 billion market by 2015, of which $77 billion is based on advertising business models.

ILCS as managed, multitenant, ready-to-use IT services (infrastructure, applications or business processes) are designed and offered as no-frills services with optional add-ons. Implemented as standardized, automated, configurable and scalable services, their entry-level price – expressed as price per user per month or price per unit per month (PUPM) – is very low and attracts a high number of prospects. The combination of industrialization and cloud computing has significant potential to deliver ILCS.

A historical analysis of IT services pricing showed that organizations tolerate high IT usage costs, for an activity, capability, deliverable or outcome, only if there are no alternatives. Now, thanks to new delivery models, industrialized services and cloud computing, Gartner analysts see increasing numbers of low-cost offerings in which the price of specific unit of function (such as email or software as a service) is instead measured in PUPM (per user or per unit, per month).

Gartner has evaluated clients’ cost levels and estimated prices for industrialized low-cost services. It found that an e-mail configured as ILCS should realistically be about $6 PUPM and is today approximately $8 to $10 PUPM, and entry-level offerings are advertised today at $3 to $4. With the e-mail market in flux and the price of traditional in-house/hosted/outsourced mail under pressure by the lower price of cloud e-mail available in the market, the -mail service is an area in which clear signals of industrialization and low price points are emerging.

Another example includes the use of the infrastructure utility for SAP (IU4SAP). IU4SAP is an outsourced platform that runs often highly customized clients in SAP application environments. Built on industrial principles (standardization, virtualization, automation) these offerings provide good service quality at low price points. This represents one of the earlier, and, so far, the most important cases of ILCS for business-critical and core functions and should realistically be delivered for around $17 PUPM.

While the price of ILCS offerings be can much lower than internal costs, the total cost of ownership of ILCS can be higher, depending on retained costs such as transition, customization, integration and risk management. Despite this, there are some early IUS and cloud-based solutions that were successfully evaluated, selected and implemented and promise much for the future of ILCS solutions.

“Not all corporate IT will be delivered through ILCS and many ‘good-enough’ services will remain in-house,” says Frank Ridder, research vice president at Gartner. “However, industrialized services represent the destiny of the IT services industry. They are, in fact, the next step in outsourcing and managed-service provision, and they span all layers of the IT services value chain: infrastructure, applications and business processes. Overall, we believe that, from a pricing perspective, the IT services industry is where the airline industry was in 2000. It is ready to be transformed – and disrupted – by an ILCS model.”

For additional information, see the Gartner Special report “Riding the Wave of Industrialized Low-Cost IT Services (ILCS)” available on Gartner’s website at http://www.gartner.com/resId=1801014.

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