Seeing Through the Cloud
This article originally appeared in Outsource Magazine Issue #24 Summer 2011
“Cloud” is the word on everyone’s lips – but what does the advent of the cloud model actually mean for the global outsourcing space? What are the different implications for buy-side organisations and for providers respectively? And is “cloud” actually anything new at all? We turned to the Outsource community to throw some light on this most nebulous of issues…
Nobody with any familiarity with the global outsourcing space could have spent the last few quarters unaware of the advent of “the cloud revolution”. However, the precise nature of this revolution remains up for debate: what some consider to be a true change in the game, others perceive as being a great deal of style and very little substance. While the pros and cons of cloud are becoming increasingly understood both within and – with Apple’s recent announcement of the launch of its iCloud offering bringing the technology into the consumer limelight – outside outsourcing, the long-term ramifications for global business are as yet unclear.
Will the potential to leverage the cloud effectively lead to the kind of savings and functionality that its proponents promise? Or will concerns on the buy-side about security and the immaturity of the model, and amongst vendors about how to glean from the cloud anywhere near the kind of levels of revenue which older delivery models have provided, prove to be insurmountable obstacles the assault on which could be the undoing of many a hitherto-flourishing organisation? Furthermore, the debate is ongoing as to whether or not cloud computing for the outsourcing space is actually revolutionary at all. Many providers have rushed onto the cloud bandwagon without actually creating truly innovative products – the clothes may have changed, but the body underneath remains the same. For enterprise-level buyers already conscious of the long-understood risks associated with traditional outsourcing models, the extra degree of complexity posed by cloud propositions could become one extra headache too far…
“There’s no denying cloud computing is a hot topic, especially among those vendors and service providers selling cloud offerings – or, for that matter, with advisors seeking to help buyers explore, adopt and expand cloud capabilities,” says Director, Research, Shared Services & Advisory at KPMG (and Outsource Editorial Board member) Stan Lepeak. “The more interesting debate is around what is really new (or not) with cloud computing. Is cloud computing truly revolutionary, as some claim, or is it a savvy repackaging by marketers of mostly existing services and capabilities? More importantly, what are the true benefits cloud computing can bring buyers in the near to medium term, especially larger organisations with significant legacy infrastructure and systems investments? And finally, what are the challenges buyers must prepare for, address and balance against potential cloud benefits?”
The advantages of the model for the buy-side are manifold and comparatively straightforward. There is the move from capital to operational expenditure: “essentially this means that cloud allows businesses to focus on their core operations whilst leaving IT to the experts” says Adam Spurr of provider Outsourcery. There are scalability and speed: “companies have the ability to expand or contract services as needed [and] the deployment time is faster as opposed to building the capabilities in-house” enthuses Freeborders’ CEO Paul Liu. There are also, in the words of Derek Johnston, head of IT, Business Stream (see Derek’s report below) “functionality and data that brings together all stakeholders (i.e. customers, staff and supply chain partners) in a business process, combined with lower-cost IT infrastructure support arrangements that actually help people to get their job done.”
Amit Badami, Founder of Emerging Markets Research Group (EMRG), sums up cloud’s appeal as follows: “Cloud computing can create savings by eliminating the cost of servers, software licences, maintenance fees, data centre space, and the benefits of replacing a large up-front capital cost with a low, ‘pay-as- you -go’ operating expense. By using the cloud, companies can also forgo the need to buy in expensive IT infrastructure (equipment or licensing standard software); these savings can be further enhanced by converting to a cloud architecture and consolidating data centres. Cloud can also help better manage scarce IT resources, in particular where skilled IT labour or equipment is not easy to source or is costly. [Moreover] because of the way clouds are designed they can act as a flexible resource and offer scalability. Clouds can be ‘tapped into’ quickly and can grow by assigning more servers to a job, and simply disappear when no longer needed, making clouds a useful tool for managing fluctuating or uncertain work loads.”
“Cloud changes everything,” says Mateen Greenway, HP Fellow CT EMEA Defence, Security, Government & Healthcare. “For HP consumers, it’s a new enablement model that delivers powerful capabilities to users quickly. It supports the consumption of resources in an abstract way where the user does not have to define the underlying technology. It encourages users to experiment, creating new applications and ways of doing business by removing the focus on the underlying technology. So for HP it’s a fundamental shift from selling product to selling a service. IT becomes a resource like electricity to be consumed rather than defined.”
