Eric Hanselman

Welcome to Next in Tech, an S&P Global Market Intelligence podcast with a world of emerging tech lives. I'm your host, Eric Hanselman, Principal Research Analyst for the 451 Research arm of S&P Global Market Intelligence. And today, we will be discussing technology services with Dr. Katy Ring, a Senior Research Analyst, as part of our infrastructure, IoT and DevOps team. Katy, welcome to the podcast.

Katy Ring

It's a pleasure to be here, Eric.

We've seen a lot of data, and 1 of things we've been talking about in a number of the recent episodes is a lot of the focus organizations are giving to digital transformation and how they're looking to try and become more digitized.

But as they're looking to tackle more complex aspects of digital transformation, how's the role of technology services changing? You've been doing a lot of research in that area. And curious how you see -- what's 1 of these things that I think a lot of organizations have been pondering how to deal with skills gaps? And a lot of the more thornier issues in terms of moving towards a lot of these next-stage technology initiatives.

Katy Ring

Absolutely right. Obviously, technology service vendors have been responding to the requirements of enterprises, who need support for their digital transformation projects for probably a decade or more now. But I think it took Technology Services a couple of years to understand that in order to support enterprises undertaking big transformation projects, it requires more than just standing up practices and recruiting staff and training staff in new technology areas like cloud services or big data or machine learning, Internet of Things and so on.

And that actually, the very nature of the way that projects are undertaken, changes the varying business models that the technology service vendors have developed over time. And so they've all been undergoing a big transformation themselves in their efforts to help their clients move towards a more digital future. And of course, that's been accelerated greatly over the past couple of years as we've all been surviving. And in some cases, it's flourishing during the pandemic, enabling remote working, improving worker safety, trying to ensure that our customers are still happy with the services they're getting as they move to interact with us using different channels and so on. So it's been a big area of change for the vendors as much as it has been for the enterprises themselves.

Eric Hanselman

So transformation is transforming those who would be the transformers of those wanting to be transformed. It sounds like it's really working both sides of that equation.

Katy Ring

Absolutely.

Eric Hanselman

I'm curious what -- in terms of that shift what are the aspects of the changes in business models for technology services companies?

Katy Ring

Well, if you think of the way that the technology services market used to operate, you had a range of different types of service providers on a spectrum from the consultancies at 1 end, would also include the strategic and management consultancies and their technology service arms, the system integrators, both at a global and a regional level, who would implement new systems, integrate them with existing systems, migrate data and so on. And then you have the outsourcers and the managed service providers, who would take over the running and management of those systems once they were stable for clients.

But that kind of siloed use of different vendors for different parts of a waterfall-like type project has, of course, been completely blown out of the water by the arrival of cloud-native development techniques, the mainstream adoption of hyperscaler platforms and so on. And so consequently, the technology service vendors themselves have had to move away from their traditional models. Consultancies no longer can simply come in and brainstorm a new way of applying technology to deliver a business outcome using Excel and PowerPoint because in order to design a service, that design needs to be data-driven and incorporate large amounts of data and be responsive to ongoing feedback from systems.

And so consequently, the consultancies are having to get more hands on and move into the deployment of systems and the management of systems. Meanwhile, offshore providers cannot simply be used to take a specification for software development, build something and then throw it back to the client because of this continuous service delivery wheel that's required in the age of digital transformation because you need that constant feedback loop that's data-driven.

And so all these different vendors are now having to work out how to change their business models so that they can work from the design -- front-end design capability through to the implementation of the system and the running of the system and keep that information coming throughout the entire loop. And of course, that changes the way that their businesses are operating and the different types of skills and capabilities that they need in order to work effectively with enterprise clients.

Eric Hanselman

Well, this -- you're really getting back to the point that Jean Atelsek and Jay Lyman were making when we were talking about continuous integration, continuous development or continuous deployment kinds of environments in that sort of DevOps cycle, which is the fact that what transformation is really supposed to be doing is changing the mindset. And yet what's happened is that technology services companies have actually had to go through that mindset change and the structural aspects that come with it and really changing their business so that it is that level of much more DevOpsy-style integration in order to be able to move towards digitization. So it's not only changing their business but changing their business in support of the way in which they're hoping to change their customers' business.

