Title of Presentation 2 lines okay 3 lines okay - IT World Canada

2002 – A Year in ReviewCanadian outsourcing market was strong, relative to theU.S.Many Canadian contracts appeared:• $2.2B Canada Post and CGI• $1.3B CIBC and HP Services (but doesn’t really count)• $700M Bombardier and CSC• $660M OPG and CGE&Y• $535M Manulife Financial and IBM GS• $250M Sun Life and IBM GS• $200M Desjardins Group and CGI• $200M Alcan and CGI• $160M Stelco and EDSTypically seven- to 10-year contracts

Use of IT Considered Part ofCompany’s Core BusinessYes, definitelyYes, to some extentA potentialinhibitor tooutsourcingNo20020 10 20 30 40 50 60Percentage2002 N=100

Primary Responsibilities for Stages ofImplementing Major IT SolutionsAbsolute, final decision onwhich IT vendor to useApproving go ahead topurchase major ITproduct/serviceRecommending/evaluatingIT vendorIdentifying andchampioning businessneed for major ITproduct/serviceLocal IT deptCorporate IT deptBusiness unit mgr or heads of deptTop Executives0 20 40 60 80 100PercentageN=100Everyone has a part to play

IT Operating Budgetfor 2003 Will…* NB: Data for 2001 refers to changes expected in 2002 relative to 2001.IncreaseStay the same as 2002Decrease200220010 10 20 30 40 50 60Percentage2002 N=100, 2001 N=105

Expected Increaseto IT Operating Budget for 2003Increase more than 75%Increase 51% to 75%Increase 21% to 50%Increase 11% to 20%Increase 8% to 10%Increase 5% to 7%Increase 3% to 5%Increase 1% to 2%0 10 20 30 40 50Percentage2002 N=48Q28B. Increase by what percent?Source: IDC Canada, 2002

Activities Currently OutsourcedApplication developmentand maintenanceData centre managementDesktop managementNetwork operationsCustomer support callcentreHuman ResourcesLogistics management0 5 10 15 20 25 30 35 40 45 50PercentageN=100; Q16. Which of the following activities do you currently outsource?Source: IDC Canada, 2002

Activities Currently OutsourcedWhich Might Be Brought Back in House* Caution: This data based on very low N values!Logistics managementHuman ResourcesNetwork operationsData centre managementDesktop managementApplication developmentand maintenanceCustomer support callcentreGenerally Canadiansare pretty happy withthe resultsof outsourcing0 5 10 15 20 25PercentageN=variesQ17. Are there any activities that you currently outsource, which you think will be brought back in house at theexpiration of your current contract(s)? Which ones?Source: IDC Canada, 2002

Determining Factor in Organizations’Decision to Outsource ActivitiesPoor businessperformanceTechnology auditChange in SeniorExecutive levelmanagementMerger/AcquisitionOther0 5 10 15 20 25 30 35 40PercentageN=100; Q18. What event ultimately prompted – or would prove to be the determining factor – in yourorganization’s decision to outsource an activity?Source: IDC Canada, 2002

Preferred Type of OutsourcingRelationshipsContracted outsourcingagreementPreferred supplieragreementClient/vendor jointventureEquity swapDon't Know0 5 10 15 20 25 30 35 40 45 50PercentageN=100; Q19. If you were to outsource a significant portion of your IT, what type of outsourcing relationship wouldyou prefer?Source: IDC Canada, 2002

Outsourcing – A Way to Address ProblemsDriversInhibitorsC$3.6 billion spent on outsourcing in 2002.Network andDesktopOperationsIncreaseEfficienciesTypical spending in a broad IS O/S engagement:ServicesProcessing• Datacentre operations 25%.BusinessProcessData CentreOutsourcingCall CentreHelp DeskApplicationsOutsourcingEcommerceKeep upWith RapidlyAdvancingTechnology• Desktop mgt./Help desk support 20%.• LAN/WAN management 30%.• Applications management 20%.• Disaster recovery services 3%.RefocusCriticalResources• eCommerce services 2%.Reduce orStabilizeCostsToo risky,too uncertainCan’tbringing ITback in-house-if I wantComplexity:what tooutsourceCanadian IS outsourcing market expected to grow anApplicationaverage Development of 7% each year over the next five years.Losingcontrol

Why Outsource?– No IT infrastructure to build. Reduce or eliminate capitalexpenditure- Improve scalability, reliability and performance of ITinfrastructure- Mitigate technology risk- Resource allocation: Place people in higher value activities- Time to market: Add resources when needed and quickly- Access to technology expertise- Cost savings: Service providers can achieve aneconomy of scale and can do it cheaper

What’s Holding Them Back?-Too expensive? That’s the general perception of outsourcing.-Information technology is core to my business, so I can’tgive it up.-I can’t see measurable benefit:‣How does it improve my business?‣Where does it achieve savings?‣How does it help me generate revenue?-Market volatility. Will my provider be around for the longhaul?-Trust! Will my provider deliver what’s promised? Willthey “cut me some slack?”

