The New Relentless Economy: How quickly can Cloud blow-up the traditional outsourcing model?

It's not a question of "If"...

We LOVE the Cloud.  When you think that 60% of the costs of maintaining the average server are purely electrical power (and worse with old hardware), simply jettisoning the asset-heavy infrastructure will reap a return.

However, when we delved more deeply into the seeds of Cloud Computing (read our earlier article), it’s clear the future potential of Cloud goes well beyond cost-savings generated by eradicating clunky, inefficient IT infrastructure.  Cloud can harness the true benefits of SaaS delivery and BPO can plug the gaps may companies need to have business services delivered in a readily-available “as you need it” model.

One of the core discussion points on this site over the years has been how the outsourcing industry can find new levels of efficiency - and business value - once companies have maxed-out the cost-savings from lower-cost labor.  The IT outsourcing business still has plenty of mileage shifting software development and support work offshore, but eventually this will dry-up.  Many of the high-end enterprises have already moved as much of the commodity work offshore, and they are having to look at more of the complex infrastructure areas for the next wave of productivity gains.  Cloud delivery is going to pay a pivotal role in the heart of the future global sourcing delivery business, but the critical question is how quickly it will become adopted.

Stephanie Overby’s latest article in Computerworld magazine has some excellent talking points:

  • Gartner predicts that by 2012, 20 percent of businesses will own virtually no IT assets.  “While adoption of cloud services is still low, outsourcers need to adapt to this change. The days of dedicated data centers are probably limited” (Susan Tan, Gartner)
  • “Enterprise decision makers are rightfully fed up with old-school, black-box, ten-year handcuff deals” (Phil Fersht)
  • While Doug Plotkin, of PA Consulting, seems to hold the opposite view that enterprises need to invest in research and take their time, before making radical decisions to their architectures; “Large established firms should research the market for the areas they can participate in without going overboard on the idea that they should completely re-architect their solutions and delivery mechanisms”.  Hmmm, maybe Doug spots a consulting opportunity…

The answer undoubtedly lies somewhere between a slow, methodological approach and a fast-paced impetuous decision.

One thing is clear: we are now living in a New Relentless Economy, where business are aggressively looking at new ways to drive out cost, improve productivity and find new thresholds of performance.  I don’t predict Cloud to sit around for years before companies finally adopt it.  Moreover, we’ll see a heavy vendor-push (already started by some) to move clients quickly onto Cloud-based platforms and train IT staff to develop Cloud-capable applications to support the transition.  Look back two years to see how dramatically the climate has shifted and ask yourself “will enterprises hang aroundin this environment, or are we on a relentless spiral for productivity improvement?”  

I predict we’ll start seeing the first wave of genuine Cloud-based business utility offerings becoming widely adopted within a two-year time-frame.

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14 Comments

  1. Syed Suhail Ahmad
    Posted April 9, 2010 at 11:17 am | Permalink

    It is coming soon.. wait for 1-2 years, or even less. Bad economic conditions are also forcing organization to go cloud and cut the spending in IT. I think once knowledge workers realise the benefits of cloud, they will change the game of doing business.

    SaaS/PaaS vendors have to come up with better security & privacy models, which is causing some concerns – especially in healthcare organizations.

    Syed

  2. Posted April 9, 2010 at 11:50 am | Permalink

    I don’t think it will blow up anything – I think it will bring great advantages to the table. Cloud – SaaS and such, is not new, it just got big enough to get some acronyms and attention. The Cloud/SaaS platforms are still created by us humans, and until such time that the machines look at us as redundant, there will be stuff to create… technology will always get attention and will always bring a better way in the People/Process/Technology Model

    Fred Dempster

  3. Posted April 9, 2010 at 11:58 am | Permalink

    Fred,

    I think the key issue here is the asset-light mentality of Cloud to eradiate a lot of the IT infrastructure pieces that have been such an incumbent feature of traditional ITO to-date. In this climate, it seems many firms will move more aggressively towards this model to rip out costly infrastructure. Hence the expression “blow up” as opposed to “gradually improve”,

    Phil

  4. Posted April 10, 2010 at 8:32 am | Permalink

    As many times, Phil’s question sent me digging for more info. To me, it just boils down to how fast it will happen. Why would anyone say different – and totally, all data possible. You can still go to a former Accenture building here in Chicago will Bill Gates’ quote “No one will need a computer faster than 4.75mhz or a hard drive bigger than 10MB” and add the fact that my first computer started out as a box of stuff from Heathkit before “PC” was an acronym. Each issue of NetworkWorld brings new stuff that assures there is no end to what Cloud can do. Even Greenpeace can’t resist, noting the expected tripling of Cloud from 2007 to 2020.