So far so good. But if it were all just sunshine and roses there would be no cloud debate at all; serious questions remain to be answered before the cloud model is fully embraced by the buy-side. Uppermost in many minds – especially considering recent hacking scandals affecting Sony, Citibank and other major institutions – is data security. Placing critical data on the internet is anathema to many CIOs already struggling to cope with increasingly sophisticated – and incentivised – hacker groups.
“Data protection is a concern of many companies, particularly in heavily regulated industries: do you really want to outsource your compliance requirements to an external provider?” asks Alastair Broom, Solutions Director at Integralis – sentiments echoed by David Ebsworth, SOO at Oncore IT: “Security and loss of control are the two major concerns of buyers. Entrusting a business to the cloud provider is a big step, so whether the service is secure can trouble many.”
Not all observers are convinced however that the cloud model brings with it genuinely unique risks. Mark O’Conor, Partner at DLA Piper, believes that the dangers are nothing new: “Following Apple’s iCloud announcement it isn’t surprising that we are seeing comments from industry experts warning of the security risks. Well, yes there are risks, but the risks are not new: we’ve been here before. Cloud computing is a return to bureau computing from the early ‘80s (the early form of outsourcing), but this time with greater bandwidth and processing speeds.”
“Instead of dwelling on the risks,” O’Conor continues, “the more interesting aspects are how the cloud marketplace will shake down. The recent EC2 outages and gaming data hacks have played into the hands of the nay-sayers but have also had a less obvious result: the (re)emergence of the old guard. More traditional technology vendors are now seeing this as their window of opportunity to enter the cloud market as a ‘trusted solution, available on sensible terms’ and are racing to establish cloud-like terms and conditions which tick the box of the utility model, whilst retaining the comfort of more traditional outsourcing concepts such as robust service levels and rights of audit.”
Of course, while infosec might be a major concern for buyers, it’s by no means the only one.
“There are potential complexities and problems that cloud computing can bring its often unwitting users,” believes KPMG’s Lepeak. “These are not-so-new problems: more renegade procurement and implementation of point solutions across the enterprise that raise support costs and further fragment IT architectures, supported standards and compliance and security regimes; potentially faster provisioning of computing services hamstrung by inflexible legacy policies, procedures, contracts and service level requirements; a proliferation of new service providers and applications, some of which will likely fail or get acquired in short order, complicating and raising the cost of supplier management and governance (it will also result in a loss of economies of scale and create integration nightmares between cloud services and legacy IT environments.
“Many buyers are forgetting why the rage of the 1990s was to move to integrated software suites: a myriad of applications that require user training and support resources and capabilities; pricing models that are convoluted, difficult to contract, open-ended and not necessarily more cost-effective when fully loaded (it is not clear why cloud service providers will have any less ambitious profit margin goals than their legacy predecessors); application standardisation that does not adequately meet legitimate user customisation needs or ends up being extensively customised anyhow often at excessive cost (if offered enough cash many SaaS providers will create expensive, one-off application variations).”
Lepeak adds: “All of these challenges are surmountable. But this surmounting has a real cost in terms of effort, time, money, resources and skills. These and many other cloud computing externalities form the ‘buyer beware’ or at least ‘buyer be aware’ manual for cloud computing.”
For the provider market there is likewise a host of pros and cons inextricably bound up with the cloud model. However, whereas for the global buy-side the advantages and disadvantages – while of great import when considering sourcing strategies – do not have much bearing upon core activities, for the provider community cloud throws up questions of existential importance. Traditional pricing models are in many cases simply unjustifiable once cloud services are implemented: if one of the great attractions of cloud for the buyer is decreased cost, it’s an inescapable effect of that cause that revenues will be under threat; simultaneously R&D spend may have to increase dramatically while the organisation endeavours to maintain service levels to existing companies served through traditional non-cloud offerings. At the same time, however, providers face a massive opportunity to seize market share through innovative, well-crafted cloud offerings providing high-quality service to global businesses – and the format’s scalability could also open up new revenue streams with smaller organisations to whom large-scale outsourcing propositions may previously have been uneconomical.
