What are the challenges for ICT markets? Interview with Ryszard Kluza and Łukasz Łacniak Comarch ICT experts

Over the past 20 years, IT outsourcing markets have undergone unprecedented change. Today, ICT innovation, work automation and cloud technologies, such as SaaS, PaaS and IaaS, are forcing companies to reassess their business strategies, operating models and risk frameworks. We present the interview by Malgorzata Zabieglińska - Product Manager ICT, with Ryszard Kluza - Director BU ICT Comarch, and Lukasz Lacniak - Business Solution Architect Comarch UK, who will present their findings, conclusions, forecasts and trends, that will influence the industry in the coming year.

Małgorzata Zabieglińska: Outsourcing has revolutionized the way businesses operate today. Outsourcing strategy is evolving rapidly with changing business dynamics. The latest IT trends, like work automation and cloud technologies, will certainly affect the IT outsourcing industry in 2017 as well. So where will the main accents of IT outsourcing trends be placed in the near future? Based on your own experience, what is the best option for outsourcing, client nearshoring vs offshoring vs (other options) of IT services? In particular, why and when does nearshoring make sense when compared with other options?

Łukasz Łacniak: Let's start with the actual definition of what nearshoring is and how it differs from offshoring, as these are the options you have when considering whether to outsource some of your company’s operations. So it is, as one may suspect, about location. The closer your outsourcing partner is located to you, the closer the services are to the nearshoring definition. But this is obviously not the selling point of any of these two options. It is all about considering service cost vs other factors, like cultural affinity/similarity, the advantage of having your service provided from a similar time zone and, last but not least, a skill-set that is, on average, different in typical nearshoring and offshoring locations. For some workloads, offshoring might be the best option, but for others, and IT managed services are among them, nearshoring is, I believe, the better option.

Ryszard Kluza: With the increase in Internet connection speed and the limitation of delays in transmitting data, the IT world has shrunk considerably. This has led to a rapid growth in offshoring services. All sorts of simple monitoring services, customer service, service desks and repetitive operations have been outsourced to countries in which manpower is relatively competitive in relation to the rates for MD in the west. This trend emerged in about 2000. At present, we are witnessing a reverse trend, that is, a return of this kind of service to countries of similar culture, which means we can observe a growth in nearshoring services. Despite lower services costs in Asian countries, customers prioritize higher quality, familiar culture and better understanding of the issue. They choose to contact an engineer e.g. from Eastern Europe.

Łukasz Łacniak: So most of you have already noticed an obvious and continuous trend that is very significant for probably most companies. I mean the trend of cutting costs. This is rather simple. From the point of view of the decision maker, here I mean mainly CIOs, they would mainly like to lower costs but, at the same time, maintain the same value, quality and SLA. Or even increase them. There is another obvious trend and hype around cloud services and, in my opinion, there are basically two ways to move forward – of course, generally speaking. One is to stay where you are with your IT services and try to negotiate the prices by, for example, lowering quality, SLA, risk requirement etc. but, of course, we do not want that. The second way would be the aforementioned nearshoring – so transferring your ICT services to another country which is characterized by lower labor costs while offering similar or better service quality. What is also important in the nearshoring approach is that you benefit from the same culture, understandable law and regulations, proximity of the country – it is so much faster and easier to travel from London to Poland or Romania than it is to Vietnam.

Ryszard Kluza: All of this leads to a clear growth in BPO services e.g. Cracow is 9th in Tholons Top100 Outsourcing Destinations 2016 ¹. From the point of view of a BU Comarch ICT manager, this trend is also very optimistic because it entails a growth in demand for our services for foreign customers from Western Europe or the US.

Małgorzata Zabieglińska: Companies looking for savings but worried about the risks and cultural barriers connected to traditional offshoring could benefit from nearshoring. However, nobody is talking about where to start searching and how to select the best nearshoring partner. What are the best options for your business and how are these different options/locations perceived/ranked by Gartner and similar companies?

