Reaching Out

As their options multiply, companies will increasingly look beyond the boundaries of their own organizations to procure IT.

A number of existing trends will accelerate and converge to fundamentally change the way companies procure IT, in essence pushing much of IT out the door. The Computerworld panelists say open-source software will proliferate—but not everywhere—and applications will increasingly be purchased as services from external parties, allowing some companies to scrap their data centers entirely. Offshoring of IT will increase, but changing labor and productivity rates will swing the pendulum back in favor of in-house systems development for some companies.

Riding the Open-Source Wave

Open-source software will become pervasive for core computing and business applications—everything from basic operating and telecommunications systems to accounting, inventory, contact management and personal productivity applications, predicts Network Services Co. CIO Michael H. Hugos. "The spread of Linux and open-source software is ending the need to standardize on any one vendor's software," he says.

Like other developments predicted by our panelists, this one will be influenced by forces abroad. "In Asia, you are going to see a great deal more [open-source] encouraged by the Chinese because they don't want their army or their government held hostage to Microsoft," says Harvard Business School professor F. Warren McFarlan.

Christopher Meyer, chief executive of Monitor Networks, agrees that open-source will continue to grow in importance and says that China will be a major reason. "Established software vendors will be unable to make their pricing policies stick there," he says.

Commodity IT

"Freeware" will drive prices down, says Don Tapscott, president of New Paradigm Learning Corp. "Now that Wal-Mart is selling a stripped PC for $300—that you can load with Linux, Firefox and OpenOffice—it will accelerate the use of open-source software."

But will those Wal-Mart boxes find their way into businesses? "The average North American corporate desktop doesn't seem ready for a Linux-based PC yet, mostly because MS Office has such a huge installed base and because minute but annoying incompatibilities between OpenOffice and other MS versions will not make these savings worthwhile," Tapscott says. "But I think the invasion of low-cost PCs is inevitable." One impediment to desktop Linux adoption will be corporate lawyers worried about the legality of the software, he adds.

Some clever hybrid approaches may become popular, some say. As open-source becomes prevalent, current licensing terms may give way to a digital rights management approach that keeps some rights reserved, like that supported by the nonprofit copyright group Creative Commons, Meyer says. "That approach would, like iTunes, institutionalize, standardize and legitimize sharing of software and ensure appropriate control and rewards for producers," he says.

Thomas Malone, a professor at MIT's Sloan School of Management, says software development efforts will likely gain some—but not all—of the characteristics of open-source. "For instance, Asynchrony Software pioneered a model where self-organizing teams of programmers from all over the Net develop software products together," he says. "But they don't do it for free; they each get a share of any eventual royalties from the sale of the products."

Not So Fast ...

Other panelists are decidedly less enthusiastic about open-source software, at least in some applications. "You cannot assure high levels of reliability from systems built exclusively by volunteers," says Paul A. Strassmann, the former top IT manager at the Pentagon. "I admire open-source software as a means for innovation, but not for delivering the infrastructure for an information-based civilization."

The quality of open-source software varies, and open-source is often little more than a backlash against Microsoft, says Microsoft researcher Gordon Bell. "Many things in the world that are 'free' come at substantial cost—'free' like a puppy."

Bell warns that "open-source" has a number of meanings, depending on the goals of the providers and users. "For example, Linux started out as something that meant free, but now suppliers are focusing on some advantage and uniqueness for each marketplace," he says. "It remains to be seen whether Linux will fragment in the same way that Unix dialects formed, which prevented the formation of a healthy independent software vendor industry."

IT: Buy It by the Yard

Utility computing—in which users buy IT resources such as storage, compute cycles or application services as though they were electricity—is nothing less than "the future of computing," Strassmann says. "The idea that each organization must invest in its own infrastructure, custom applications, unique data definitions, and location-specific software and hardware is economically not sustainable. Only medieval guilds are comparable to the structure of existing IT organizations."

David Moschella, global research director at CSC Research and Advisory Services, says the utility model is already here. "It's what most consumers and small businesses already do as they use and sometimes even pay for Web-based or mobile services," he says.