    Fred

  5. Charles S
    Posted April 10, 2010 at 9:55 am | Permalink

    Phil, you leave out the issues about secure data in clouds. Some secure data is not meant for Clouds period, it is just too sensitive for this reason or that reason. I see this issue holding back the transition to a full Cloud model.

    The Cloud is a return to the old mainframe/dumb terminal days in some vendor forms of it (SaaS (e.g. Google Apps, Chrome OS) and quick demand adjustment in other forms (e.g. Microsoft Azure). As long as the solutions do not require high amounts of data security, the model can save money, as with Azure you can shift your solution to different data centers around the world (in real time) for lower local network latency.

    So, I see the Cloud as just one solution but there will still be a need for in-house data centers and servers. This data most often needs a non-outsourced IT workforce to manage. There are also some companies who are bringing in other IT work back in-house as some solutions are often best built with local talent without timezone and/or language barriers that increase overall quality.

    Charles Schoeneberger

  6. Adrian Stone
    Posted April 11, 2010 at 9:15 am | Permalink

    I liked Charles Schoeneberger’s comparison to the mainframe/dumb terminal solution. I think for a fair comparison to cloud you need to go way back in IT history to the old computer bureaux days – sometimes know as time-share (before my time, no really). Let’s hope cloud is a more successful model than time-share…….

    Adrian

  7. Posted April 11, 2010 at 9:22 am | Permalink

    @Charles: I don’t see these data security issues as very different from what is going on today with third-parties managing externalized datasets for their clients. The same regulatations concerning moving data offshore / protecting client information will still apply. “Private Clouds” are a way to alter the perception of buyers, but essentially I see the “security” argument as more of a defensive strategy from worried IT professionals who have plied a great living protecting data inhouse. Those cloud providers which want to lead the market will offer data security solutions with their offerings that are going to be more advanced than most companies can delivery for themselves inhouse. They prefer the “asset light” model and will invest on broad Cloud offerings to enable those deals to happen. Sorry, I just don’t buy it

    PF

  8. Posted April 13, 2010 at 6:16 am | Permalink

    This is definitive “hype”!

    The three key attributes of cloud computing are virtualization, elasticity and pay-as-you-go.

    Virtualization and elasticity are all about hardware capacity and do not impact outsourcing. (Remember, most data centers are already oursourced, cloud or no cloud).

    Pay-as-you-go is relevant to BPO but not ADM. Given a large chunk of India-based outsourcing is in the ADM space, this too will be untouched by cloud computing.

    Pay-as-you-go is of interest to consumers but consumers do not outsource! Fortune 1000 corporations do, but they have large volume BPO processes; pay-as-you-go will not reduce their costs. Labor arbitrage and outcome-based pricing will.

    Outcome-based pricing looks very similar to pay-as-you-go until you recognize that outcome-based pricing is quite independent of cloud computing. Most BPO outsourcers are already writing it into their contracts with no whiff of cloud anywhere in the contract.

    So, where exactly is the connection between cloud and outsourcing? Far fetched I say.

  9. Posted April 13, 2010 at 6:37 am | Permalink

    Kishore,

    I have to disagree here. Too many technical folks fail to view the bigger picture when it comes to Cloud. At a tactical level, when you look at solely hardware capacity solutions, it’s hard to see beyond how it can impact businesses beyond creaking ITO deals. However, you really need to look at the convergence of BPO, SaaS and Cloud in a broader outsourcing context to start to visialize how the three pillars of business delivery can – and are – coming together in a blended outsourcing model. Yes, it will take time (and I have called out a 2 year time frame to see some real progress here), but it has to happen, and our recent “state of the industry” survey data supports this: http://www.horsesforsources.com/category/the-industry-speaks. BPO provides labor arbitrage and the ability to personalize “standardized” solutions, SaaS provides the one-to-many process templates that underpin the BPO, and Cloud the delivery engine. Moreover, the virtualizaion that Cloud provides also adds a whole new layer of cost-arbitrage for clients – the arbitrage of unwanted, inefficient hardware and ludicrous wastage of costs on energy to house and support infrastructure.