Łukasz Łacniak: Obviously, it depends on your company’s geographic and business center of gravity. If it’s Europe, let’s say you’ve got your business in Belgium, then Eastern Europe could be a good place to start such a challenge. For companies from the United States, most likely it will be Latin America. You see the pattern. So why Eastern Europe? Let’s look into the hourly labor cost in the European Union. There is still a clear advantage there over the west. In addition, law regulations concerning employment there are much less strict than in western countries. And, of course, the quality of education in Eastern Europe is well known for its high standard of education in terms of technical and computer science. Comarch is a great example of a company that is strongly tied to local universities. Every year there are hundreds of new interns coming and working/learning for a few months by fighting with real life projects and tasks. And for many of them it is then their first real job and employer. A great opportunity for young people, and a great advantage for the company.

Małgorzata Zabieglińska: Cloud computing has proven to be one of the great disruptive technologies of our time, and has become the next trendsetter for the outsourcing market over the last years. While reading publications on cloud computing, we see that thanks to cloud technologies and others ICT trends, such as mobility, IoT, and big data, business has more and better information, allowing companies to make smarter decisions. How have cloud services really impacted businesses today and how can they help contribute to business growth?

Ryszard Kluza: The first news about the so-called “Cloud” came in about 2008. Back then it was some sort of novelty, a curiosity. Most large IT companies claimed that they had or initiated their own cloud computing services. With time there were more and more details about this type of service. There were also reports made by analytical enterprises which described, among others, how many enterprises used the “Cloud” and what the trends and anticipations for the years to come were. Every large manufacturer offered its own cloud solutions and tried to convince customers to buy its technology. No matter if we like it or not, the so-called “cloud services” are now commonly available. Importantly, it looks like in certain IT areas, such as developer systems, backup, e-mail, storage of pictures, etc., cloud computing is a clear leader in the market. Certainly not all enterprises are willing to send, particularly the so-called “mission critical systems”, their systems to the cloud and still choose to manage them in a traditional way. However, the impact of such solutions on business is considerable.

Cloud computing services are popular mainly thanks to their extreme flexibility, which means it is actually unnecessary to invest in one’s own platform. Another important thing is the option called “pay as you grow”, which means that you can pay according to your use. By having a dedicated IT platform, it is difficult to use all of its features. Thanks to placing systems in the so-called cloud, this issue is minimized. The aforesaid flexibility guarantees considerable optimization of costs in the enterprise which uses exactly the amount of computing power and period required to have a business profit. It is no longer necessary to invest means in the IT platform, while the saved funds can be dedicated to the development of products and services.

I assume a clear development of various cloud computing services. I do not mean a provider of a pure cloud in the so-called IasS model, but diverse applications which operate in the cloud. In my opinion, we are about to witness a change in the IT service model, that is, the current model in which customers expect adaptation of the solution to their needs will change into a completely different approach, a more open approach. Companies will monitor the solutions which are standard in the IT service market and will adapt to them by training their own resources and adapting to standards in the cloud services market. This will result in a substantial reduction of turnkey application purchases with expensive licenses replaced by so-called monthly fees. Customers will pay a periodic fee for a standard cloud solution, will have to adapt their own teams to the solution, but, in return, will not need to incur considerable investment expenses. All of this will lead to a rapid growth in demand for ICT service management in the cloud, since someone has to manage these environments in order to make sure the quality of the services performed for the enterprise is not reduced and make sure that this enterprise is able to pursue its basic business activities.

Małgorzata Zabieglińska: For most organizations, the question is no longer whether it is appropriate to adopt cloud, but when is the right time and what kind of service model to choose; SaaS vs the rest (IaaS, hosting, on premise). What are the pros/cons of going SaaS vs more traditional/diversified approaches with different app and infrastructure providers and often with the infrastructure provider being an internal IT dep?

Łukasz Łacniak: Well, one might think it’s lower cost and easier/quicker implementation, flexibility and so on. But there are still so many enterprise systems not yet cloud ready. Cloud infrastructure, which by definition is not designed to be reliable, isn't really best fit for legacy applications. Attempts to ensure the high availability and business continuity of such applications in the cloud may prove to be not possible at all. And there is still a niche for traditional hosting/private cloud providers there. What is often overlooked, but shouldn’t be underestimated, is the overall project risk seen from the buyer’s perspective. There is so much less exposure to various implementation and operational risks when there is only one vertically integrated party responsible for the service from top to bottom. Often that's even more important than the potential cost advantage of a more diversified model with many layers of service providers.

