Ireland’s IT Economic Outlook for 2011 & the Role of IT in Recovery

Highlights

• Assumption on Ireland’s (RoI) economy for 2011
• Impact on IT investment for 2011
• Northern Ireland
• IT contribution to productivity and growth
• Managing costs
  

Overview

A view of Ireland’s economy for 2011

Most economic forecasts, including the Irish government’s forecast, suggest that GNP growth for 2011 will be in the range of 1% to 2% and GDP growth much lower. The fact is that there will be a four-year reduction in Ireland’s deficit of circa €15bn, which will be front loaded (€6b) to satisfy the international community that we are taking remedial action to correct our finances and reduce the cost of national borrowing. It is unclear what the impact of our 2011 budget and the slow global recovery will be for Ireland as a small open economy. Suffice to say current indicators suggest:-

• There is likely to be export growth, which is heavily influenced by multi nationals who have or will invest in Ireland.
• Government spending on goods and services will reduce by circa 4.7%
  Stimulation of indigenous industry, which is important, will continue and significant progress will be made in building our knowledge economy through R & D support by Science Foundation Ireland.
• Though overall our costs have reduced, making us more competitive, taxes will increase and social welfare will be reduced, resulting in weak domestic economic activity.
• Radical changes in delivery and operation of the public sector will be slow feeding through but a start will be made in 2011.
  

As a CEO, I must take a position for my company, Sogeti. My assumption is that overall economic activity will be flat and for stimulation of growth that focus has to be on:

• Productivity (Efficiency & Effectiveness)
• Entrepreneurialism to take market share and/or improve service delivery and
• Innovation so we don’t mortgage the future any further.
  

Ireland’s likely IT economy for 2011
July 2010, Datamonitor projected a CAGR growth of 3.7% in the Irish IT services market 2009-2014; with implementation and systems integration (SI) accounting for 40.5% of the total IT services market. As with the overall economic outlook for Ireland, it is difficult to take comfort in this level of growth projection. However, it is useful to consider what the likely drivers might be that will cause demand:-

• The focus on reducing the cost of the Public Sector means organisations in the sector will have incentives to leverage current systems and IT to improve service levels to citizens, improve productivity and reduce overall costs.
  
• Change in the public sector will have to be initiated; shared services and outsourcing have already been mentioned by some politicians in the media. 2011 is likely to be a year where longer-term ICT strategies and plans to address the required change are initiated with spending on advisors who have done this before.
• It is likely to be business as usual as regards system enhancements to comply with local and EU directives/legislation.
• Consolidation and change in the financial services sector and delayed expenditure during the crisis means that system enhancements and changes will need to restart, especially those to do with risk analysis, regulatory reporting, and compliance improvements. In addition, restructuring of our banking system will accelerate systems activity. Divestments, M&A activity, and improved profitability drivers will require IT suppliers who have experience in decoupling systems and data, merging/consolidating systems and data and integration skills.
• In the private sector, both large and small companies face tough market conditions. As a result, the focus may be on extension of application life, rather than major replacements, planning for moves to new architectures, such as cloud related SaaS (Software as a Service), PaaS (Platform as a Service), and IaaS (Information as a Service) and any improvements that reduce cost or improve productivity or competitive advantage.

In conclusion, from our assessment of the IT services market domestically there will be average growth greater than the GDP growth because of the drivers listed above and the fact that software systems can be at the core of reshaping the performance of organisations. The market growth will be insufficient to enable all service providers prosper. This will result in more competition on service quality, and value for money will return as providers compete for market share. Buying behaviours are also changing from draconian lowest cost service provider to quickest time-to-value type suppliers. Cost will still be one of the biggest weighting factors.

Cost of procurement will also be a key consideration, particularly in the public sector. In recent years, we have seen a move to running open framework tenders to identify a small number of acceptable suppliers who each compete within the terms of the framework every time there is a need to buy a resource or a service. This has brought greater responsiveness to filling requirements and better value because of the need to compete for the regular mini-tenders under a larger framework contract.

Northern Ireland view for 2011

The recent UK budget suggests that over the lifetime of this new coalition government that cuts in available public funding could be between 20% and 25%. As two-thirds of the NI economic activity relates to public sector spending, NI will experience similar challenges to the Republic of Ireland. However, from an IT perspective there is potential to reap the rewards of a more advanced infrastructure and the investment and change over the last 12 years since the Good Friday Agreement.

