The Industry Speaks, Part IV: Cloud services will separate the “real” business services providers from the body-shoppers

GruyereFor once I am stumped for a catchy title, and am opting for some good ol’ jargon-laden gruyère to tee-up Part IV in the series discussing our New Normal in Outsourcing Delivery survey.  At least I’ve avoided the ‘T’ word lately, to grant myself a morsel of poetic license to indulge in a little schmolz… 

But we all love the term “Cloud” (c’mon, you know you do…).  It gives us a nice fluffy visual of ripping out all that complex, clunky computing chaos from our organization, and having some nice services vendor deliver us everything we need for our business… leaving us with simply a screen, a keyboard and lots off additional space in the office to set up that Fussball table… or a Twister mat in the corner… 

Why Cloud Computing is the future of outsourcing delivery 

While I am probably the first cynic to de-odorize the latest cheese fumes that infuse our industry, I have to admit I am rather taken with the whole philosophy of Cloud Computing.  Cloud signifies the coming-together of business process and IT delivery in a fully outsourced model (see earlier post).  Cloud’s not simply about outsourcing the heavy-duty computing grunt – it’s about the delivery of real business services, enabled by the applications needed to support them, powered by the requisite computing and network infrastructure to host and deliver them. 

 

If Cloud was only about gutting the clunky, expensive and environmentally-unfriendly infrastructure, and having Amazon and co. deliver the computing power, then it’s really just an infrastructure utility offering.  However, if you’re going to have your data and applications hosted externally in the Cloud, do you really need to manage them yourself anymore?  It all depends whether you need to customize the applications yourself because it gives you some sort of competitive advantage.  For example, do you really gain a competitive edge with the way you run your benefits administration, or process your insurance claims, or isn’t it time to find a services vendor that will host the app, the associated infrastructure and even process the transactions for you?   If you feel your edge is customer service, or great internal employee care, then you can keep inhouse staff to take care of that, but what’s the point in managing all the related IT and back-office processing if someone can do it for you? 

To refer back to the fundamental principle of outsourcing, if a third-party services vendor can perform a task for you at lower cost, and to an equal or higher standard, and the costs and risks of transitioning into the outsourced environment are outweighed by the business benefits, then there’s little sense in doing it yourself.  And if that vendor can add genuine consultative value to improve that task and add to your overall business performance, then we’re talking about real business effectiveness, and not simply a cost-arbitrage scenario.  

Cloud’s value will only be reached when vendors and customers are honest with themselves 

The challenge posed to the outsourcing industry to find new performance thresholds, is shared equally by both customers and services vendors: 

1) Customers:  do you know how to take business performance to the next level, and are you having the right conversations with the right services vendors who have the process depth and delivery model to help you determine what that next level is?  Do you have full confidence in the solutions being touted by the vendors with whom you are talking, or are you afraid you’re simply being heavily “sold”?  Have you seen real evidence of their capabilities to deliver real business effectiveness? 

2) Services vendors:  have you determined where you’re truly distinctive in the market and can bring real business performance improvement to your clients beyond simple cost-efficiencies?  Or are you simply following the crowd and adding a thin veneer of industry jargon over your standard capabilities?  And if you choose to ignore the hype and focus on standard service delivery, will you get squeezed out of the market in the future by smarter competitors with deeper process and delivery capability? 

The question is how long it takes for our customers and our services vendors to dig deep and find honest answers to these questions.  We knew back in 1995 that e-commerce was the future of retail, but it really took a decade for it to become widely-adopted.  Cloud will likely take 3-5 years to become fully-formed as a business utility offering, but we can be sure its seeds have been sewn and its roots already taking shape, as our new study essentially reveals: 

 

Figure 1: The roots of Cloud in an outsourced environment: Two-thirds of  customers now evaluate ITO/BPO solutions as bundled options 

 The roots of Cloud services can be found in today’s blended ITO/BPO engagements 

Just a couple of years’ ago, it would have been unthinkable that so many customers would be entertaining the concept of “hybrid” BPO/ITO solutions, where they would seek to outsource business processes alongside the IT componentry that supports them.  Only a handful of customers had “bundled” both their BPO and supporting apps management with a single provider.  And these tended to be in cases where large customers had opted to “lift and shift” entire shared services operations over to their service provider and it was simply easier (and contractually more attractive) to lump everything over to one vendor to take care of everything.  Today, as Figure 1 illustrates, close to two-thirds of customers are evaluating their outsourcing options looking at both both ITO and BPO in a more blended model and nearly one in five are doing it extensively (that’s a lot of engagements). 

In many engagements today, we are seeing both ITO and BPO feed off each other, where services vendors are getting much more proficient at cobbling together hybrid teams of systems architects and business process analysts to develop broader engagements that tackle end-to-end business process flows.  Many of the more recent BPO engagements we are seeing have been extensions of existing ITO relationships, where the incumbent IT services vendor has brought in BPO teams to layer on business services. 

