Monday 11 June 2012

Time for burial – the TCO play has run its life – enter CVC

The dominant theme of the past two decades in IT and operations services spend has been to bring down the Total Cost of Ownership. The businesses were riddled by a plethora of operational inefficiencies ranging from sub-optimal business processes and automation to an ineffective and localized human capital supply chain. While the early adopters spotted and fixed this, largely within the last decade of the 20th century itself, the bulk of the folks got onto the bandwagon between the mid-90s to the middle of the last decade.
While there were a range of new products, services and solutions that came into the market, few focused beyond the TCO and cost optimization themes. Almost every large enterprise had their time, effort and money spent in implementation of ERP products, embarking on collaborative B2B and B2C commerce, et al. And all the while, as an aside, the cost of implementation was also being driven down through optimal sourcing leveraging the benefits of cost and labor arbitrage. Every conceivable component of ‘cost of ownership’ from people to infrastructure to application underlying the business process was optimized to achieve maximum TCO reduction. Make no mistake, this yielded some fantastic business results with actual annual budgets for many of these enterprise cost elements coming down anywhere between 10-30% and the cost of implementation anywhere between 20-50% depending on where each company was on the operational efficiency curve. Even the latest technology or service management trends being adopted like the cloud and shared services et al, merely redistribute the pie within the service providers and optimize the TCO for the buyers. Check the services spend numbers as a percentage of sales for organizations and as a percentage of GDP for the larger economy and you would know where this play is headed.
The TCO play, stark as it sounds, has run its life. It is, in fact, on life-support! The incremental benefits of this play and the effort and costs required to realize them, soon shall make no economic sense.
So what is in store? I deliberately used the preposition ‘few’ instead of ‘none’ when I referred to where, buyers and sellers alike, were focusing in the recent past. There are quite a few areas, for that matter, where technology or process investments have pushed boundaries for the business to be able to expand beyond its current boundaries. The ability to service a global consumer base 24x7 on voice or data is an example. The advent of the web as an alternative channel to take products and service to market is another. The ability to slice and dice enterprise-wide data and carry out data analysis and analytics hitherto not possible, is yet another. These are the areas where technology and operations spend has effectively ‘Contributed to Value Creation (CVC)’ for an enterprise, organization, and at a different magnitude of generalization, the world.
Again, be warned that this is a much tougher route to take. Not just because it is not a much trodden path, but also because the number of experiments and ideas that would actually translate into a viable business proposition would be dramatically lesser than the TCO play that everyone has been used to. Also, measuring CVC is not likely to be straightforward. This would mean, exactly determining the contribution of IT or process driven initiatives, to the business benefits and realized returns-on-investment by broadening the business horizon, will be much tougher than the TCO regime.
Yet, this is inevitable. This is what, in the next decade or more that unfolds, will deliver quantum benefits to the business, revive/sustain/grow business interest and investment mindshare in technology and process services. But most importantly, this will take the CIO and COO agenda of enterprises beyond budget and TCO management to the realm of driving business direction and creating business value, and the outsourcing players back to the heady days of hefty double-digit percentage growth.


Note: The views expressed here and in any of my posts are my personal views and not to be construed as being shared by any organization or group that I am or have been associated with presently or in the past.

No comments:

Post a Comment