Mirror, Mirror – Two UniversesOutsourcingEach piece representsa key area of activity inoutsourcing. Collectivelyit can define all types ofdeals.BizAppsSystemsNetworkCUSTOMIZED-always a one off-sees transfer ofassets and people-fixed contractCommodityUniqueMakes sense hereCould move to hereBut can it work here?NetworksSystemsAppsBizSTANDARDSERVICES-pay as you go- feature functionbuilt upon abase service-recurring feestructuredUtility

IT UtilityOutsourcingStandard ServicesService OfferingCustomized ServicesUtility Serviceprovider definesIT ArchitectureCustomer DefinesUSP defines andownsStandard part ofofferingAssetsOperations ManagementCustomer responsibleowns/leasesCustomer definesStandard part ofofferingFinancingCustomer defines

The Utility PlayersHostedCollocationASPSI/NICablecoAIPTelcoHSPxSPs

xSP Model in CanadaBusiness ServiceProvider (BSP)CSPPSPPEPProcessexecutionProcesssupportApplicationServiceProvider(ASP)NSPSISPDESPASPContentApplicationsDevelopmentSystemsinfrastructureNetworkCommon Elements of an xSP Service Offering

Layer Upon LayerTodayTomorrowOutsourcing• All or nothing• Serves 1% ofmarket• Will becomecommoditizedOut-tasking• Designed forthe rest• Serves 99%of market• But vendorsseemuninterestedOutsourcingOut-taskingHostingIT UtilityDo-IT-yourself

Computing Capability Brought to You by…CommunicationService ProvidersIT ServiceCompaniesTelcos moving to offer IT services-Familiar to telecom dept.-Closest adherence to“utility” model-Customers may favourthem for these services-They own the allimportantpiece – thenetworks-Familiar to IT dept.-Understanding ofrelationship between IT,apps and biz process-High customer touch-They own and drive thehigher value add inservicesIT companies reaching across entire breadth

The Utility ModelIn the Utility Model, a company purchases enterprisecommunications/computing as a third-partyprovisioned and managed service rather than buildingand owning it themselves.The new utility model suggests that ITcapacity and services will be obtained in thefuture much the way organizations orindividuals currently procure telephoneservice, electricity, or other utilities: througha network that connects back to a centralhosting company, where virtually all of theservices required can be obtained.

Utility – Pros and ConsUtility presents a real alternative to outsourcing:• More selective• A real option for small/medium business• Pay as you go – pay for what you use. No long-termcontract• IT infrastructure as a “utility” seems inevitableBut there are doubters:• Traditional O/S companies will say it doesn’t work, but thetruth is many aren’t interested in serving themedium/small business market.• Traditional communication service companies should bepretty good at this. The model fits their businesses

Parting Thoughts-Limited resources should focus on the application layer• Efforts here increase business opportunities• Drives improved user productivity-Consider your business needs and what’s required fromthe IT infrastructure side to support these-Know that O/S makes sense for your company by doingyour homework.-General rule in outsourcing is have an exist strategy:- Are you equipped to take over when the contractexpires- Be vigilant in measuring performance and value

Parting ThoughtsIf a customer does not have a clear understanding of ITcosts, then they should not outsource.Is there a trend towards dealing with advisors andbrokers? Would they be helpful to you?If a computing utility model is greeted with significantadoption over the next few years, we may once again bewitness to a fundamental shift in the way thatorganizations leverage the power of IT.BUT IT’S A BIG “IF.”Adherence to the old model may be difficult orimpossible, despite the fact that utility may not beeveryone’s choice.

Parting Thoughts-Industry consolidation is rampant:- HP and Compaq- Intria and HP- IBM and PWC- CGI and Cognicase-What’s in store for IT service providers in 2003?- Are telcos still targeting IT services? There’s evidence tosuggest some are looking to retrench into familiar territory.- Consultants also want to be outsourcers – Accenture, CGI,Bearing Point- One-stop shops-Expect an even more competitive market – everyone focusing onsame client set and that’s good news for customers.

Thank youdmclean@idccanada.com