“From a providers viewpoint – the whole cloud computing paradigm is both an opportunity and a threat,” says Ashish Gupta, VP & Head of EMEA for HCL. “For long-term enterprise-centric providers the emergence of a cloud computing ecosystem offers a huge array of opportunities to engage with their clients and migrate to more flexible service offerings where the need for a service integrator across (maybe) hundreds of cloud service providers will only increase. It also will help bring down their costs for servicing clients. The threat is if applications change fast enough in enterprise environments then a lot of large outsourcers will not only have to contend with RIM and IT consolidation as a volume deleveraged but also ‘cloud’ services – all of this will reshape the outsourcing provider landscape significantly in the next three-to-five-year timeframe.”
Gupta continues: “For providers the cloud is an operational challenge to the extent that cloud services mean a significant fragmentation of the services landscape in an enterprise – managing that as a ‘single hand to shake’ and providing a service level is going to be no mean task. There is obviously the short-term challenge for everyone wanting to rush headlong into the cloud where reason and logic may be difficult to sell. For new age outsourcers with flexible service models – the cloud is a continuation of the trend which we have been propounding – increase specialisation on different aspects of the enterpriser service stack leads to higher visibility, lower costs and more choice for customers.”
Venkat Kd, VP Enterprise Business Solutions, Mahindra Satyam, believes that “depending on where the provider comes from, challenges will differ”.
“For all three – hardware, software and services – the push towards becoming some sort of an aggregator poses a business model challenge,” he explains. “For services companies with asset-based revenues, the challenge could be of revenue cannibalisation. For services companies without asset-based revenues, the challenge would be to understand risks and operational discipline associated with asset-based models. For hardware and software companies, the challenge could be risk of revenue cannibalisation and change management with their sales force and adjusting to the new cash flow models.
“For all companies the transition to risk-sharing with the customer and outcome-based pricing would be a huge challenge. From a talent perspective, there is a challenge in building new levels of complexity and sophistication required for the cloud across diverse skill sets, starting from architecture to legal professionals [and in] smooth transition of standards from pre-cloud to cloud eras, especially in privacy and security. Some of the customer related challenges for the provider could be: internal security perceived being superior to cloud-based; fear of losing control; threat perceptions of internal IT; fear of undifferentiated IT use; legacy or sunk investments drag; missing opportunity to re-imagine business or operation models enabled by the cloud (eg. new extended enterprise capabilities, testing flexibilities); conservative approaches caused by inadequate understanding; early adverse critical incidents; lack of national and industry understanding (in varying degrees) to guide its members or constituents on cloud adoption.”
One question regularly arising from the at-times-effervescent hype generated by cloud is whether or not this is actually a revolution at all or if it smacks more of “the emperor’s new clothes”. As HfS Research’s Phil Fersht and Esteban Herrera point out (see their article “Innovation: what is it, and why am I not getting any?“) “Buyers are tired of this nebulous concept, and most recognise that provider offerings are really things that used to exist under different names but have been re-labeled as ‘cloud’…While HfS sees value in the concept and execution, particularly of public cloud solutions, we agree that cloud has fallen victim to an excess of hype.”
Oncore IT’s David Ebsworth believes that cloud is simultaneously both revolutionary and nothing particularly new: “This began a lot earlier than many think. Forward-thinking companies who began outsourcing to the cloud, before it was branded as such, have demonstrated that it is a delivery method that works. Now it has a name like ‘the cloud’ and a next-generation aura, more companies are beginning to jump on board.”
He continues: “Similar to when the term ‘e-Business’ was touted as the next revolution, the term ‘cloud’ is gaining the same momentum. In reality, people saw that ‘e-Business’ was the same as regular ‘business’ and thus will see that ‘cloud’ is just a method of delivery. The ‘cloud’ has opened up huge new opportunities: ‘business’ can now be offered as real time services to other businesses and consumers, and from this perspective the opportunities to outsource or contract to a third party are bigger than they have ever been before. Revolutionary? Maybe!”
So where now for the industry? How will this confluence of advantages and challenges play out? The analysis is almost universal that, revolutionary or not, cloud represents the future for at least a large proportion of outsourcing activity. NIIT’s Ravi Pandey, for example, is in little doubt that the cloud model is with us for good and will continue to expand.
“Cloud computing will continue to grow in the three to four years as more companies recover from the recession. The coming of age of cloud computing will have a profound effect on outsourcing, and it is expected that the large outsourcing deals of a few years ago will be replaced by smaller more value-focused contracts.”