Large businesses will follow suit, he says. "Too many IT organizations are currently drowning in low-value IT work," Moschella says. "Only by using more-standardized, [utility-style] services can companies redeploy their resources to focus on things that can deliver unique business value."

And running computers isn't one of those things, McFarlan says. "Data centers a decade from now will be gone. You'll be using a combination of application service providers and third parties for security and backup and so forth," he says. China will be an important player, McFarlan predicts. And, he says, an entire industry will spring up that's focused on very high reliability, redundancy and security.

Andre Mendes, vice president and chief technology integration officer at Public Broadcasting Service, says that standardizing things such as wiring, network protocols, desktop hardware and operating systems, e-mail clients, server hardware and databases has boosted efficiency in his IT shop a great deal over the past five years.

"The next steps involve the outsourcing of all of these services to companies whose core competencies focus on the 99.999% availability that I need, but at a much lower cost," he says.

"The first part that's easy to do is storage, then computing cycles," says Mendes. "And once that's done on a subscription basis, then there's standardization at the application level."

Will Mendes eventually close his data center? "Absolutely. I think that's actually necessary," he says. "There will be companies that specialize in ultrahigh security and reliability. It's going to be more and more expensive to have that in-house, and with that expense comes additional liability. At what point do you outsource that liability to someone who does it for a living?"

Users will benefit from utility computing's simplified pricing, Hugos says, and that will bring with it less-onerous licensing terms. "Licensing will become simple annual payments based on the number of users or transaction volumes that a company has. Enforcement will be largely voluntary because the annual payments will be low and the software vendors will have easy ways to audit a company and find out if they are in compliance or not."

Utility computing will gain ground first inside companies as a way to make more efficient use of their own resources, Tapscott says. "Then, once they have their internal utility architecture, it only makes sense that they can plug into outside utility computing resources when they need it," he adds.

But Meyer says he doubts that it will become commonplace for companies to buy raw processing power like they buy electricity. "The communications and coordination costs will swamp the hardware costs," he says. "But there will be applications in very computing-intensive applications, like meteorology and animation, in which cycle-grabbing will be an attractive solution."

Meanwhile, Offshore ...

Procuring IT from abroad will become so common, panelists say, that a broad array of IT services will be available around the world, almost like a futures market where labor is readily bought and sold, or "arbitraged," on the basis of small differences in price and quality.

"The software industry will become completely global," Meyer says. "Sourcing of talent will become efficient enough that deviations of price from value will be arbitraged. Today, superior software people move to where they can get paid what they are worth, but tomorrow they won't have to."

Competitive pressures will force companies to turn to global labor markets, McFarlan agrees. "Fiber optics basically allows us to arbitrage labor markets that used to be distinct from each other but are now absolutely connected," he says.

Offshoring has so far been driven mostly by efforts to lower costs and make them more manageable, says Moschella. "But increasingly, customers are looking to their outsourcing partners to help them in areas such as innovation, agility, value and even transformation," he says. "The focus of the outsourcing industry over the next five years will be on improving their ability to be true business partners with impact far beyond cost control."

And that shift will have a profound effect on outsourcing practices, says Sloan's Malone. "Eventually, all the opportunities to gain from shifting work to low-wage countries will have disappeared because the low-wage countries won't be so low-wage anymore," he says. "When that happens ... different companies, and countries, will become experts in providing different kinds of services and products."


Outsourcing will capture most of future increases in global IT services spending.

Growth Goes to Outsourcing

Source: Gartner Inc., Stamford, Conn.

Projected worldwide Linux operating environment new license and upgrade/maintenance revenue, 2001-2008
2001 2002 2003 2004 2005 2006 2007 2008
Revenue ($M) $82.5 $89.3 $129.7 $183.8 $248 $319.9 $402.2 $492.8
Growth (%) NA 8.2% 45.3% 41.7% 34.9% 29% 25.8% 22.5%

Compound annual growth rate, 2001-2008: 30.6%

Source: IDC, November 2004

Copyright © 2005 IDG Communications, Inc.

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