Being predominantly a BPO person myself, I am getting increasing calls from infrastructure guys trying to find out how “BPO fits in with their Cloud strategies”.  Simply put, BPO provides that layer of flexible personalization to a Cloud/SaaS offering that can make it workable for a business.  I may be somewhat biased towards BPO offerings, but I am going to put a stake in the ground and declare that those service vendors which successfully develop Cloud offerings, that are supported by deep BPO expertise, are going to win out in the long-term.  While today, these “bundled” offerings may not be anything nearly as sophisticated as fully-integrated Cloud solutions, pulling together the business process and supporting IT apps and infrastructure, within an outsourced model, is the first step on road to achieving integrated Cloud services. 

 
The bottom-line:  Cloud will separate the real business services providers  from the body-shoppers
As companies increasingly look to take advantage of standardized business processes, the fusion of IT delivery supported by business process services will accelerate.  The ultimate challenge is for IT architects to understand how BPO delivery works, and business delivery analysts and operators to understand how to standardize their services on standard applications and infrastructure. 

Moreover, services vendors need to decide whether to provide the data center and networking capability themselves, or manage it via partnerships.  Customers care about where their confidential information is housed, and many will prefer it to be within the confines of a trusted service vendor.  Don’t be surprised to see some partnerships and mergers between strong infrastructure services and BPO vendors in the coming months as the move to Cloud services picks up more steam. 

To cut to the chase, Cloud Computing presents the biggest opportunity for today’s services vendors to deliver blended IT/BPO services, where they can not only drive down costs through labor arbitrage and the removal of IT hardware with its associated energy costs (that surmount to 60% of the costs of maintenance), but also to improve business performance through holistic, integrated business solutions.  The ability to demonstrate real industry business process depth to compliment a robust Cloud infrastructure is the only way to do it, and the time to develop that acumen is upon us.  2010 will see separate the men separated from the boys in this market.  Vendors pushing standard labor arbitrage services under a thin veneer of “Cloud marketing” will quickly get cast aside as the table-stakes get a lot tougher. 

 

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10 Comments

  1. Posted February 6, 2010 at 10:38 pm | Permalink

    And you doubted my prediction that 2010 was the year for cloud computing to impact the industry? :) Of course, we’ll all believe it when we see it…

    This is the springboard year. Customers, with no labor arbitrage opportunities that have probably forgotten to plan post-transition infrastructure investments need to find cloud computing. Its just not clear how these customers are willing to share this infrastructure with others….

    What is clear, not all vendors are positioned to make the investment. Good planning, great customer communication, and careful investments are needed.

  2. Posted February 7, 2010 at 1:35 am | Permalink

    Phil another very relevant question specially for outsourcing industry, my simple understanding of cloud computing is that it will eliminate need for desktops and centralized storage will ease ramp up of processes, reduce software license requirement and management, reduce risk of data theft, help in DRP and creating backups, reduced power expenses as cooling requirement will be reduced on the floors.

    So the advantages to service providers are plenty from cost reduction, speed of execution, security and flexibility. and if the technology, which is still at nascent stage, get fully developed will increase competition many fold – as start up cost of new players will be far less then existing companies sitting with big inventory, system, process and teams to manage current clutter.

    The problem will be customers will look this as one more opportunity to squeeze costs. I want customers to focus more on enhancing capabilities and effectiveness and enhance their revenue/cost ratio by enhancing revenue and customer satisfaction. Cloud computing should be visualized as tool to enhance end to end business capability and effectiveness and eliminate the business clutter completely for customers, shareholders and employees.

    I still need to come across a successfully implemented cloud service for a complex environment so it seems a lot of hype before execution.

    Ashok

  3. Posted February 7, 2010 at 8:38 am | Permalink

    @Tony: I predict Cloud won’t become fully-formed for another 3-5 years, but we are in agreement that the seeds are being sewn this year, and the data supports that.

    It’s going to take some sizeable investment from the service providers and a cultural shift for some to become more business services-focused. My theory about Cloud separating the “men from the boys” is largely down to the appetite and investment levels needed to raise the value proposition and get out of standard operation work with clients.

    While some vendors are raking in the dough on standard techincal services work, they won’t have the appetite to get out of their comfort zone and invest in datacenter delivery and business process acumen to deliver real cloud services.

    Others will see a more gradual play to augment their current offerings to be more “solutionized / standardized”

    A few will really grasp this and go for fully-integrated Cloud offerings.

    Will be interesting to see whether the strong infra-services outsourcers (i.e. HP/CSC/IBM and to some extent Dell, Fujitsu and a few others) step up to layer their BPO services effectively on Cloud.

    PF

  4. Stephen Cohen
    Posted February 7, 2010 at 9:09 am | Permalink

    Phil,

    You’ve done the best synopsis yet of bridging the value propositions of BPO and ITO under the single blended delivery solution. You’re argument that Cloud services will provide that blended delivery is very compelling,

    Stephen

  5. Posted February 7, 2010 at 10:39 am | Permalink

    Great post. IMHO it is your best. As with many new offerings, many organizations are like kids at a public swimming pool pondering the high dive; many are interested but nobody wants to go first. Many prefer to be a hamster, not a guinea pig.

