value insights

Leveraging Cloud OutSourcing- Valutrics

Technology is driving several changes, which could influence how outsourcing is positioned in future. Improved information processing capabilities will enable organizations to integrate processes to get the ability to see, manage, and optimize end-to-end processes in action. There is an interesting opportunity for companies to differentiate themselves from competitors but the investments need to be justified.

Cloud sourcing involves sourcing solutions and computing capabilities to run a business through a combination of cloud applications, cloud platforms and cloud infrastructure. Cloud computing leverages the concepts of infrastructure convergence and shared services and incorporates set of disciplines, technologies, and business models used to deliver appropriately managed IT capabilities as a service30. The concepts have been around for a long time, however technological advancements and emergence of intranet has now accelerated the trend to leverage these concepts more effectively. Cloud services are typically categorized into three areas:
• SAAS (Software as a Service) – e.g.: Emails, ERP, CRM
• PAAS (Platform as a Service) – e.g.: Web servers, Middleware
• IAAS (Infrastructure as a Service) – e.g.: Network, Virtual machines, Voice, Servers

Depending on how the access to the service needs to be controlled, cloud services can be public (open to everyone), private (restricted to few users behind a company firewall), or hybrid (combination of private and public permitting some interoperability).
The model is fast emerging as an alternative sourcing model for companies. Providers with cloud offerings continue to emerging at a rapid pace as acceptance from clients is maturing and gaining momentum. The “cloud” model is leading the fundamental change in the way services are delivered and managed. Cloud computing today promises on demand applications, platforms, and infrastructure for companies to address business problems at much lower price. There seems to be sufficient motivation to use cloud services as clients see the potential to reduce investments in infrastructure, hardware, data centers, and licensing costs. Cloud computing must now be incorporated as a meaningful and growing channel for outsourcing.

Cloud Adoption
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:
1. Availability of reliable offerings to address specific enterprise business domain needs.
2. Risk Management and Sustenance keeping all vendor viability factors like financial, security, business continuity, disaster recovery, future investments would need to appeal the enterprises.
3. Dissatisfaction with current outsourced providers can trigger an alternative model evaluation. This can be due to various reasons some of which , lack of innovation, lack of continuous improvements, poor quality of governance and relationship interactions et. This can especially happen when contracts come up for renewal; enterprise needs require major software upgrade, 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.
4. 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.
5. Cost Reduction benefits need to be real, sustainable, and measurable. Most enterprises today do not 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-upfront costs thus reducing the total cost of ownership (TCO). This can be an attractive value proposition for the C level to support adoption.
6. 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.
7. 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.
8. Overhaul of traditional licensing 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.
9. 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.
10. 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.

Cloud sourcing Benefits
Cloud based services are sold on demand (like a utility), can be flexibly adjusted to user needs and are typically accessed by users via a computer and internet connection. The benefits of cloud computing can be enormous
• Rapid deployment of business applications and underlying processes – The model has the potential to deplete any competitive advantages that large companies have traditionally enjoyed due to large investments in building proprietary technology applications and processes.
• Empowerment of end-user – End users can directly control and provision required resources to address business needs.
• Focus on core competence – Companies can now focus on sourcing “clouds” instead of building technology.
• Device and Location Independence – Services can now be accessed from anywhere using web browser and internet.
• Reduced operating costs and capital requirements to run the business – At a fraction of cost companies may be able to get the same services at a much lower cost base and channel spending to more value added activities.
• Standardization – Cloud computing will also focus companies towards standardization on platforms, technology, and processes.
• Increased capacity and utilization of resources – Improved capacity as virtualization is core to cloud computing. Computing resources like servers and storage devices can now be used at higher utilization.

The Cloud sourcing Cycle
Sourcing of clouds follows typical solution sourcing cycle – aligning the business needs with the right providers with strong delivery capabilities. The cycle will start with reviewing the scope and business case to determine suitability of cloud service as solution. Sourcing professionals can take an active role in evaluating the need and minimizing the risk to the company.
Unique cloud considerations need to be well understood during evaluation in consultation with stakeholders. Some examples of the cloud specific considerations can include understanding of transition complexity and process, data transfer and sharing, security tolerance, business continuity, service pricing benchmarks, SLA expectations, Intellectual property protection, Information and data ownership, multi-sourcing complexity and exit or switching strategy.
Once it is established that cloud computing is the right sourcing solution typical steps will require
• scanning the provider market
• selecting the provider
• negotiating the contract
• conducting a pilot if needed and finally
• Defining long-term implementation roadmap.