    I completely agree that is far more easily said than done, and we are seeing a huge resistance to this movement from the IT professionals threatened by this trends, but the bigger picture doesn’t lie – companies are constantly seeking new avenues of cost-elimination and Cloud – combined in an outsourcing context – can provide that for many companies willing to embrace it,

    Hope this clarifies my position,
    PF.

  10. Posted April 13, 2010 at 7:11 am | Permalink

    Phil,

    The difference between hype and vision is a story-board of the future.

    Consider a global bank which has outsourced trade settlement to an Indian provider. All their hardware and proprietary software is in an outsourced datacenter in the US / Singapore / Australia. People are in India.

    How will their operation look two years from now, when the BPO + SaaS + Cloud convergence actually happens?

    Alternately, consider an Insurance company that has outsourced claims adjudication to an India-based provided. What will they look like two years from now?

  11. Posted April 13, 2010 at 7:31 am | Permalink

    @Kishore: the global bank can locate delivery personel wherever it wants. The bigger issue is what is chooses to do with its current outsourced datacenter. They could “sell it” (or transition it) to a service provider as part of a Cloud engagement and the service provider can work with the bank to complete a detailed application audit to see if it can Cloud-enable its software. It’s all in the metrics, ultimately. Once service providers can make money absorbing clients’ datacenters and moving them onto their Cloud models, then the cost-arbitrage makes sense. My prediction was that it’ll take two years to start seeing this type of engagement becoming more commonplace.

    The Insurance company will most likely be using a service provider that has some ambition to deliver claims processing in a more sophisticated Cloud-like environment, whereby its claims adjudicators can access the latest imaging solutions to view picture of claims damages directly in the Cloud, as opposed to storing hoards of the stuff in inhouse servers (just one example of possiblities here – there are many more to think of). Cloud won’t dramatically impact everything, but create a more unique delivery environment for outsourcing services to work. It’s all about the sourcing industry being innovative and using these new tools more effectively…

    Phil

  12. Ken Cameron
    Posted April 13, 2010 at 5:03 pm | Permalink

    First, a couple of comments on earlier comments: Service Bureau Corporation (spun off from IBM as a result of the Consent Decree with the Dept of Justice) was the first Cloud Computing provider. ADP was the first SaaS provider with payroll. Both were in the 60′s. Kishore said “The three key attributes of cloud computing are virtualization, elasticity and pay-as-you-go.” You forgot automation, and automation at a level that most enterprises have not experienced. Automatic scaling (up/down), automated provisioning, etc., are critical components of the cloud concept. IMHO, the focus for the larger enterprises will be implementation of internal private clouds, however, quickly evolving into hybrid clouds where the enterprise will absorb external resources into their private cloud instead of laying out capital for additional capacity or technology refresh. The $64,000 question is how fast enterprise developement groups will begin developing cloud capable applications.

    Regarding the core question of the article as to how fast Cloud will overtake outsourcing, I believe it is already having a major impact. Outsourcing deals are getting smaller and shorter in duration. When a company looks at $100 per virtual instance in the cloud versus $500 per instance with an outsourcer, the mud-slinging will begin. Outsourcing vendors will eventually be forced to evolve into being cloud providers. It will be a dramatic change to their business model, from today’s fixed-price, long-term structure to the cloud’s variable price, short-term (if any) model. Any client who is currently evaluating outsourcing should be asking the vendors to present their cloud strategy and how it would benefit them if they sign with that vendor. If not, I hope they are only looking at a 2-3 year deal.

    One thing for sure, this new decade will be one of the most interesting in the IT industry.

  13. Posted April 14, 2010 at 3:24 am | Permalink

    Phil,

    You business scenarios are illuminating, particularly the insurance one.

    But the banking scenario leads to the primary roadblock to cloud adoption: cloud, at its heart, relies on hardware sharing for delivering value. Banks demand isolation even while they outsource half-way around the world – access controlled work-areas, private VLANS, dedicated servers.

    If you further push them towards application sharing…I’m not convinced they will buy the idea, even two years from now. But as you point out, some compromise solutions will surely evolve but very, very slowly.

  14. Palan
    Posted April 19, 2010 at 10:47 pm | Permalink

    Phil,

    I agree with your views on Cloud computing and am also beginning to believe – cost of security is going to increase, by security i mean data security/ protection. Few applications can be moved to cloud and it makes sence to move them to cloud to achieve business value.

    I also feel that out of 100% of IT applications 60 to 70 percent can eventually move to cloud in next 7 to 8 years time… may be 10 years as well

    So in this decade we should see interesting changes in IT industry.

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