Freeborders’ Paul Liu concurs, believing that “we will see a continuous movement of services to the cloud as traditional IT environments come to the end of their lifecycle… The heavy mobile adoption relies on the cloud for services. Larger bandwith and proliferation of 3G and 4G services will increase cloud adoption.”
Meanwhile Freelancer.com’s Matt Barrie predicts “ever-increasing middleware services, better handling of email, more sophisticated software offerings and a dramatic lowering in price…. Also the cloud will roll out globally to incorporating data centres in every country in the world.”
There is of course no “last word” on this topic – we’re still at an early stage of the story of cloud with many oscillations and dramatic revelations to come. In the words of Winston Churchill, “this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.” Triumphs and tragedies lie ahead; the only certainty is that cloud is here to stay, and it is up to the outsourcing community to determine as far as possible how this revolution plays out.
Matt Barrie, Freelancer.com
Cloud is the future of hosting, and any hosting provider that’s not doing this will be out of business in a few years. Previously if I wanted a new web host, for example, I had to rent a bare bones Linux machine and then proceed to install all the software from scratch. With Amazon AWS, for example, I can snapshot that host and spawn up a new image immediately. I can detach and reattach filesystems to any machine I like.
Christine Sheppard, Atum Corporation
Outsourcing in itself is not a new business model or concept – loud computing is just making better use of the internet to enhance the success (and acceptance) of outsourcing… Let’s face it – we are doing everything else online… why not completely move our businesses into the cloud? The service industry can only benefit from this kind of global internet business model. It will certainly help the little guy…
Mikeal Abramoff, CAD Crowd
Cloud computing enables companies to be nimble and quickly sign up with an account and have access to information anywhere in the world. This promotes globalisation and advantages through outsourcing through cloud software.
Faye McClenahan, Aculab
In a telecoms sense, what cloud computing offers service providers is a new network or platform option on which to run their services. When you then throw cloud telephony providers into the mix, there is the potential for service providers to be able to add more features, services and content quicker than currently possible, and at a reduced cost, yet helping to increase ARPU – or at the very least engender a greater degree of customer loyalty.
Ravi Pandey, NIIT Technologies
Cloud gives providers regular fixed annual revenue; a steady monthly income is an attractive prospect after a difficult few years companies have had to endure. It can also strengthen the client/provider relationship.
How cloud computing helped Business Stream storm ahead
Head of IT, Business Stream
Business Stream was established to operate independently from the rest of Scottish Water from 1st April 2008 in a new, competitive water market in Scotland, open to all 140,000 non-domestic customers. That meant we had to establish a retail utility operation from a standing start in a relatively short period of time. Cloud computing was growing as a serious option for all organisations, but in the case of Business Stream there was a great fit due to:
- Our scale – 200 employees spread across two office locations, but also with home and field based staff, and third parties working as part of our supply chains.
- Lack of infrastructure – we did not own any data centre capacity and operated on infrastructure shared across the rest of the Scottish Water group.
- Standard requirements – we were looking for standard functionality across a range of business functions including finance, human resources, payroll and sales management.
- Aggressive timescales – the time to separate from Scottish Water was imposed by the regulatory authorities, meaning that new solutions had to be up and running quickly.
While choosing cloud computing resources has been a great success in terms of delivering cost-effective functionality in the required timescales – something not to be under-estimated in terms of achievement given the track record of systems delivery projects – there is another aspect to cloud computing that has the potential to be a significant source of benefit to many organisations.
In the past, organisations had both a desire, and at times a technical necessity, to standardise IT infrastructure across their estate, often driven by the fact that locally installed client applications software would have specific technical requirements in terms of computer resources and configuration. Large multi-site organisations, in looking to outsource their IT, would engage organisations with the scale to support their user base through standard processes and technology, often across international boundaries.
Cloud computing frees organisations from those constraints – the application, not the desktop build, is the thing that unites and integrates people across the organisation.
Business Stream has gained from this second major benefit of cloud computing because by separating our IT infrastructure support arrangements we have been able to select partners with the right fit for our relatively small organisation, not the entire Scottish Water group.
The lesson is that locally sourced, tailored IT infrastructure support arrangements, combined with rich functionality delivered through cloud computing, can provide organisations with the best of both worlds – functionality and data that brings together all stakeholders (i.e. customers, staff and supply chain partners) in a business process, combined with lower-cost IT infrastructure support arrangements that actually help people to get their job done.