This article originally appeared in the July 2011 issue of infoTECH Spotlight.
Cloud computing has been whispering a lot of promises to IT, ones that CIOs are still not sure will be delivered. While the cloud is simplifying some aspects of IT, it’s making others that much more complex, including outsourcing models and redefining the role of service providers.
From an IT perspective, the introduction of the cloud model actually means that CIOs now have to manage an even more complex, hybrid environment – external cloud services, along with their own internal systems managed in a cloud-like manner, as well as older legacy applications, according to a recent report from IT consulting company Accenture (News - Alert).
Before considering the implications, take into account that cloud computing has certainly come a long way, but still has a long way to go, according to a recent study released by IT consulting firm Avanade. The survey results say that 74 percent of enterprises are using some form of cloud services – a 25 percent growth since Avanade’s previous survey on cloud computing in October 2009, which found the majority of companies that have started to use cloud computing are taking a hybrid approach to adoption. This is one of several recent studies that show enterprises’ uptake of cloud computing and thus changing the IT outsourcing landscape.
Gartner (News - Alert) predicts that during the next few years, market dynamics will determine whether “cloud sourcing” will be the demise of traditional outsourcing, if it will lead to the convergence of services and products currently marketed “as a service,” or if it will result in next-generation outsourcing. What will come of cloud sourcing is not clear, but an EquaTerra (News - Alert) study predicts that cloud computing will dominate the IT outsourcing market this year.
“While some kinds of services are advertised as being as easy as turning on the lights, customers often need more than just raw power. Therefore, 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,” says Gissler.
He also says that cloud will drive outsourcing to become more prevalent as companies will need to manage multiple service providers.
“Given the challenges companies face with cloud services such as security, data integrity and service availability, the important integration role played by some outsourcing providers isn’t going away anytime soon,” Gissler adds. “The ability to advise companies on 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 likely usher in a totally new era of outsourcing.”
Accenture’s February 2011 report, “Has The Cloud Made Outsourcing Obsolete?” also takes into account the inevitable buildup associated with any new entrant to IT, especially one that has the ability to change the management landscape so drastically.
Dr. Leslie Willcocks of The London School of Economics and Political Science, with whom Accenture is currently conducting research into the impact of cloud computing, calls this a “misleading narrative of transformation,” according to the report co-authored by Jimmy Harris and Gavin Michael.
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 this – the 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 all – that these are predestined forces at work and that the effects of this technology will be linear and predictable.”
Dmitry Loschinin, president and CEO of software developer Luxoft, agrees that the cloud is making a significant mark on the outsourcing industry as it increases the demand for new, innovative corporate solutions.
“Whether used in a storage capacity or to greatly decrease carbon footprints, cloud computing has greatly impacted the outsourcing industry and makes the availability of engineering talent with this skill set that much more important,” says Loschinin. “More and more companies are embracing the benefits of the cloud, as previous hesitations have given way to clear cost-savings, infrastructure optimization benefits and improvements in security. As a result, we are already seeing an increased demand for the rework of existing applications and the innovation needed to develop new corporate solutions. That’s where our expertise is needed the most.”
There is no doubt that cloud computing is posing several management challenges for companies outsourcing IT. One of the biggest challenges that companies face is mismatching outsourcer goals and provider capabilities, says Loschinin.
“The most successful outsourcing engagements match the business and technical goals of the client with the culture and strength of the provider. A clear understanding of outsourcing objectives and their close match to the attributes of an outsourcing provider is a must at the start of any outsourcing endeavor,” he explains. “Another challenge occurs when a client’s IT organization is not structured properly to support an outsourcing engagement. Successful outsourcing relationships are collegial endeavors that depend on shared vision, excellent communication, and transparent, compatible processes between the outsourcing client and provider.”
Loschinin also says that outside viewpoints and expertise are beneficial for developing strategies and plans for overcoming weakness.
“However, managerial weakness is never a good starting point for outsourcing, as the client is still responsible for managing successful results in an outsourcing effort. To avoid this, companies should only outsource development functions where key management metrics, processes and success performance measures are well understood and can be adapted by the client organization.”
