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Outsourcing
Many cloud enthusiastsproponents of a simple utility model for providing business serviceshave written off outsourcing companies for dead. But the shakeup within the services industry has meant more complexity, not less, resulting in a critical new role for value-added outsourcing.
What if you could access information technology and business services as easily as a homeowner accesses electricity? Thats the promise of the cloud, as its now called: a utility model for computing capacity, software and business functionality that is redefining how organizations operate and how they serve their customers and constituents. Its also redefining the role of service providers and outsourcing companies. The big question: Is the cloud making outsourcing obsoleteor more important? The utility metaphor is inevitable. It also explains why some might think that cloud technologies enable a kind of do-it-yourself approach to business services, eliminating the need for value-added outsourcing. After all, homeowners dont need a personal contractor to integrate the coal companies, turbine manufacturers and engineers behind electricity delivery. They pay their bills and turn on a switch. So is a similar kind of easy access to business power the inevitable evolution of the services marketplace? It might seem so. Companies already can simply provide a credit card number to a cloud IT provider and get computing capacity within minutes. They can contact a software-as-a-service provider and get ready access to robust cloud-based capabilities in areas such as sales, CRM and finance. With that kind of responsiveness and ready capability, will a CEO or CIO need a service integratora traditional outsourcing partneranymore? The answer is: Yes and no. The cloud is indeed simplifying some aspects of the IT and business services world. But its also making many others more complex. Some
kinds of services might actually become almost as easy as turning on the lights. On the other hand, customers often need more than just raw power. The electric company isnt in the business of providing advice about what appliances your home needs, for example, or about how all your fancy new electronic equipment works together. Different folks need different strokes. So the various levels of service needed in the new cloud environment will inevitably result in a kind of shakeout within the outsourcing industry itself, resulting in a range of providers offering alternative value propositions at a variety of price points. The danger for corporate customers at this point in the evolution of cloud services and outsourcing is in overemphasizing the easy parts while paying insufficient attention to the hard parts.
Complex IT environments
From an IT perspective, the introduction of the cloud model actually means that CIOs now have to manage an even more complex, hybrid environment: externally provided cloud services along with their own internal systems managed in a cloud-like manner, as well as older legacy applications. From a business process perspective, integration points between different functions and processes need to be carefully (and commercially) managed, since a utility cloud provider most likely will not have a perfectly clear sense of its clients overall business goals to say nothing of the needs of the clients customers. Given the host of other challenges companies face with cloud services security, data integrity and service availability chief among themthe important integration role played by some outsourcing providers isnt going away anytime soon. Indeed, the ability to advise companies on
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We can implement business applications we need much quicker when they are provisioned in the cloud
Cloud empowers us to access best-in-class applications quickly, which we could not have accessed readily before
Cloud enables us to focus on transforming our business, and not only our IT function
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Source: HfS Research and The Outsourcing Unit at The London School of Economics, November 2010
the proper design of their business models based on multiple service providers, and to help them harness the potential innovations arising from the interaction of these providers, will in all likelihood usher in a totally new era of outsourcing for providers ready to meet the challenge.
research into the impact of cloud computingcalls this a misleading narrative of transformation. According to Willcocks, IT industry hype about technology as the primary driver of sustainable change has been associated with virtually every new generation of technology. On the one hand, you can see the almost religious overtones in some of thisthe need to be born again and leave the old world behind. On the other hand, he continues, there is also some sense in which converts speak of the inevitability of it allthat these are predestined forces at work and that the effects of this technology will be linear and predictable.
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What the hype ignores is the complexity of change and the considerable stake that the current players (both buyers and providers) have in whats happening. Companies are not, in fact, powerless entities buffeted by uncontrollable forces; most are savvy enough to understand that technology evolution requires the evolution of business models too. It is highly unlikely that large, global enterprises will simply toss out those IT solutions that keep the lights on today in favor of the technology du jour. At the same time, IT and business process outsourcing providers are acutely aware of the implications of cloud services and are actively working to evolve and leverage their own capabilities in light of this change. Through their existing client relationships, moreover, they are in a strong position to shape how these new cloud technologies develop.
A number of false assumptions lie at the heart of some claims made for cloud computing.
