Weighing the Advantages

By Jack Singh and Charles Arnold  |  Posted 02-11-2009

Cloud an Outsourcing Option in Troubled Times

About a year and a half ago, no one was talking about cloud computing as part of IT outsourcing (ITO) deals. But now, in today's climate of deferring capital expenditures and finding short-term savings, most everyone has their head at least partially in the clouds. That is, most companies that are considering ITO are also considering whether cloud computing is right for them.

And with good reason. As Tier 1 service providers like CSC, HP and IBM invest billions in their clouds, they're increasingly offering cloud computing as part of their services - which stands to change the landscape of IT outsourcing. Many deals will become less complex, less dependent on labor arbitrage in offshore markets, and more easily implemented.

Even more, cloud computing can enable companies to potentially exit their capital-intensive data centers, which in many organizations are seen as a problem child. Currently, for example, one international consumer goods organization with more than 100 servers and 15 data centers in the Americas is considering a service provider's cloud as an alternative - which could reduce its operations to a mere four servers at a single data center.

Add it up, and cloud computing is likely to put a new spin on IT outsourcing - one that bodes well for buyers. 

Weighing the Advantages

Less complexity

In traditional ITO contracts, statements of work can be thousands of lines long - a you-do-this-I'll-do-that breakdown of tasks to be performed either in-house or by the service provider. In cloud computing, on the other hand, the software, labor, processes and facilities are all bundled together in the provider's cloud. If it's in the cloud, then it's the provider's responsibility - case closed. So instead of taking many weeks to negotiate statements of work and financial responsibility, both parties can instead focus on the solution and its business benefits.

Traditional ITO can also be a pricing nightmare for buyers, as it's virtually impossible to get an apples-to-apples comparison. If you're spending $3.50 per terabyte of storage versus someone else's 50 cents, it might be because you have hardware, software and labor costs built into your rate. In cloud computing, conversely, everyone is buying the same thing, so pricing is more transparent. Buyers can compare such metrics as price per named user, price per concurrent user, charge per controller, or SPECint for processing power.

Reduced dependence on geography and labor arbitrage 

ITO relationships have long wrestled with questions about location and service quality - and the culprit has often been offshoring, since it simply takes time for a new, low-cost market to mature. That's exactly why, for example, a medical device manufacturer recently ruled out China as an ITO delivery location. The company wants to minimize its dependence on that market's lifecycle. 

But cloud computing takes some of the location concerns out of the equation. With cloud computing, labor arbitrage will become notably less important versus automating the right business processes through outsourcing. Today, for example, you might have your computer systems in a data center for Asia-Pac, and the people managing those systems are located in the control room of the data center. As such, geography, assets and people are all linked.

In cloud computing, however, the data center location is less important, and the people can be anywhere as long as they can manage the cloud. That gives you much more flexibility in determining the location of IT personnel and assets.

Focus on Applications

When it comes to offshoring, cloud computing also stands to challenge traditional thought in another big way. Since the first step in preparing for cloud computing is making sure that applications can actually run on a cloud, many companies will need to remediate their proprietary applications - a labor-intensive activity that may have them looking for the lowest-cost labor market.

Not so fast. Since the cloud-worthy applications are often the ones that drive competitive advantage, companies won't want their trade secrets in the hands of a remote processor overseas. Instead, they'll want to keep these applications close to the vest.

Say, for example, an insurer needs to rewrite its software that weighs the risk of potential customers. Or an agricultural products company has an application that determines how to process raw materials to match consumer demand. Companies will want to use local people to reengineer these strategic applications for the cloud. So instead of offshoring the work as usual, the industry once renowned for sending jobs overseas may start to bring them back home.

Easier implementation

Finally, cloud computing may also pave the way for smoother transitions in outsourcing. In traditional ITO, service providers almost always have to build additional capability to accommodate a customer's processes. But in cloud computing, the environment - the cloud - is already built, and it can be ramped up or down based on the company's needs.

In addition, cloud computing can streamline relationships involving multiple providers. Gone is the pain, for example, of adapting the helpdesk provider's trouble-ticketing system to also work for the data-center provider. In cloud computing, that trouble-ticketing system would be written for the Internet, so anyone can use it. That minimizes risk for all parties and improves service delivery.

Is the Cloud for You?

Cloud computing presents some exciting new options for IT outsourcing, but it's not a panacea, and it's not for everyone. Look at the buyer landscape in terms of a dartboard, with cloud viability strongest in the center. The bullseye - the ideal - is the smaller company that's facing big investments in computing and communications infrastructure. For this company, the option to buy services on a cloud is very financially compelling.

The outer ring - the opposite end of the spectrum - represents the large companies that either can't get their arms around their applications or they have many subsidiaries that would all need to buy into the cloud for it to work. For these sprawling organizations, cloud computing would be an expensive, multiyear transition.

In the middle ring, meanwhile, are the large business-to-consumer organizations like banks, retailers and health insurers. These companies are likely to have well-defined applications that can be rewritten for the cloud, and they probably know their cost per transaction so they can quickly calculate the benefits of cloud computing. One North American health insurer, for example, recently considered buying claims processing as a service in a cloud versus managing a huge in-house portfolio of claims applications.

In conclusion, the outsourcing marketplace is clearly getting ready for cloud computing. IBM is upgrading its on-demand computing centers and linking them in a global cloud infrastructure; HP is deploying its adaptive cloud infrastructure for the U.S. Department of Defense; and CSC continues to invest in its grid computing technology.

Beyond these big three, the marketplace has a wildcard in providers like Amazon, Google and Yahoo. These companies have significantly less experience in providing IT services to corporate clients, but they nonetheless have invested billions in cloud capability. And the very notion that IT managers could use a credit card to buy computing capacity whenever they need it could potentially change the way IT operations are planned and delivered.

Against this landscape of cloud preparations, organizations are wise to consider cloud services in their ITO deals. Companies should keep cloud computing on their radar screen, think about how it could change their business, and start assessing the cloud potential of their critical applications. The clouds on this horizon could serve them well. 

Jack Singh is a client executive and Charles Arnold is managing director, IT advisory at outsourcing advisory firm EquaTerra.