Managing turbulence in the cloud
Chris Nuttall, Member of Management Group
Kenneth A. Adler, Partner and Chair of Outsourcing Practice Group Loeb & Loeb LLP
A large proportion of Fortune 500 organizations are now using or planning to use cloud computing based services. The main benefits of cloud computing based services include: (1) obtaining greater flexibility for the organization, (2) reducing costs, (3) increasing operational efficiency and (4) using a cloud computing approach as a strategy for pursuing new technology developments. As a result, many CIOs are taking an experimental approach to cloud-based solutions to drive IT-enabled business innovation.
Complementing increased buy-side demand, the market for cloud-based services is dynamic and rapidly growing. The range of providers is large and varies from new start-ups to established IT service providers. The range of cloud-based services is wide and includes business and IT services such as Software as a Service (SaaS), Platform as a Service (PaaS), and Infrastructure as a Service (IaaS), for both B2B and B2C markets.
The key question is how should organizations contract and prepare for outsourced cloud-based services to ensure a viable and sustainable business case, reduce operational and legal risks and deliver improved business performance?
To answer this question, three key elements need to be addressed which will assist in both achieving better business benefits and lowering costs, while identifying a risk level that is known and that the organization can accept: - Adopting best practice customer-focused, performance-based contracts for cloud-based services
- Adopting an optimal multi-sourcing strategy for cloud-based services that integrates with the wider shared services and outsourcing strategy
- Enhancing governance and management capability to manage ‘in the cloud’ and ‘across clouds’.
The allure of cost savings can blind customers to the current risks of commodity cloud-based service offerings. Currently, many cloud-based service agreements are not a best practice from a customer perspective. These agreements are often short-form (or even click-wraps), supplier focused, and fail to appropriately address the significant operational and legal risks inherent with cloud-based service offerings, which outsourcing arrangements generally outline. As such, these agreements are not structured to deliver the right performance outcomes and have an inappropriate allocation of risk, shifting many significant risks to the customer. Additionally, these exposures need to be considered when adding cloud-based services to existing outsourcing agreements, since these agreements typically are not structured to address the risks associated with cloud-based services.
The key issues that need to be addressed in cloud-based service agreements are highlighted in the table below. These issues can be resolved via various means, depending on the type of cloud services involved (eg, SaaS or IaaS) and the degree to which the services are critical to the customer’s operations.
The successful adoption of cloud-based strategies remains a challenging and evolving area. By adopting best practice cloud contracts, implementing an optimal multi-sourcing strategy for cloud-based service offerings, and enhancing governance and management capabilities, organizations can navigate and manage the turbulence of the cloud and deliver a viable and sustainable business case for change that will successfully improve business performance and deliver the required business outcomes.
Chris Nuttall is an expert on Shared Services and Outsourcing with PA Consulting Group and a leader in PA’s North American business. Chris Nuttall can be reached at email@example.com or by calling +1 212 973 5955. Kenneth A. Adler is a partner at Loeb & Loeb LLP and is the Chair of the firm’s Outsourcing Group. Mr. Adler can be reached at firstname.lastname@example.org or by calling +1 212 407 4284.