Katy Ring

Absolutely. And the main way that all these different types of vendors are doing this or making the shift is to move to a platform broad professional service business, where they have created internally their own digital business architecture as the engine to support consistent development, delivery and operation of the services they offer. And doing this, they've created their own sort of platform of platforms approach. So they work with the platforms that are delivered by the hyperscalers that are used by many customer enterprises.

But they've surrounded that capability with their own architecture that takes advantage of containers, micro services, and so on and are able then to use the data that the client enterprise has and adds their own data sets to that as well as applying templates and accelerators often created to support a particular vertical sector or subsector within a vertical industry. So that there's a mix of commercially available components that they use in the architecture as well as their own proprietary IP that helps them work at speed with the client to deliver the outcomes that the clients looking for from the transformation project.

Eric Hanselman

It seems like last year, a lot of times we were talking about infrastructure, all conversations led to the Edge. I think we've gotten to the end of last year and clearly where we're headed, I think, this year, is that all conversations about digital transformation seem to be leading towards platforms. And I think the thing that Jean and Jay were talking about was the shift upwards in terms of levels of abstraction, I think the point that you've made is right smack dab in the middle of this, which is that you're talking about technology services companies that are actually leveraging abstractions that can help to bring together the various cloud platforms, all the other bits and pieces that are necessary to pull together under this larger umbrella.

But when you're saying platforms are platforms, you're taking this next step up in terms of abstraction and it's the platform that starts to bring it. But it sounds like the thing they're leading with is taking a lot of that industry vertical expertise that they've got and rolling that into the platform capabilities.

Katy Ring

Yes, absolutely. That's correct. Because the 1 thing that these technology service vendors are not trying to do is go and sell a platform to an enterprise. What they're endeavoring to do is harness their platform approach so that they can work in a more digitally intuitive way with the enterprise clients, building custom solutions for those clients because that is still, at the end of the day, what Technology Services is primarily about. And so to do this, they have had to develop their own obstructions, you're right, but also being able to reuse some components and reuse some of the learnings from different projects so that they are in a position to help enterprises move more quickly to the outcome they're looking for then the enterprise themselves could do without that proprietary IP.

Eric Hanselman

Yes. And hopefully, they've got the ability to operate at scale and to be able to build that kind of platform capability in ways that can be easily replicated across clients. So they've -- they can do the thing that tech services companies always need to do, which is be able to operate at scale to gain some level of efficiency.

Katy Ring

Absolutely. But I think 1 of the challenges here is that it's a nice sales and marketing story. And I think many conversations start out discussing the use of usable components, which there are, to some degree. But actually, the more involved that the technology service vendor gets in terms of the digital transformation project the enterprise is endeavoring to complete the more custom requirements there are. And so consequently, technology service vendors, I think for a few years, were a bit caught out because they believed that the market was going towards this very standardized approach to services.

And while there is a level of that, which can be incorporated into the types of architectures, these vendors are building to support their professional services. At the end of the day, I feel we should never forget that most enterprises do want to develop something that's specific to them and their business requirements.

Eric Hanselman

Well, to your point, really what the whole process of digital transformation is all about is building the business around the data, but fundamentally, that has to be driven by the nature of the business, which hopefully is always going to be relatively unique.

Katy Ring

Absolutely.

Eric Hanselman

We talked about industry verticals, but there are also technology aspects that start to roll into this. And you mentioned the Internet of Things earlier. Is that scenario in which we take a look at a lot of the voice, the enterprise data, there are significant skills gaps and capacity gaps in terms of IoT capabilities, an area that's challenging for organizations that are looking to put the benefits of IoT to work for them. What are services partners doing in IoT?

Katy Ring

Well, to begin with, IoT is a fascinating advanced technology area when it comes to discussing the role of the technology service vendor because it is an area that is very complex, as you say, but it is also an advanced technology area where most enterprises understand that they need external third-party help in bringing their projects to successful conclusion.