The cloud pricing mechanisms are still evolving but it is more and more common to see models today that are based on utilization of hardware and software. The concepts of “utility computing” and “pay as you go” could become a reality if cloud-computing platforms are established successfully over next few years. Interestingly, providers have already started embracing the model as they realize the economies of scale and higher volumes potential and another way of delivering services to clients.

Risk Management with Cloud sourcing
While cloud computing is certainly high on companies agenda today, implementation of model due to security, availability, performance and integration concerns continue to be key concerns. Recent examples of failure include Amazon’s data center outage in April 2011 and recent Microsoft Azure’s outage in Feb 2012 where several websites that leveraged cloud based models went down due to technical issues. Vendor stability is another factor that companies need to carefully evaluate. Most cloud vendors do not have strong and established records of accomplishment of offering client services. In addition, as new architectures and technology is evolving, the services offered by cloud vendors can change over time. Consolidation is also a big possibility similar to typical growth, consolidation, and decline cycles witnessed during dot com era. Switching costs for vendors can also be very high if it does not work out well or new models provide better processes and functionality. Speed to launch and total cost of ownership are other factors companies should evaluate in addition to risks, ROI and benefits associated with cloud computing. Companies therefore should evaluate the cloud services sourcing strategies carefully to determine if benefits justify the risks for particular services under consideration.

For clients the sourcing landscape will start looking as 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 licensing 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. 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.

Cloud sourcing adoption trends
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 standardized services offerings available via the cloud.
• As clients experience the 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
• Conceptualizing 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
• Outsourcing client applications and associated environment to the cloud.
• 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 value added accelerator to provide delivery to clients when quick functionality needs to be integrated to address broader outsourcing scope.

Cloud will continue to emerge as a key sourcing option for enterprises for 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 evident that adoption of model is gaining momentum even though there are enormous challenges with 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. These surfaces whenever the industry goes through a change.

Roadmap for leveraging cloud outsourcing initiatives
The choice of sourcing model for nature of tasks and selecting the Cloud provider are two important decisions that can have a long lasting impact on the business.
Infrastructure scope should be reviewed to clearly differentiate between commodity services and specialized services. Cloud outsourcing is typically successful for commodity services that are delivered against standard service levels. Specialized services may require specialized service providers and unique sourcing models. Choice of sourcing model is typically driven by three factors, flexibility desired, cost reduction and nature of scope of work (commodity v/s specialized). Flexibility in execution decreases as organizations move from using contingent workforce, co-sourced arrangements, managed services arrangements to cloud sourcing.

Some good practices to leverage Cloud outsourcing initiatives include:
• Select providers that have repeatable, standardized solutions to deliver services to their clients. They should be able to demonstrate matured ITIL practices in context of their business.
• The variability in infrastructure areas is much greater than the application development and maintenance areas. As a result, infrastructure outsourcing approach requires more focused sourcing approach.
• Depending on needs and sourcing options, blend strategic assessments, program integration, and execution leveraging by leveraging the strengths of providers.
• Understanding how various functional activities like incident management, provisioning, back up / recovery, system administration, maintenance, change management, capacity planning etc., are conducted across different technology areas (databases, servers, networks etc.), will be required to address the timezone coverage needs, resource capacity required.
• Provide the providers access to documentation, data from ticketing and other tracking systems, as it would help them baseline the demand to determine capacity and propose baseline service levels. This transparency in data collection, analysis and estimation is critical to build trust and ensure that any change in scope and volume of work is well understood both sides.
• Strategic assessments should focus on not just determining the scope of work but identifying areas of gaps, infrastructure enhancements, risks that would need to be accomplished before operations can be smoothly transitioned to providers. It is important to understand and define the handshake not just with external providers but also with internal infrastructure units to ensure process integration and compliance.
• Centralize and consolidate your data center operations and blend them with lower cost, cloud based and remote delivery options wherever feasible.
• Consolidate non-production (development, test) environnements and infrastructure (servers, database, etc.), that is no longer required.
• Invest in transition management. Planned and well-supported transition would establish a solid foundation for future delivery of services.
• Establish a well-defined and flexible contract and invest in building a win-win relationship with the provider company.
• Look beyond the immediate need and encourage continuous improvement. While short term cost benefits may look lucrative, do not lose focus on service quality, flexibility and long term needs.
• Establish internal measurement benchmarks as understanding performance expectations from internal teams would drive establishment of suitable SLA with vendors. Otherwise, you will not know what to expect from vendors. Sometimes these steps are required to prepare for infrastructure outsourcing.
• Focus on maturing processes – Maturing internal processes would drive matured outsourcing. Providers would ask for long term contracts to justify investments in sourcing maturity. It therefore makes sense to mature before you outsource to sign matured outsourcing arrangements and keep the flexibility. Invest in maturing the relationship