It’s extraordinarily difficult for humans to comprehend really long periods of time. For example, think about the Roman Empire in relation to the ancient Egyptians: In 2015, we are closer in time to the Romans than the Romans were to the Egyptians when they started building the pyramids. To the Romans, the Egyptians were ancient history.
Discerning when events occurred within the vast gulf of time would be just about impossible without a framework to make sense of what would otherwise be a chaotic heap of random events. Enter periodization, a process that helps us put events into context.
Periodization can be applied to just about any span of time, so let’s apply it to something closer to home: the evolution of the $110 billion sourcing industry:
- The Strategic Sourcing Period -- 1980 to 2000: Buying was focused on large transactions, with multiple sourcing towers such as data center, applications or end-user computing sourced to a single provider.
- The Multisourcing Period -- 2000 to 2010: Buying was still focused on large sourcing towers; however, towers were sourced to different providers.
- The Confederation Period -- 2010 to today: Buying has continued to be focused on sourcing towers; however, not only have towers been sourced to different providers, they've also become much smaller in total contract value -- and deals have become much shorter.
Which brings us to today. I’d argue we’re on the cusp, or have already entered into, a new period. This new period looks very, very different than the previous three. Where previous periods were focused on dedicated, tower (think horizontal) human-powered services, this new period is focused on shared, platform-based (think vertical) automated services. We’ll call this new era the “Platform Period."
Consider the following:
1. Massive-scale infrastructure platforms had a blowout quarter. Amazon Web Services generated more than $2 billion in revenue in the third quarter of 2015, which was up an astounding 78 percent from the previous year. Not to be outdone, Microsoft’s cloud, which includes the Azure platform, was up a whopping 128 percent from the same period in 2014, with revenues of $1.1 billion.
2. SaaS platforms are growing like gangbusters, and have plenty of headroom to grow. Publicly-traded SaaS companies founded from 2008 through 2014 needed 50 percent less time to reach $50 million in revenue than their counterparts founded between 1998 and 2005. Additionally, traditional software vendors control 83 percent of the market cap of software businesses, creating an incredibly target-rich environment for enterprise-savvy SaaS platform sales teams.
3. Traditional providers are investing heavily into hosted private platforms. Nearly every traditional IT services provider is building a hosted private platform -- some are focused up through the hypervisor (IaaS), some through the runtime (PaaS). The difference between this and legacy sourcing is that these hosted private clouds are standardized, usually running a shared, multi-tenant environment and are built on a common architecture.
While born-on-the-internet companies have been living this business model for years, the really interesting thing is that traditional service providers who have made a living on building bespoke environments for their clients are also making the shift to standard platforms. This is not just a technology change isolated to a few providers, it’s business model and cultural revolution for the IT services industry. Some will be able to make this transformation. Many will not.
4. Digital Disruptors are using vertical-specific platforms to power growth. A small cadre of emerging services providers recognize that Excel and PowerPoint just won’t cut it anymore. These providers are creating dedicated research and development functions focused on building reusable platforms to reduce the time it takes to get prototypes into the market. Although these platforms are generally 80 percent standard and 20 percent customized for a client, buyers still are making bets on these proprietary stacks, as they would any enterprise software selection. This kind of buying is occurring in spades, and the digital disruptors are growing at a clip their much larger competition would kill for.
5. The ISG Engagement Database is chock full of “platform” deals. As we reported in October, “Deal values will remain smaller with the occasional large contract award mixed in as businesses focus on areas like security, digital and cloud." Underneath this statement is the fact that the platform stack is inherent in most security, digital and cloud projects -- specifically, platforms that “allow multiple participants (producers and consumers) to connect to it, interact with each other and create and exchange value.” This stack concept is already fundamentally changing the sourcing industry.
Long-time sourcing savants may not think this is sourcing at all, but it is. Clients are buying hardware, software and services, it’s just that the hardware and software are shared among thousands or even millions of clients, and the services, rather than human-based, are software-based. The catch here is that it’s not happening in the way that we are accustomed to. Buying is taking place in small pockets, often outside of IT. Platforms are often key accelerators for digital disrupters, who focus on new business models within the middle and front office, not the back office. Traditional sourcing takes place in the back office, where commoditization and cost reduction reign supreme.
The middle and front offices source their technology differently. It often starts with a relationship, grows into a prototype and then explodes into something much, much bigger -- nearly overnight. It’s shadow IT on steroids. Most organizations are already well into the Platform Period, they just don’t realize it yet because the buying is so choppy and unstructured. Think about how many applications have moved to SaaS platforms within your organization.
For traditional providers that don't have insights into their clients' applications, this is unfortunately a case of death by a thousand cuts. The data center is being deconstructed, application-by-application, workload-by-workload. Remember that each one of these platforms takes a small slice of the addressable infrastructure and applications outsourcing market with it when a client moves it to an automated, multi-tenant platform. Most traditional providers recognize this is happening; the challenge is doing something about it. This is why we see so much acquisition activity happening today. It’s a very fractured market, and the only way to recapture the workloads that have left is to acquire the platform itself.
The Platform Period will move very, very quickly. Take a look at the length of each of the three periods above. We’ve gone from a 20-year period, to a 10-year period, then to a 5-year period. If the pattern holds, we’re already here. This of course does not mean that dedicated, tower-based, people-intensive work will disappear. What it does mean is that the majority of the net new work that is driving business growth will be sourced on vertically integrated highly automated stacks.
According to historians, most people living through a period do not identify as belonging to a specific period because they can’t tell if they are at the beginning, middle or end of it. That said, there is usually a major event that heralds the end of one period and the beginning of the next. This non-historian is betting that the third quarter of 2015 will go down in sourcing lore as the event that ushered in the Platform Period.
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