Also, without clear roles, responsibilities and collaboration in place, the client and outsourcer teams may adopt divergent strategies that can dilute or dissipate the value of the outsourcing engagement.
“To avoid complications, clients should insist upon, and outsourcers should participate in, regularly scheduled “transparency” check-ins to ensure that each company is following the intended workflow and helps to avoid unnecessary confusion, delays, rework and missed opportunities for early success,” Loschinin adds.
“Lastly, companies also face challenges when they do not set clear, measurable objectives with the outsourcer from the beginning. From the onset of the outsourcing relationship, the scope of work and deadlines should be clearly outlined, defined, and agreed on by all parties involved. Without these in place, key project components can be delayed and the overall goal of the engagement overshadowed by missed deliverables, added expenses and more.”
The introduction of the cloud model means that IT departments now have to manage an even more complex, hybrid environment consisting of externally provided cloud services along with their own internal systems and legacy applications.
“From a business process perspective, integration points between different functions and processes need to be carefully managed, since a utility cloud provider most likely will not have a clear grasp of client’s overall business goals,” says Accenture’s Gissler.
Executives at Accenture are seeing a trend of organizations turning to cloud services so they can focus more on the areas that are core to their business – versus spending time on the design and build components of their platforms and infrastructure, adds Gissler.
“Large global companies are taking advantage of cloud services to expand into new geographies,” he explains. “Smaller companies are using cloud to get greater process improvements through automation without having to make the historical large upfront investments that was required in traditional solutions of building all the hardware, software, etc. regardless of number of employees using it.”
The trend toward the bundling of services, sometimes all at once – or in what Accenture refers to as “sequential bundling” – will continue to increase in the next three to five year, Gissler predicts.
“This is being driven by the client need to rationalize the provider portfolio and by adoption of global business services models, which could be described as a shift from outsourcing to the sourcing of business services (including IT), indicating the outsourcing industry is moving into a new phase,” says Gissler, who expects cloud computing and software as a service to bring both simplicity and complexity.
“They will simplify and standardize the procurement of specific services, but it will increase the number of providers and complicate the service architecture as buyers will need help integrating new capabilities with legacy systems, and ensuring security and performance in the process,” he says.
Because of this new set of third parties whose services cut across traditional lines, Accenture also expects the role of the service integrator to continue to rise in importance.
“It takes specialized skills in service integration as well as processes and tools that automate and monitor IT to ensure coordination and oversight between third party providers and in-house IT,” says Gissler. “The cloud has magnified the issues of a multi-sourced environment and strategic sourcing has become not just an integral part of the IT agenda, but a critical part. The key to being a service integrator is to adopt a services mindset across all internal and external capabilities provided in IT. It’s not just cloud services, it’s all services IT provides to enable the business.”
Global IT strategies and the availability of solid engineering skills around the world will be an important factor impacting outsourcing engagements, according to Luxoft’s Loschinin.
More specifically, he says, enterprises will look for outsourcing vendors with strong global delivery capabilities in an effort to optimize cost structure, increase scalability, tap into global labor pool and foster innovation.
“In the next few years, we will see a continued rise in the adoption of agile development in large enterprise environments. This will allow them to effectively manage processes and respond to change, as well as to have full visibility into possible outcomes for stellar software delivery,” says Loschinin. “The same flexibility that agile software development has provided to smaller enterprises will now allow large corporations to continually transform and thrive in a dynamic environment.”
With the proliferation of mobile device usage in the enterprise, Loschinin says companies will need support to develop applications devices such as the iPhone, Android (News - Alert) and tablet devices like the iPad.
“Because of this, mobile software will surpass application development on all other traditional computing platforms in the near future. Furthering this trend will be companies that demand access to services and wireless Internet connections in cars and airplanes and will push for the development of new solutions to meet this growing need in the market,” Loschinin says.
But perhaps most important for CIOs today, is to begin to understand what it means to operate in a multi-sourced environment – and as with any new technology, assess the risks involved.