Doug Plotkin, Member of PA’s Management Group
PA Consulting Group
Chris Nuttall, Member of PA’s Management Group
PA Consulting Group
There is always something that promises to change everything. It is sought after and desired; there is a yearning for the change that will elevate and energize, giving credence to a moment. In the IT world today, that latest something is “cloud computing,” a way of using the internet to share computing resources (hardware and processing power, applications and software, storage and data, people and expertise) sitting “somewhere else” rather than on a local computer or in a known data center where those resources are received through a dedicated network. Obviously, there are some advantages to the advent of this new cloud model, though they are typically restricted – at least for now – to applications where little customization is required by the user, and security requirements are not too expansive.
A critical question considers the effect of cloud computing on sourcing. Does cloud computing constitute a sea change in the future of a significant, important industry, or is it just the evolution of the status quo? Let’s break it down into simple parts. Traditional IT outsourcing is the notion that a vendor, generally in its own service delivery center (SDC), delivers processing power to a customer via a dedicated network. It has long been true that some of those resources (e.g., mainframes) could be shared between customers. In this sense, cloud computing is an uneventful evolution. Many vendors contend that cloud computing enables “utility” or “on demand” computing where it did not exist before, but this claim is unfounded. Whether one uses the cloud or a dedicated network, the architecture within the data center is similar, so that the manner in which costs are allocated across the customer base does not significantly differ; in both these cases, therefore, the on-demand delivery model is comparable. And, variability is not a new notion at all; indeed, it has been a feature of the outsourcing world for many years through mechanisms like ARCs (Additional Resource Charges) and RRCs (Reduced Resource Credits), enabling monthly changes in demand from the baseline of contracted services.
Now, all this refers to services that are proprietary and customized and which typically drive the very basis of an organization’s business. These services cannot be simply purchased from just any provider at any time, but instead must be procured uniquely. In such cases, there is nothing new in the cloud except, perhaps, a marginally less expensive, and arguably less secure, delivery system from the SDC to the customer. Still, when the services needed do not require customization, cloud computing may have advantages. Software as a Service (SaaS) is an example of how the cloud can deliver certain non-proprietary services while end running traditional approaches. Salesforce.com is one of many widely used applications that fit comfortably within the SaaS model. Although it is mission critical, a SaaS solution may not deliver particular proprietary advantage other than lower cost. But, to be effectively deployed through a cloud mode, it can only be moderately customizable.
Like all new innovations the cloud comes with its risks and tribulations. It has been a trend for some years – often to mitigate the risks of traditional outsourcing models – to develop shared services organizations that centralize the sourcing of various functions. Mature procurement groups apply purchasing power leverage on an enterprise level to prevent rogue departments from going to the market on their own and sub-optimally deforming the best architectural intentions of the organization. Because the computing resources needed to deliver services were, generally, under the control of the IT department, it was not difficult to enforce rules preventing individual groups – or even individuals – from making their own purchasing decisions outside the boundaries allowed by the enterprise. But, the cloud obscures all that by making it easy again for a department to bypass a central purchasing authority which is trying to gain control for the enterprise over applications and how they are sourced; instead, these departments can fly directly to the cloud for the services they may not procure internally. This raises significant ramifications for Procurement and IT departments; for them, the advent of the cloud may be a troublesome game changer with consequences for financial and compliance control management.
So, have we, in the cloud, unearthed an ethereal change? We believe that emerging cloud computing services have not changed the essence of effective sourcing. One must still focus on core competencies, manage demand effectively, create a competitive and innovative supply market, and ensure there is still a high performing governance and management organization. Maybe cloud computing means everything under the sun is new again, but the sun will rise again in the morning, and the earth will still revolve around it.