NI has relatively more shared services, infrastructure, and applications, many that have significant outsourcing elements. Leveraging these past investments by extending the scope and coverage will enhance return on investment, citizen services and productivity and means that NI is starting from a better position than the Republic of Ireland.

The Republic of Ireland can learn from the past experience across the border. Some of the challenges faced by NI included the cost of procurement and related delays because of large long term ITTs and the ability of indigenous SMEs to participate in winning business. On the positive side there is now an accepted and mature level of collaboration between service providers in forming consortia to win and deliver the services and solutions.

There is a challenge of fixing commercial terms in a big long-term outsourcing contract whereby a win-win can be created for both the public and private sectors.

With tighter budgets feeding through it is likely that there will be fewer big contracts, though some existing contracts are due for renewal shortly. It will be interesting to see how the procurement process changes to open up competition, improve value for money and reduced procurement costs.

Stimulation of the private sector, via FDI (Foreign Direct Investment) and indigenous start-ups, is a high priority to reduce dependence on the public sector spend. With the new budget, this area takes on a new urgency and focus.

The role of IT and IT organisations in the recovery (How IT can contribute)

This review of the economic context for IT in 2011, suggests that organisations that procure, use and develop IT solutions are likely to have the following business drivers:

• Most IT organisations must deliver more to the business with less resources/costs. (Efficiency & Effectiveness)
• Many organisations must start or execute fundamental changes in their business and operational models underpinned by changes in how IT systems are delivered.
• Organisation stakeholders will need to see visible outcomes from IT changes in the form of improved market and financial performance in the private sector and enhanced services and value for money from the public sector.
  

2011 will be a year to inject momentum into change, yet will not be a year for large cash outflows. However, reality suggests for many organisations the strategy and plan may yet need to be developed and agreed by stakeholders. Citizens and stakeholders need to see output resulting in reduced cycle time to make change and deliver value. As a result, short regular cycles that deliver value rather that “big bang” lengthy change processes will be essential.

Hints & Tips as to what the leaders should do:-

• Think and Act Agile: Not just Agile software development but Agile management. Why? For several reasons! Agile focuses on short regular delivery cycles that deliver operational value to stakeholders. Agile accommodates changes in a flexible and dynamic manner. Agile reduces time-to-value and has higher quality outputs. Adoption of the Agile manifesto & principals is appropriate for managing the operations. These are:

1. Individuals and interactions over process & tools
2. Working software (output) over comprehensive documentation
3. Customer (internal/external) collaboration over contract negotiation
4. Responding to change over rigidly following a plan.
   

• Competence & Capability building: - Particularly where a shared service can be provided to multiple business stakeholders. The benefits are many including (a) high utilisation of resources and assets (b) building of strong and consistent expertise, processes and methodologies and (c) standardisation. Specialist expertise can be developed internally but leveraged across multiple projects, resulting in lower external spend, higher productivity and better readiness to consider outsourcing to further reduce costs.
• Connect improvement & cost reduction initiatives to key business/organisation KPIs: - The most effective means of driving improvement, particularly in the software development lifecycle (SDLC), is to underpin the activity with a simple structured approach such as TPINext® or CMMi (Capability Maturity Model Integration). These maturity models allow organisations to benchmark the key dimensions to performance, connect these dimensions to target business results and then focus improvement investment on those dimensions that will impact the bottom line KPIs in short timeframes.
• Cloud Computing: - In its broadest sense it opens up an additional choice for IT. It means that in addition to the make-versus-buy decision, in effect there is a rental or pay-for-what-you-use when you use it option. Converting an on-premises license model to a cloud model changes large CapEx costs to on-going OpEx costs, thus reducing cost, time to value and overheads whether you are a provider of IT or a user of IT. In 2011, a Cloud option must be considered for all Greenfield opportunities. In a legacy environment, it must also be considered but the transition cost must be fully understood so it does not hit in a year where finances are tight. Depending on the environment one of more of the following Cloud options, Software-as-a-Service (SaaS), Platform-as-a-Service (PaaS) and Infrastructure-as-a-Service (IaaS) need to be evaluated.