by Thomas Hoffman

From Cloud Computing to Shared Services: Why CIOs Are Taking a New Look at Sharing IT Infrastructure and Applications

Aug 26, 2009
Cloud ComputingCollaboration SoftwareIT Leadership

Sharing IT services with other companies in your industry is back in vogue, thanks to cloud computing, the economy and new ways to collaborate.

The world’s top hotel companies have collectively invested tens of millions of dollars to implement their own customized reservation systems—considered the heart of their operations. Each hotelier views the capabilities of these systems as providing them with some competitive advantage over how they calculate rates and room availability.

But the transaction-processing side is considerably more mundane than the algorithms that put individual guests in rooms. While the hoteliers aren’t quite at the point of viewing hotel reservations as a commodity service, the potential cost savings that could be gleaned from the creation of a shared, industrywide system is enough of an enticement to have brought the CIOs from these companies together to explore the possibilities.

During the past six months, board members for Hotel Technology Next Generation (HTNG)—a global trade association of hoteliers and technology companies that includes Starwood Hotels & Resorts Worldwide, Marriott International, Hyatt and InterContinental Hotels Group—have been actively discussing possible areas for shared services among participants, including shared property management systems, reservation systems and networks.

“It’s a preliminary discussion right now,” says Tom Conophy, CIO for global IT at InterContinental Hotels Group in Atlanta. “But there is a desire to explore where you can share infrastructure or applications, like financial apps, that are less competitive from a guest point of view.”

“It’s a great example of an untapped opportunity in the hospitality industry,” adds Todd Thompson, CIO at Starwood. He believes that a shared hotel reservation system will eventually evolve, likely with one or more tech vendors making their systems scalable enough for use across many major hotel companies by offering them as a shared service.

To read more on this topic, see: Legal Considerations for Shared Services, The Price Is Always Right and Public Cloud: New Cloud Marketplace for Hosted Server Capacity.

Interest among CIOs in sharing software applications, IT infrastructure and services such as server and storage capacity isn’t limited to the hospitality industry. For instance, discussions are underway in both the real estate and insurance industries, where interest among larger companies to host vertical applications for smaller organizations is “red hot,” says Rob Scott, managing partner at Scott & Scott, a Dallas-based law firm that specializes in software licensing.

In May, 25 of the nation’s top research universities convened at Indiana University to explore the potential for sharing a range of IT services, infrastructure and software applications, including mirrored sites for disaster recovery, high-performance computers used for research, large-scale storage systems, Web hosting and help desk operations, says Jerrold Grochow, vice president of information services and technology at the Massachusetts Institute of Technology.

The idea of IT services shared among industry rivals isn’t new, but attempts to establish them have a spotty track record. Previous initiatives, such as an effort in the early 1990s to form a shared travel reservation network called Confirm was started but never materialized, though it was backed by Sabre Holdings, American Airlines and a few other travel industry players. Others have prevailed, including SITA, a provider of air transport communications and IT systems that was owned and operated by members of the air transportation industry.

But the odds of success are improving, and with them is a renewed desire among CIOs to engage in shared IT endeavors. For starters, CIOs are under tremendous pressure to reduce costs, but many have exhausted the tried and true techniques for doing so, such as offshore outsourcing, data center consolidation and server and storage virtualization.

Meanwhile, the technological world has been transformed by the global expansion of broadband networks, open source and the emergence of cloud computing, which make any discussion about sharing systems considerably more practical. Together, these developments may induce companies to find solutions to typical obstacles concerning management and control of shared environments.

“With the advent of cloud computing, I think that’s going to open up the doors to this type of collaboration,” says Conophy.

Why Share Now?

Renewed interest in sharing IT services across companies has been percolating since the economy began to tank last year—and corporate executives began considering nontraditional ways of cutting IT costs.

“Consider a large investment bank that invested hundreds of thousands of dollars in additional server capacity during the last bull market to support additional business,” says Howard Rubin, a Gartner fellow and professor emeritus of computer science at Hunter College of the City University of New York. What can that bank do with its excess capacity? Open access to it, says Rubin, through what he calls a “technology commons”—an arrangement to share infrastructure services the way New England farmers used to share grazing lands. By leasing or renting that capacity to other industry firms, an investment bank could generate additional revenues, lower its fixed IT costs and channel more investment into money-making IT and business projects, says Rubin.