    Cloud does facilitate IT duct tape to deal with perceived changes in keeping up with the Jonses. Specifically, it is a quick fix for Web 2.0 and the great influx in customer facing IT with the barrage of blogs and customer centric forums. These functions are not major concerns regarding security issues (a major apprehension in the consideration of cloud) and cloud enables rapid storage space availability without requiring investment in infrastructure.

    What I tend to think may be an issue is at what point does the buyer see the risk of tying into a provider further with increased commitment. To compare it to dating, is there a perception that moving from a comfortable friends with benefits relationship to a more significant linkage looks like an engagement ring is involved? We’ll see.

    Another related dimension of possible concern to organizations regards fall out from the recession and market forces of outsourcing, M & As. In this environment, many providers are dinner for diners. If a corporation is happy with their provider, who is to say that they will be happy with the firm that acquires their provider?

    This results in a convergence of technological advances and economic reality and there is risk in that combination. Allegorically, who an organization went out with in the evening and who they woke up next to in the morning could be quite different.

    I recall an old saying about putting all of your eggs in one basket. Perhaps the new SLAs need to be like a prenup as a form of CYA to provide flexibility if the changes in this dynamic market are not satisfactory to the client.

    Fools rush in where wise men fear to tread could be a prophecy for some.

  6. Posted February 7, 2010 at 10:58 am | Permalink

    Another aspect in all of this is the potential of cloud merged with platform as a service (PaaS). This fusion can propel an organization’s IT environment forward with a quantum leap without upfront investment and reduced deployment times, especially as it applies to ERP and modernizing venerable legacy systems. The expertise and economy of scale are strong business propositions for providers. Why reinvent the wheel?

  7. John Steinberg
    Posted February 8, 2010 at 9:37 am | Permalink

    Phil,

    Most of the infrastructure people currently only view Cloud as a way of scaling hosted data services “on demand”. While this adds a new level of efficiency to an organization, your points about blending the scalability of Cloud with BPO is spot-on. Cloud + SaaS is too rigid for many firms, whereas Cloud + SaaS + BPO in a holistic integrated model with the capability to tailor the customer requirements is exactly where this is headed,

    John

  8. Gaurav
    Posted February 8, 2010 at 10:12 am | Permalink

    Cloud represents a threat to the Indian providers, as the move to more standardized solutions accelerates. Customers will want to deal with vendors that are hosting their data in secure onshore datacenters, not offshore. If Infosys, TCS and co are smart, they’ll look to buy-up onshore US and European IT services vendors with datacenter Cloud capabilities,

    Gaurav

  9. Posted February 10, 2010 at 7:37 am | Permalink

    Phil – One of the paramount reason cloud computing will see increased customers adoption is the increased benefits they will derive from bundled IT+BPO offering as the new outsourcing mandate is to look beyond traditional labor arbitrage, lift & shift and ensure sustainable transformational savings which can only be achieved by letting service provider taking end-to-end ownership of both process & technology, thus aligning customer business structure to continuous changing eco system. However this also warrants service providers to gear up an increased competency & knowledge level in both process & technology domain and service customers through a private cloud beyond the traditional SaaS model.

  10. Posted February 17, 2010 at 4:23 pm | Permalink

    Hi Phil,
    Nice getting in touch after a while.

    Like I said back in one of our discussions in 2008 IT/BPO bundled deals are the answer to achieve ‘enterprise agility’ in this drastically changed corporate world. ERPs and SOA middleware which can faciliate BPO are the order of the day. SOA architectures facilitate creating and changing your business processes quickly as the need arises. Having a SOA based SaaS framework which provides an ability to easily span these “internal” processes beyond your organizational boundary to support BPO arrangements can become a strong competitive advantage for a firm today and in to the future.

    EDS (now HP Enterprise Services) and more recently Dell/Perot is a clear indication of where we’re headed. Although I might not like it from the branding perspective (being a die-hard fan of EDS brand) there must be a reason why HP has given away such a valuable brand name, and has converged the offering and positioned themselves as a bundled ‘enterprise platform/outsourcing service provider’.

    What this approach results in providing is what I call ‘Agile Outsourcing’. Agile Outsourcing – ITO/BPO bundling has definite advantages over the conventional ITO alone and BPO alone models, coz the very nature of conventional models encourage (or at least unintentionally result in) disintegrated blame-game silos with mostly conflicting agenda items on each vendor’s list. Agile Outsourcing results in a more agile enterprise which is better suited to meet today’s challenges.

    Technologies that can blend BPO models in the SOA based SaaS architectures will provide a solid platform for ITO/BPO bundled service offerings. I strongly believe that we’re bound to see some strong convergence between ITO/BPO moving forward. There definitely are some exciting times ahead and solid opportunities for vendors who realize this trend early!

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