Second, looking at the financial side of the equation, the cloud can deliver some astounding results. Softwareas-a-service applications cost less to implement and maintain than a companys own applications. And because providers offer software for multiple clients running on their cloud, marketplace competition creates stronger incentives to continuously improve the software, making sure all the new bells and whistles are there for clients as they are made available. That generally doesnt happen as effectively for companies running their own shops, providing services only to internal customers and competing for scarce investment dollars with other functions and business needs. From an infrastructure cost perspective, the architecture that underpins a serious cloud providers products redefines presumptions about data storage costs and may make it a no-brainer to use a cloud provider rather than maintain a companys own private data center. Some estimates place the cost for storage on the cloud at as little as 10 cents a month per gigabyte, compared with as much as 25 dollars a month for storage inside a companys own firewall. For a large multinational, those savings can amount to millions of dollars per year. A number of false assumptions lie at the heart of some claims made for cloud computing, and companies that proceed based on those assumptions could find themselves in trouble. For example, some commentators who see the cloud as a kind of do-it-yourself model for business and IT services apparently presume that cloud-based offerings wont require any modification or customization. For a large enterprise, that is seldom if ever the caseor will be for only small and discrete processes that do not
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require much coordination on a firmwide basis, and whose impact is thus less widely felt. The idea that a cloud-based model will inherently simplify services is also a dubious proposition, even at the basic level of procuring raw computing power. Yes, an organization can easily acquire storage and run applications by renting server capacity. But from an enterprise perspective, that means that IT executives now must manage multiple external cloud providers and an internal IT environment that is in all likelihood a hybrid between traditionally run services and others run in a cloud-like manner, as well as various legacy systems that cannot readily be given up to the cloud. Finally, and most important, theres the not inconsequential matter of service integration, which will become considerably more complex as the number of providers increases. At the moment, such integration is not part of the business model of most utility cloud providers. It is important to understand what integration is all about in the traditional outsourcing model, versus how it will look in a cloudbased environment. Today, integration is really about getting multiple vendors, across systems and functions, to work together to manage basic services in a common and consistent way. If an application goes down, the company providing the desktops needs to be able to work easily with applications providers to solve the customers problem. In an environment where companies are sourcing business and IT processes on the cloud, however, the greater integration challenge will be integrating data consistently across multiple services and then understanding the end-to-end
business process thats being serviced so that a company can be confident that its employees and customers are being served properly. Take a common financial process like order to cash. In a cloud or software-as-a-service environment, a company might use five different cloud-based services to run that end-to-end function. But from the companys perspective, all executives really want to know is how quickly they can get from order to cash, and how the speed, efficiency and cost of doing so can be influenced in a positive way. At this point, monitoring and managing that integrationkeeping in mind the ultimate business goal of the serviceis a capability well outside the comfort zone of most cloud providers. Utility cloud providers are also becoming aware that clients expect them to assume liability for data security and integrity. These companies are, after all, product and software vendors at heart. Being able to do more than issue periodic software updates and attend to the hardware detailsto tend to the data across services and ensure its safety and integrityrequires skills, mindsets and business models that most utility providers do not currently have.
The cloud will hasten the emergence of multiple classes of outsourcing services and providers.
Class system
The role of outsourcing is changing dramatically and will continue to do so as companies increasingly rely on the cloud for IT processing and business services. We are, in fact, entering a period when the cloud will hasten the emergence of multiple classes of outsourcing services and providers. At least three service categories are likely to emerge. And at this point in the evolution of the industry, it is possible to identify some of the key success factors that will be in place for each one.
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Offering this kind of business capability will require an outsourcing provider to develop a higher level of sophistication in integrating its own and other services and in managing them seamlessly. Consider the complexity involved even in a rather nascent form of this business design consulting that ensues from a cloud-based environment. One global financial services company initiated a new strategy to improve its client acquisition and penetration efforts, and to enable the better allocation of scarce resources to business opportunities. The solution was a hybrid between what weve termed the utility model of raw computing power and the sales functionality delivered through a software-as-a-service model. The implementation strategy was based on an extremely agile approachstarting with a common core solution and then radiating out to more configured solutions for units in different countries, all in an unusually fast, eight-week timeframe. Offshore resources were used for the raw utility needs, such as data conversion. The result was that the company met its goals for transformation at scale in a compressed, accelerated timeframe. Success factors: Far from putting outsourcers and integrators out of business, the new cloud environment is likely to make the services of an integrator even more critical to becoming a high-performance business. The specific role an integrator plays will change, however. Critically, it will involve managing a more complex, hybrid computing environment. For many companies, an integrator acting as a trusted broker will be needed to solve the interoperability and security challenges of cloud services. Such an integrator will be tasked with taking a holis-
tic view of IT and business services across an entire enterprise, helping mitigate risk and improve quality by managing some or all of those services end to end. This means that a successful integrator will have to be more than a pure consultant, and will need to have deep operational experience across all major business processes and technology solutions. Because it is so early in the cloud computing maturity curve, consistent standards are not yet in place. If part of a process is run by one provider and another part by a different provider, the smooth and seamless integration of services is likely to be a challenge, especially as companies eventually seek to switch providers to improve performance or reduce costs. An integrator will be able to offer better governance to harmonize the pieces and also to ensure that a client is, in fact, making proper use of the computing and process resources for which it has contracted. The integrator should also be able to provide what we can call frictionless business design. Aided by the other two categories of outsourcersutility services and business function providersintegrators will work with clients to combine, recombine, commission and decommission different components of a full IT and business solution. This can reduce the friction of functions operating in obsolete ways, or of newer functions that are not adequately integrated into the business. Companies should be able to acquire a service, use it where it makes sense and then say goodbye to it when its no longer needed. Finally, the ability to bring innovation to a client will be a distinctive feature of successful outsourcing providers in the cloud era. Our research and experience suggest that the next stage in outsourcing will be achieved when service providers and clients collaborate to innovate, and this is another key task of the new breed of integrator.
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This novel kind of relationship between provider and client will draw on distinctive leadership skills and pioneering contractual relationships where risks and benefits are shared more equally. Achieving such relationships takes time and commitmenta commitment that is unlikely to be achieved in a commoditized, cloudbased contract but that can leverage those commoditized value points integrated into an overall solution.
What is clear is that this is a new game that cannot be played successfully under old rules. This is another evolutionary shift in the relentless way that value migrates in an industry. What was innovative becomes commoditized, leadingfor those who intend to keep playing the gameto another era of innovations. Companies that intend to be effective in the new game need to start changing the way they manage their IT and business operations now. They need to plan for the environment of the future; they need to carefully assess the risks involved with deploying new technologies; and they need to understand at an even more detailed level the capabilities of their suppliers and providers so they can choose their integrator properly. Most important, perhaps, is to begin to understand what it means to operate in a multisourced environment, where the different components need integrating, not just once in a while but constantly.
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