Shared IT services have already taken root in academia and among nongovernmental organizations (NGOs—nonprofits that run aid programs). In 2001, NGOs led by Save the Children, along with Cisco, formed NetHope, a nonprofit IT consortium of 26 international organizations whose members now include ChildFund International, Relief International and World Vision. NGOs have extremely lean IT budgets, so they were thrust together by a common need, says Ed Granger-Happ, U.S. and U.K. CIO with Save the Children. NetHope’s slogan, in fact, is, “Collaborate or perish.”

NetHope provides its members with technology such as shared satellite services in geographies where connectivity is scarce, including parts of Africa and Asia. Sharing satellites and ground stations is cheaper than having your own equipment, says Khuloud Odeh, former CIO at CHF International, a development and humanitarian aid organization.

As a nonprofit, NetHope operates on grants from companies such as Microsoft and Accenture as well as annual membership fees from its participants. Members pay between $8,000 and $20,000 annually, depending on their size. NetHope recently conducted an ROI study for its members and determined that the typical participant achieved a return of more than 475 percent on their membership fees, says Granger-Happ.

ERP, Community Style

Some academic institutions have looked to shared software development to provide applications that drive down IT and operating costs. In early July, Colorado State University and San Joaquin Delta College each implemented an ERP-style financial system that they codeveloped with other members of the Kuali Foundation, a group of 31 colleges and universities that also includes the University of Arizona, Indiana University and Cornell University. Collectively, the group has invested $9 million toward software development for the project, says Brad Wheeler, vice president for information technology and CIO at Indiana University.

The “soup to nuts” system includes general ledger, accounts payable, accounts receivable and other financial modules. The Kuali Foundation ran the ERP project as a community initiative, and next month, Wheeler says, it will be made available under an open-source license.

For its part, Indiana University contributed five software developers from Wheeler’s 700-person staff to help with the ERP project from its launch in the summer of 2005. While the project demanded a lot of time and attention from Wheeler and other founders—including defining the modules that would be developed and setting time lines—he says it was worth the effort to build a system that better fit higher education business processes.

Wheeler observes that some large universities have invested more than $100 million to purchase and install third-party ERP systems in recent years. Besides saving each of the participants millions in software licensing and implementation costs, each of the participating college IT staffs know the ins and outs of the Kuali system, says Wheeler. Although each institution will host its own system, a core group will continue to share software development.

The Devil in the Details

Getting the benefits of shared IT services, however, requires a lot of negotiation and hand holding. These partnerships are fraught with challenges ranging from contractual issues to security and liability concerns.

Interim discussions among the top research universities touched on some of the potential difficulties they would face, including how service-level agreements would be structured and how the group would resolve differences when participants are split on adding new technological capabilities, says MIT’s Grochow. “There would have to be a significant amount of attention paid to this,” he adds, referring to the myriad legal questions inherent in a shared services arrangement.

Issues such as where competitive data or a set of applications resides physically takes time to resolve, notes CHF International’s Odeh, as does developing a level of trust between participants. Entrusting IT operations to an outsourcing provider with an established track record “is one thing,” says Steven John, CIO at H.B Fuller, a specialty chemical manufacturer. “Sharing IT resources with another entity is a higher degree of risk,” he adds. Running a shared service or hosted application “isn’t a core business for the organization and the participants typically don’t have the experience running such an operation.”

From 2001 to 2007, John was the CIO at Agriliance, a former joint venture between Land O’Lakes and CHS, which was the largest distributor of pesticides and fertilizers in North America. As one of the parent companies of Agriliance, Land O’Lakes ran the IT infrastructure for the joint venture. Eventually, the two firms shared some software licenses. Both companies were happy with the relationship (it dissolved in 2007 when the partners decided they could make more money on their own).

“I think it worked because it involved a parent company and a child company,” with clear lines of authority and accountability, says John.

There are barriers inherent in corporate culture, as well. For about a year, officials at Franklin W. Olin College of Engineering in Needham, Mass., and nearby Wellesley and Babson colleges have been exploring different ways to share their existing IT resources under a possible barter-type arrangement where no cash changes hands. The discussions have covered a range of options, including the possibility of extending to Wellesley the fiber-optic connection that already links the Olin and Babson campuses so that the three schools could share storage and other systems. It would also improve the experience of students who cross-register across the three campuses. Workgroups studying the viability of sharing business continuity platforms, archiving and storage plan to present their findings to a group comprised of VPs for academic affairs, administration and finance by October. “Everything is on the table” if there are cost-savings or other efficiencies that can be achieved, says Joanne Kossuth, vice president of operations and CIO at Olin.

