How and Why Cloud Computing Will Change Outsourcing Services

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How and Why Cloud Computing Will Change Outsourcing Services
By Kathleen Goolsby, Senior Writer

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Technology enables business change, but it doesn't drive it. Jim Stikeleather, Chief Technology Officer at Dell Perot Systems, says change doesn't happen unless there is an economic value. And that's why cloud computing will make such a huge impact on outsourced services. It changes companies' ability to consume IT. "This will create a very different IT outsourcing marketplace and also create a lot of friction over the next five years," says Stikeleather.

RamPrasad Kan, Chief Technologist at Wipro Technologies, says cloud technologies are a potential game-changer. "They encompass infrastructure, platforms, applications, and BPO services -- and this 'IT-as-a-service' model may create a whole new wave of outsourcing."

Cloud technologies enable a multi-tenant services model. Stikeleather points out that there are a lot of companies today touting the fact that their software runs in cloud computing when, in fact, it's not multi-tenant; they just create new instances for each customer running on the application. That's not cloud technology, he says. It's important that buyers understand this differentiation, as it impacts the capabilities and cost and efficiency benefits of cloud-based services.

This article looks at the drivers and impediments to adopting delivery of outsourced services from the cloud, the cloud's impacts on various aspects of outsourcing, and recommendations for selecting outsourcers delivering cloud-based services.

Drivers for growth in cloud-based outsourcing services

The industry experts we interviewed about cloud services described several drivers that will cause much of outsourcing to move to the cloud in coming years.

First of all, it increases business agility. "The ability to acquire IT on demand and have upward and downward scalability allows customers to quickly take advantage of software that gives them a competitive advantage," says Marc Schwarz, Senior Vice President and leader of the Oracle On Demand business.

A primary driver is that it eliminates buyers' up-front costs and decreases their total cost of ownership. This is especially attractive coming on the heels of an economic recession and five years of IT budgets constrained mostly to maintenance activities. "The cloud model is like a Monopoly game's get-out-of-jail-free card because there's no capital expenditure (capex) and no up-front cost," explains Stikeleather. Companies can immediately transition to new applications and services.

The growth of Software-as-a-Service (SaaS) startups is another driver and perhaps the tipping point for adoption of cloud-based services. Major software vendors changing their existing licensed maintenance model and beginning to offer their products in the SaaS model is another catalyst for cloud growth.

Other drivers include the cloud's ability to:

Reduce a buyer's footprint in legacy systems
Increase flexibility for companies facing a major software upgrade or changing their software. (It can also decrease flexibility, Schwarz says, in the case of SaaS, as it forces the buyer to upgrade with everyone else at the same time.)
Shift from capex to operating expenses (opex) if a company moves new business units or startups or mergers/acquisition activities to the cloud
Handle competitive pressures, especially in the mid-market. Small and midsized businesses are currently adopting SaaS and cloud-based services faster than larger enterprises, as they enable supporting the business when it's growing and cutting back when necessary
Support globalization efforts without having to deal with associated infrastructure issues

Impediments to the growth of cloud-based outsourcing services

"Cloud-based services offer a great deal of promise if we can eliminate some of the impediments such as security issues, integration, and customization," says Ed Anderson, Chief Strategy Officer at CompuCom. "The new ways of doing business will eventually crowd out the old ways. But the technology is not yet ready for prime time in terms of moving legacy apps to the cloud."

Stikeleather explains applications that companies developed for their own use cannot take advantage of the cloud model because "they weren't written in a stateless architecture. As a consequence, these applications allow only a certain amount of vertical scalability. To truly achieve the benefits of cloud-computing technologies, companies will have to rewrite those applications."

Another impediment is buyers' CIOs. Until they evolve into more of a strategic planning role rather than an operational role of running a data center and application development, their decision-making around cloud-based and utility computing models will experience a conflict of interest. Industry experts predict it will take a while for some CIOs to get comfortable with this change.

The cloud's impact on outsourcing

Les Mara, who leads Enterprise Services BPO in EMEA at HP, says the cloud's impact on outsourcing over the next five years will be profound because "it will disintermediate the need for labor." It will remove indirect processes and enable capturing and processing data in real time for all parties in an end-to-end supply chain. "Because it will materially increase the scope, speed, and effectiveness of the work the provider does, it will create an immense opportunity to optimize the customer's working capital."

Kan at Wipro points out that cloud technologies will enable IT service providers to deliver end-to-end services regardless of the various platforms, applications, and technologies involved.

He cites another impact to outsourcing: Companies will no longer develop applications for non-core/non-differentiating processes, as those applications will be readily accessible in the cloud. Enterprise IT will become a hybrid environment of on-premise, private cloud, and public cloud services.

Schwarz at Oracle On Demand points out that cloud-based services will change outsourcing contract methodologies. "Buyers will move away from long-term contracts where the return on investment depended on continuous improvement, and move to shorter-term contracts with more flexibility to quickly buy new services."