Małgorzata Zabieglińska: Cloud technologies are great, but there are a number of factors to consider to determine if public, private or hybrid cloud services make the most sense for you. Or should you avoid the cloud entirely? What should I take into account when choosing private, public or hybrid cloud? Should I choose smaller companies/challengers instead of 1st league players like Amazon, the king of the jungle? Does it make sense to go hybrid? Is there even a chance for smaller/newer players/telco operators, cloud wannabes/traditional on prem IT depts., to catch up with these huge cloud companies?

Łukasz Łacniak: OK, let’s start with what is important. It looks like we are going to see much more cloud computing in the next few years. That’s an obvious trend. However, I recall that only a few years ago you could easily find opinions that cloud will be gone in one or two years. So that’s an interesting development. Large enterprises from basically every industry are transitioning their entire infrastructure and data ecosystems into the cloud. Companies from even the most traditional and change-resistant sectors are adopting this new model of service delivery. Now, between 60 and 80% of respondents say that cloud services is the way to go and use cloud for at least one mission-critical application.

What is my experience with the cloud? It can definitely confirm that trend as well. Comarch is, first and foremost, a software house. And we used to provide it in a traditional way, which was license and maybe some support/maintenance/implementation/integration stuff on top. And now, probably 95% is sold in the Cloud model (SaaS). So back to your question - for now hybrid cloud, so a mix of public and on premise cloud, seems to be the tactical answer. But is it really the long-term answer? I'd say it will be a similar story to hybrid cars. They were there and are still there, and are efficient and so on, but you can clearly see the drawbacks when compared with fully electric Tesla S. Big players are possibly too far ahead of the smaller competition to let them catch up anytime soon. But there are issues like security and privacy. And since I started my journey in IT, I've been told many times that the best partner is one of similar size. So one could ask if the best cloud partner for a medium-sized manufacturer's IT department is a company currently bigger than Apple, right?

Małgorzata Zabieglińska: I wonder if there is still space for traditional/smaller/independent data center providers (colo, traditional hosting etc) in the market?

Ryszard Kluza: The data center services market is centralizing; this is a result of advancing business globalization. From the point of view of the final users, it does not matter if they connect to the systems hosted in the office in which they work or to a server located in another place in the world. What is crucial is the delay in data transmission, if this factor is negligible – the user cannot see any difference, it does not affect the use of a specific application. Faster and faster Internet connections with increased bandwidth serve to foster globalization and the centralization of data center services. What is more, CDN – Content Delivery Network – services available in the market and able to cache data and disclose them to users in order to minimize delays have a significant influence on this trend. Of course, there are local regulations which force providers to have physical data centers in a specific country/region, but it is not an obstacle to large global providers. Due to these elements, the market is shrinking for single players who render simple colocation-type services. Enterprises operating around the world and providing advanced Managed Services are more willing to choose a global provider as it guarantees faster activation of their own services in various continents, where managed systems are located in server rooms situated e.g. in Europe, America or Asia.
Łukasz Łacniak: I think there is, because of the very reasons mentioned earlier. Colocation and even traditional on premise IT is going to be around for quite some time, as there is still so much legacy around. Cloud native apps are still only a few percent of the total app landscape. Looking at the topic from another angle: there is quite a lot of uncertainty in the market because of recent developments in the UK and USA. Imagine you have your business in the UK, but you process sensitive data of your European clients. It might be that the only way to stay compliant with EU law will be to move your entire DC to the EU. The colocation option makes much more sense than investing in a new and shiny data center in such a context. Another point - there is the emerging trend of edge data centers – the concept of running not just one or two central Dcs, but of spreading your workload among smaller locations, but closer to the consumer. That's another opportunity for emerging players.

Outsourcing, nearshoring, cloud, data center, these are topics for a never-ending conversation. At the very end, I would like to ask for your opinion on ICT trends in the coming year. If you had to predict one breakthrough or technology that will dominate the ICT market in 2017, what would it be?

Łukasz Łacniak: In 2017, I put my money on cloud management, particularly cloud vendor management and cloud cost containment. I expect AI and automation technologies to dominate the ICT market, but maybe not just yet in 2017.

¹ http://www.tholons.com/TholonsTop100/pdf/Tholons_Top_100_2016_Executive_Summary_and_Rankings.pdf

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