Yet institutional challenges may arise when it comes to prioritizing and implementing the recommendations of the workgroups. On one hand, says Kossuth, “there’s a built-in need that people have to own everything related to their organization. It’s hard for people to [share services] because they’re vested in their job functions and they’re vested in their organization’s ownership of that function.”

IT leaders also worry about creating additional work for staffers who would have to run any shared environments. “We have to try to figure out ways to do this without making it overly burdensome for staff at the respective schools,” Kossuth notes. Then there’s the popular conviction that you can’t (or shouldn’t) trust anyone who isn’t on your payroll.

Among executives in the utilities sector, there’s an embedded belief “that they need to control their own destiny,” says Michael J. Carlson, former vice president and CIO at Xcel Energy, who recently left to lead smart grid operations for GridPoint.

Any attempt to share IT resources among utilities would also likely be heavily scrutinized by state regulators, thus adding costs and effort that may make shared services not worth pursuing, Carlson adds.

CIOs who consider hosting IT services for one or more organizations would face the uphill battle of gaining buy-in from others in senior management, particularly if the service “isn’t core to the rest of your organization’s business and if it would take cycles away from the normal job of a CIO,” says Beach Clark, CIO at the Georgia Aquarium in Atlanta. Clark notes that an industry consortium is building software for keeping animal records. “It’s years behind schedule, so there’s some skepticism” among his senior executive peers. “I think we will follow the lead of some of our peers in the industry on adopting [it].”

Ways to Make Shared Services Work

Assuming that you can get past the philosophical objections, the remaining obstacles and risks can be addressed through legal agreements and well-designed governance processes.

A board-type structure where each of the major participants has some level of representation is important for such purposes, says Scott. He says it’s acceptable to have one of the members serve as the president or CEO of the entity “since realistically, most of these consortia are going to be tantamount to closely held businesses with a small number of stakeholders involved.” Plus, because shared services organizations are typically formed to help member companies reduce costs, “you’re not looking to add labor costs” by hiring executives to run the business, Scott adds.

The rules should include policies for vendor selection and vendor management, as well. “You run into this problem where one of the members may have a close or strong relationship with a particular vendor, and it’s really the strength of the combined group that helps you to gain bargaining power in the marketplace,” says Scott. As such, it’s important to establish clearly defined processes for vendor selection and management, even down to such details as the dollar value of gifts that participants can receive from vendors.

But tread carefully: Some ill-fated consortia were weighed down by too much planning and bureaucratic decision making, observes Indiana University’s Wheeler. He says he’s seen groups with big charters go heavy on governance and achieve far less. Wheeler points to a previous, unsuccessful attempt by a closed group of university investors and a vendor to develop a financial system in 2003. That was “before open-source development models had made such progress [in creating] enterprise-scale application software,” he says.

The hoteliers hope to avoid such mistakes. With respect to sharing a hotel reservation system, participants are discussing how much flexibility they would have to modify the functionality to suit the individual company’s needs, says Conophy. “What you need is freedom in a framework,” he adds, meaning that any agreement to share software would include provisions entitling participants to customize portions the application. It might be similar to the open-source model of the universities’ Kuali Foundation, without the reciprocal sharing of modifications.

Also, the service being delivered has to be as good, if not better, than what IT organizations are currently providing in-house, says Gary Curtis, global managing director for Accenture Technology Consulting (he is not involved with NetHope). Curtis has worked with multinational companies to restructure IT operations, including incorporating shared services within some of them. He notes that whether a shared services provider is an independent company that’s established by member firms or a member hosting an IT service, it “has to pass the same test” as an outsourcer, such as an audit to demonstrate it has the proper controls and governance in place for operating the service.

Finally, to address privacy and security concerns, it’s important for shared services participants to be clear up-front about the types of data that need to be kept private and the information that can be shared freely among members, says Granger-Happ. Confidentiality arrangements should be written tightly to prevent one or more participants from taking proprietary information or processes away from any of the other members, advises Scott.

The attorney goes further, cautioning that participants install strong accounting and internal controls to prevent any members from filching funds. That’s actually happened: Scott points to a group of insurance competitors who formed an organization to provide shared technology services only to discover missing money about eight months ago.

In the end, CIOs have to decide which, if any, IT activities could be shared or operated by another business in order to drive down operating costs and free up precious resources for more ground-breaking endeavors. “Do we want 100 people working on developing and maintaining a hotel reservation system?” asks Starwood’s Thompson. “Or do we want 100 people focused on building innovative solutions for our company?”

Thomas Hoffman is a freelance writer based in New York.