Cloud-based services will radically change the outsourcing business from the service providers' perspective, says Stikeleather. There will be many more complexities involved in a provider offering to "take over your IT software and hardware and move it to our environment" because cloud-based services with a variety of vendors will comprise a large component of the buyer's IT.

Cloud-based services will also cause an evolution and huge change in the way outsourcing providers price their services. Stikeleather says customers will expect their entire outsourcing solution to be billed on a "natural forecasting unit" that correlates with the buyer's revenue items (such as the number of beds in a hospital, the number of prescriptions filled, etc.). Stikeleather expects this change to cause a lot of friction over the next five years, with providers protesting "this is the way we've always done it."

Kan at Wipro cites examples of the types of cloud-related services that outsourcers will typically provide:

Consulting around integrating enterprise IT with private and public clouds to create a hybrid environment
Implementing and managing private clouds to consolidate and optimize infrastructure
Migrating enterprise applications to the cloud and the related testing, certification, and governance for risk and compliance
Developing custom applications for the emerging cloud software platforms
Developing new applications that integrate collaboration, communication, and cloud platforms

He also believes service providers will need to take on the role of a trusted partner to integrate cloud services of multiple service providers with Enterprise IT. Stikeleather agrees. "Outsourcing providers are going to move up the value chain, offering consulting and information management services -- not in the actual delivery of IT but in how buyers should provision and organize their systems and business process workflows," he says.

Risk mitigation in selecting an outsourcer for cloud-based services

The industry experts we interviewed shared their insights into new criteria that buyers need to consider when selecting an outsourcing provider that will deliver services from the cloud.

Kan at Wipro says that buyers need to realize that "creating private clouds that cater to the needs of an enterprise is a complex task. It requires a systems view, and the provider must have capabilities and good practices in R&D, infrastructure management, testing, application migration, and systems integration." He suggests the litmus test is how the service provider used cloud technologies to optimize its own environment.

In addition to reviewing a provider's cloud-specific offerings, he advises buyers to ask questions about the provider's capability to manage the long-term IT transformation to a hybrid cloud environment, as it encompasses all aspects of IT, and enterprises will need to take a phased approach. Ask questions about the provider's ability to integrate and aggregate multiple cloud services, governance, risk, compliance, as well as cloud-burst capabilities in the provider's data centers. Find out about the provider's interoperability skills, tools, and methodologies as well as its strategic partnerships with cloud technology hardware, software, and platform partners.

Stikeleather believes the key to risk mitigation is to first get comfortable with virtual service provisioning and also to "eat the elephant in little chunks at a time" instead of taking the big-bang approach that often occurs in ITO.

Dell Perot Systems, for instance, has a virtual desktop offering. It allows customers to take a certain small piece of their company and run it for a while through this virtual desktop and virtual messaging. It's an on-demand, pay-as-you-go model that allows buyers to bring up a small group of people using the services and, in the process, figure out what they need as SLAs and contractual terms and conditions, explains Stikeleather.

"The same thing holds true from the provider perspective. So much of this is new to everybody, and there is no standard way to do this yet," says Stikeleather. Providers can benefit by offering to take over a small piece of a client's virtual business the first time out, rather than the whole spectrum.

Finally, when is the best time for a buyer to move to cloud-based outsourcing services? Look for triggers such as the following:

Inability to comply with evolving regulations
When sunk costs become less of an issue (such as when a technology refresh is on the horizon)
An opportunity to use the get-out-of-jail-free card -- avoiding expensive up-front development costs by moving to SaaS or cloud-based services

Lessons from the Outsourcing Journal:

Cloud computing technologies will make a huge impact on outsourced services. Because it changes companies' ability to consume IT, it will create a very different IT outsourcing marketplace and also create a lot of friction over the next five years.
Cloud-based services will cause providers to change the way the price their services. Customers will expect their entire outsourcing solution to be billed on a "natural forecasting unit" that correlates with the buyer's revenue items (such as the number of beds in a hospital, the number of prescriptions filled, etc.).
Technology will not yet allow moving enterprises' legacy applications to the cloud. Because of the way companies wrote the code for these apps, they will have to be rewritten before they can move to the cloud.
Outsourcing service providers will need to take on the role of a trusted systems integrator partner. Over the next five years, they will move up the value chain, offering consulting and information management services -- not in the actual delivery of IT but in how buyers should provision and organize their systems and business process workflows.
The due diligence and provider-selection process should focus on the provider's systems-view expertise, infrastructure management, testing, application migration, systems integration, tools and methodologies, and its ability to manage risk and compliance in the cloud. A litmus test is how the service provider used cloud technologies to optimize its own environment.
Cloud-delivered outsourced services are new to everybody, and there is no standard, proven way of doing this yet. Both buyers and providers can benefit by starting out with a small piece of the business rather than taking the usual big-bang approach to IT outsourcing.

Publish Date: January 2010

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