So for example, we know from our data that around 2/3 of enterprises that are undertaking a digital transformation project that is highly enabled by Internet of Things technology, use an external technology services vendor to work with. But that's not the same for all the advanced technology areas. So we also know from my partner teams working in AI and machine learning that the use of external technology service vendors for those types of projects is much lower, about 20%, 25%. So this is clearly an area where enterprises understand they need help. And where the service vendors themselves are building up their capabilities to respond to that.

One of the big problems there is for enterprises looking to take advantage of IoT is that they get the go ahead to conduct a pilot, which is perfectly standard. If you have a new technology, you want to assess that technologies capabilities and try out different ways of applying it within your organization. But the big challenge we have in the IoT area specifically is that a lot of companies, more than half struggle with moving those projects from pilot to production level.

And the 2 main reasons that we are given for this pilot purgatory and the data that we gather is to do with the technology and the IT skills gap that you mentioned earlier. So there's a big commitment in terms of moving to production scale with IoT in terms of investing in infrastructure. And there's also a whole range of different skill sets that need to come into play, spanning from cloud services to the implementation and management of Edge platforms to understanding how best to collect the data from the Edge and to filter out the noise so that you can recognize a signal. So that the analytics models are actually providing something that's useful back to the organization. And then, of course, there's also a big concern over a lack of cybersecurity skills to ensure that this highly proprietary data is saying safe and secure.

Eric Hanselman

Yes. It's actually something, I'll preview the next episode, Ian Hughes is going to be on talking about industrial IoT and the points you're making about data and particularly about managing the data process itself, ensuring that the data that you have is solid, a lot of that data cleansing process, key parts of being able to pick all that up. But I think you've hit on what I think is a wonderful term, the pilot purgatory. How do organizations escape from pilot purgatory? And that's -- isn't that 1 of the bigger challenges that enterprises face in so many technology transitions?

Katy Ring

Absolutely, it definitely is. And there's a whole range of issues. I mean we've touched on the need to invest in infrastructure. I mentioned that some of the skill sets that enterprises know that they lack capability in. But there are also other issues that softer issues, if you like, that come into play in moving a project using IoT technology into production. One of the issues, actually, I mean, I've had many people tell me, "Oh, isn't it because the project is led by a small internal team and there isn't the buy-in from general stakeholders. And once you get a Board-level approval and a Board-level leadership, you can power through and move to production.

But actually, it's not a straightforward just that. It is true that if a project is championed by a very small team that hasn't built the network and relationships and bought in the agreement of a broad range of stakeholders, it's not going to be successful in moving to production. But what we're equally finding is that projects that are led at a vague level by board-level approval tend to be too wide in their business goals. So you hear organizations saying they're going to invest in IoT because it will save labor costs because it's going to help them with the reduction of carbon emissions because it's going to improve worker safety and so on and so on and so on. So you end up with a list of 5 or 6 key issues that IoT is going to address.

And of course, if you're attempting to create a pilot that can be seem to be successful and to produce a return on investment those -- having those multiple factors involved make it very difficult to prove the case. And so this is another reason why some of these projects are failing. But when we asked the minority of organizations that are managing to move their projects from the proof-of-concept stage to production level. We find some things that you would expect to find that these organizations have been using IoT for a little bit longer. So they have a little bit more experience. They're more aware of the skills that they're lacking and they have had the time to move up the maturity curve.

So that comes with experience. And so that's not something you can necessarily position as the way to crack the pilot purgatory problem. But one of the insights that did come out of talking to these companies is that they seem to have a different relationship with their technology service vendors. They see these vendors much more as strategic partners. They know exactly which skills they need those partners to have. And they are also looking to work with those partners to build that experience up internally and to create an ongoing partnership, which means that they -- as part of the relationship with that vendor, they're looking to improve their maturity and their internal experience as the partner helps them move to production. So it's a slightly different mindset in the way that they work with vendors and the positioning they give to those vendors within the status of the project.

