Complementing traditional outsourcing with the emerging cloud computing
In the last article I discussed the emergence of cloud as a key sourcing option. Media has been publishing so much on the cloud that it is often touted as a threat to the traditional outsourcing. Since everything seems emerging as a service, it is easy to get carried away with the hype undermining all the future adoption challenges. This article analyses if cloud computing will cannibalise the traditional outsourcing business or actually increase the market size and provide more revenue generation channels.
Cloud computing will enable the client to provision services without being concerned about the platforms, infrastructure, applications and programming involved. To create a massive change at this magnitude, the economic value of the change would require ruthless justification and major investments. While the model seems much better established at the consumer level, the adoption at enterprise level still seems largely experimental.
Several factors will impact the adoption of cloud service model over next few years:
- Availability of reliable and mature cloud offerings for specific enterprise business domain needs.
- Risk management and sustenance keeping all vendor viability factors like financial, security, business continuity, disaster recovery, future investments would need to appeal to the enterprises.
- Dissatisfaction with current outsourced providers due to various reasons (e.g.: lack of innovation, progressive improvements, poor quality of governance and relationship interactions etc…) can trigger an alternative model evaluation. This can especially happen when contracts come up for renewal; enterprise needs require major software upgrades, and need replacement of existing software. If the current providers have not matured their service offerings, they will most likely lose out to other models that promise higher value to clients.
- Enterprise efficiency is a function of how enterprises are structured to leverage the benefits of the scale from cloud services. In most situations, pooling opportunities to generate scale to adopt the cloud offerings may be difficult. The ROI of the cloud model diminishes significantly if volume deals are not possible.
- Cost reduction benefits need to be real, sustainable and measurable. Most enterprises today don’t know the true cost of their outsourcing initiatives and are not able to accurately determine the total cost of their services. Cloud computing will shift capital expenditure to operating expenditure and will have no up-front costs thus reducing the total cost of ownership (TCO). This can be an attractive value proposition for the C level to support adoption.
- Cloud would need to be designed to be flexible. Building flexibility would require more investments. Inability to get required features can be a deterrent for the enterprises.
- Change management will be critical to motivate users to adapt to how services will be provisioned to them. The cloud may not require a whole lot of IT support post implementation in the steady state. The decision to leverage cloud may be in direct conflict of interest with IT.
- Overhaul of traditional licencing models will be critical and major software vendors (Microsoft, HP, Oracle etc) will need to start investing in building their products with a cloud option.
- Availability of capital to build cloud solutions will be important. Investors would need to see the demand or potential to generate demand. The investments required to build, deploy and market enterprise-class cloud solutions are extremely high.
- Performance of cloud providers will determine their future success and adoption. This performance baseline does not exist today. The competitive positioning of cloud providers driven by their business and pricing strategy will be an important enabler of model adoption.
Clients would need to invest in building strong outsourcing management capabilities
For clients the sourcing landscape will start looking like a mix of traditional legacy implementations, traditional outsourcing, contingent, consulting, private and public clouds. The cloud services will require sourcing and vendor management skills with experience of purchasing outsourcing and software licencing services. Global sourcing management is going to become even more complex and critical. Similar principles that enterprises use today to manage traditional outsourcing providers will need to be applied with situational differences (see my article ‘The emergence of cloud as a key sourcing option‘). The changing IT landscape will ask for better management and monitoring systems. In addition, building strong integration capabilities will be critical to ensure that IT systems continue to improve and deliver to business needs.
Traditional providers need to innovate to address the competitive threats
Several trends may emerge in the provider industry with increasing adoption of cloud sourcing:
- Enterprises may reduce development of applications for processes that they don’t see as core competence and have standardised services offerings available via the cloud.
- As clients experience short-term contracts with cloud providers, the length of traditional contracts and the flexibility to move out quickly will be questioned.
- Providers will need to invest more in innovation and evolve new capabilities to successfully migrate clients to the cloud and take advantage of rising demand in the industry. These services can be in areas of: strategic consulting to determine new service and systems architecture; conceptualising and implementing private clouds; migrating processes and applications to the cloud; building controls to manage risk and security issues; system integration services for cloud; and development and testing of cloud-related applications.
- Investing in building new cloud solutions and leveraging available cloud solution offerings to compliment service offerings and provide better value to clients would become more and more important. In some situations, cloud may serve as a value-added accelerator to provide delivery to clients when quick functionality needs to be integrated to address a broader outsourcing scope.
Cloud will continue to emerge as a key sourcing option for enterprises for the rest of this decade. The recent survey reports indicate that traditional vendors are starting to face strong competition from new infrastructure providers like Amazon, Rackspace, Verizon, AT&T, Dell, Fujitsu etc in the IaaS space. How the cloud will change the broader IT outsourcing industry has yet to be seen. It is however clearly evident that the adoption of the model is gaining momentum even though there are enormous challenges to adoption. It is however interesting to note that all the majority of adoption drivers could have been successfully applied to offshoring adoption two decades ago. Traditional outsourcing providers should start thinking about this big shift that has already arrived and may soon start challenging at least the commodity IT services and infrastructure space.