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Saturday, March 19, 2011

Cloud & Outsourcing Service Providers

Far too often, am asked the question – Won’t cloud disrupt the outsourcing vendors in a big way. My answer is Yes & No. Yes. The cloud will definitely impact those outsourcing vendors who just wait and watch or do superficial adjustments to the emergence of cloud. For those outsourcing vendors (just like in the case of all the players in the software ecosystem), trying to understand the impact of the cloud and proactively embracing the cloud, the impact is going to positively felt. Let’s examines this further. It’s clear: The cloud’s impact on outsourcing over the next five years will be profound because “it will significantly influence the demand made on the nature of services and the type of expertise built by service players as seen in the industry today. On an As-Is scenario, one of the key changes would be that the demand on labor will go down – as cloud could cut down need for support processes while enabling near real-time data processing across the value chain for business”. At the same time, the disruptive cloud technology can enable whole host of new business opportunities centered on new business and technology and support execution models hitherto just dreamt of.

Zoom forward: The beauty of the cloud technologies is such that overtime, it would be seen that cloud technologies will enable IT service providers to deliver end-to-end services regardless of the various platforms, applications, and technologies involved. Extend the thought – one can easily see that within enterprises the classification of core/non-core would begin to diminish overtime as cloud enables Enterprise IT to act as a hybrid environment of on-premise, private cloud, and public cloud services.
The cloud-based services will change outsourcing contract methodologies. “Buyers will move away from long-term contracts where the return on investment depended on continuous improvement, and move to shorter-term contracts with more flexibility to quickly buy new services. In respect of some business functions, the complexities involved in structuring a deal centered around cloud would encompass requirements like providers promising to take over customer infrastructure and run it from their shared centers to minimize multiple cloud vendor management for customers”. Cloud-based services will also cause an evolution and huge change in the way outsourcing providers price their services.

There are various types of cloud-related services that outsourcers will typically provide:
• Consulting around integrating enterprise IT with private and public clouds to create a hybrid environment
• Organization change management & risk management
• Implementing and managing private clouds to consolidate and optimize infrastructure
• Developing custom applications for the emerging cloud software platforms
• Developing new applications that integrate collaboration, communication, and cloud platforms
• Migrating enterprise applications to the cloud and the related testing, certification, and governance for risk and compliance
• Offering many commonly used functions as –a –service
• Governance mechanisms, regulation compliance
• Making Business –IT alignment realized over time.

In its fully evolved state, service providers will take on the role of a trusted partner to integrate cloud services of multiple service providers with Enterprise IT. Outsourcing providers are going to move up the value chain, offering consulting and information management services — not in the actual delivery of IT but in how buyers should provision and organize their systems and business process workflows.

Services providers that focus on providing services at the lower levels of the infrastructure and platform stack will need to become more agile and nimble to new technologies and faster technology cycles. They will have to provision new services as quickly as their cloud computing alternatives. The ease with which users can access social technologies, mobile devices and SaaS technologies will mean that IT and outsourcing partners will be bypassed, leaving a myriad of contract support challenges. Inevitably, outsourcers will have to support new technologies and do so in a far more rapid manner. This will lead to tactical responses by outsourcing providers for example leveraging service catalogs to provide a range of computing alternatives and service options to business users (including dedicated, shared and cloud services at different prices and service alternatives). But the real change is one of drastic business model change from hierarchical command structures to a modularized, configurable set of services that can be provisioned to clients in a rapid fashion.

Cloud Computing challenges services providers to sell beyond IT - . Service providers that own the IT budget do not have the relationships to effectively sell many of the cloud enabled business services that are emerging, as they require IT, business and executive relationships – and of course process knowledge. “Upwardly mobile” services providers capable of selling at the process layer will become aggregators of on-premise and Cloud IT technologies within hybrid environments.

If a service provider’s revenue is dependent on increased resource consumption as defined by resource units (e.g., managing more servers) any move to the Cloud most likely will result in a net reduction in resource consumption as infrastructure is consolidated, automated and virtualized.
Overall, I think Cloud Computing is about to bring a lot of changes to the traditional Outsourcing world with a few challenges such as security which is slated to have crossed the tipping point and is poised to put customers at greater risk at the cost of low-cost cloud alternatives that today present themselves as the new-world outsourcing parties.
Nevertheless it will accelerate offshoring / outsourcing, in my opinion because:
- It will drive the traditional outsourcing parties to adopt faster nimble methods

- Contract cycles and agreements will have to be revisited as niche core cloud service players will go after the buyers as contract renewal approaches.

- Fixed Contracts will come under fire as demand of variable contracts will increase. Traditional vendors will have a problem as their models are based of one-time fixed with incremental charges while with hardware/software costs dropping dramatically customers will end up paying more

Cloud computing is surprisingly incremental – software provides a potential risk, hardware provides a potential risk but platform as a service offerings and ability to tap huge new markets tilt the scale. We believe cloud models, like SaaS, will take more years to go mainstream in a true sense of the term, ie, relative to the size of the overall software market. This implies that while SaaS has already displaced traditional software in some categories (eg, CRM), a widespread shift will only be gradual. This provides a window of opportunity for IT-services vendors. Newer offerings like platform BPO adds to the service provider pie. Platform BPO can be described in many ways. For example, it can be considered a SaaS model implemented across a business process, or something akin to “process as a service”.

In effect, platform BPO is about:
- Automating a business process to ensure lower dependence on manpower resources;
- Hosting that process on shared infrastructure (of the vendor or rented by the vendor) rather than on the customer’s premises;
- Pricing the offering on a transaction-based model rather than on a cost centric - people deployed model;
- Sharing of the core platform across many customers (multi-tenant) rather than proprietary to a single customer. Platform BPO is, thus, a new way to deliver processes that have already been around, and it is much influenced by the emerging cloud-computing concept.

Three years from now I would say a good number of enterprises will have their strategies in place for how they plan to use the cloud. The smaller the enterprise the greater the potential exploitation of a third-party cloud will happen. The larger customers will likely use cloud-like technologies, but internally private clouds. Our customers are unlikely to use any public platforms except for what they would deem as commodity activities, such as payroll, F&A, HR, etc (not core strategies). How does that impact companies like us? Large enterprise market, our predominant market space, is likely to adopt cloud technologies internally, and try to charge back their internal clients/departments on a cloud-like billing pattern. Therefore, they would like to reduce the complexity of what they have to take advantage of the variable costs from a costing perspective. In a three-year timeframe that will be a substantial transformation for a lot of companies, which translates into opportunities for people like us.

On a three to five-year perspective, most of the enterprises will be transitioning to a cloud-based delivery strategy for tech and services. Not likely too big, as big a transformation as ERP, CRM, etc as it will be technology-driven transformation on the inside. Business benefits that the end user will see will be greater efficiency, from infrastructure, hardware perspective. There will be a better sharing of resources. What we are seeing in a lot of pilots is speed. Change and speed will be much better in a cloud environment.

And that provides an opportunity for outsourcing service providers when it comes to cloud integration, cloud enablement of existing applications or creating new applications all together on the cloud.

As long as the outsourcing partners’ providers continue to be innovative, and adapt themselves to the market conditions, there should be no room to get worried. After all, the outsourcing service providers do carry with us the knowledge of the applications, ecosystem and architecture for the customers we operate with. Value gets created only by assisting the end client in their business process. In its true sense, value is not just created by cloud infrastructure providers, as they are only going to commoditize the data centre service.

So, overall, well run offshore headquartered firms shall see net positive opportunities with large enterprises embracing the cloud.

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