Eric Hanselman

So a mindset change not only in the way they expect to operate, but the way in which they expect to work with their service providers. And I thought it was interesting that you're identifying, they expect to learn from their service providers. And that, again, is a much more fundamental change in those expectations of how those relationships have typically work, I don't know, fascinating. As we look at the year ahead, what should organizations be doing to prepare for the twists and turns that can be in store?

Katy Ring

Well, we've just talked about changing mindsets. And of course, it's an easy price to say much harder to actually execute.

Eric Hanselman

Absolutely, New Year's resolutions and all that.

Katy Ring

Change your mindset yes. But there is an area I feel very passionately about in terms of the way that the technology services industry works because I think we are whether we're enterprise clients of service vendors or whether we work in the technology service vendor organization itself. We've all come to understand that technology is thought about differently and used differently to how it was 10, 15 years ago.

We used to see technology as an end in its own right in a sense. You would bring in a big system to automate existing paper-based processes, for example. And once you've done that, that was done and that was it. But when we look at the way that we procure technology, both products and services and the way that we work with our technology service partners, I don't think we've actually sat back and considered the fact, well, now technology is simply a means to a business outcome.

We need to look at some of these other internal processes in the way that we contract with our technology providers and the way that we engage and work with them. And there's been a phrase that's been in the services market for a long time, outcome-based contracting. The idea that the service provider works jointly with the enterprise to produce the technology outcomes that will then enable the business goal that set up the whole economic reason for the project in the first place. And it's been a bit of a holy grail, and it's been very difficult to actually deliver.

And 1 of the reasons for this is the lack of sight of the metrics from the project, maybe a little bit of mistrust. There is a slight different agenda if you're a vendor to if you're a buyer. But now in the digital area where we're moving to data-driven systems, there is a level of transparency coming into the engagement with service vendors in the sense that we can -- both sides can see the metrics, they can see what is working and what is not working and how if you tweak that, you take that feedback into consideration the outcomes improve.

And I think that transparency from data-driven business should help build the trust that maybe finally enables us to get to the point where both the vendors and the buyers can work together to deliver business outcomes. And I think that does require reconsidering how the commercial transactions with these vendors are set up.

Eric Hanselman

That, in fact, 1 of the big benefits that we've always identified around digitization is that you have the data. And now you've got the ability to use that data as that means to have the visibility to understand how outcome-based engagements actually are performing as opposed to the more difficult process historically.

Katy Ring

Absolutely. And it becomes easier and faster to set benchmarks because I think 1 of the problems has always been as well, understanding where the organization was before the new technology was put in place because often it requires measuring things that haven't been measured. And so consequently, it's been very difficult to see what progress you're making.

But as that becomes less of a problem because we're gathering so much data, and we're able to establish benchmarks across industry sectors or certain sizes of companies and so on, service vendors can actually act as a kind of broker in gathering this anonymized data to work with clients. It's been something that both sides of the market have been interested in for some time. But I think now with digitization, we are actually moving to a point where this is more possible.

Eric Hanselman

And a virtuous circle that data drives to completion. Wow.

Katy Ring

Absolutely.

Eric Hanselman

That is fascinating. I really was thinking when we were sort of starting off in this conversation that we'd be talking more about the services specifics about this, but the fact that, that services aspect could actually begin to help, not only drive what are some of the fundamental goals of digital transformation, the digitization of the enterprise itself, but also start to provide substantially greater visibility. We talk about the greater uses of telemetry. Well, here you are in the environment in which you can actually start to feed that back into the business to go do benchmarking the business, benchmarking of the technology services provider, all sorts of positive outcomes.

Wow, well, wonderful stuff. Well, Katy, thank you very much for all of the perspectives. It's been great having you on the podcast.

Katy Ring

It's been my pleasure. I really enjoyed it. Thanks a lot, Eric.

Eric Hanselman

And that is it for this episode of Next in Tech. Thanks for -- audience, for staying with us. I hope you will join us for our next episode where, as I mentioned, we'll be talking about industrial IoT, a step beyond some of the initial points that Katy has made with Ian Hughes. So I hope you will join us then because there is always something Next in Tech.