Has the cloud made outsourcing obsolete?

Has the Cloud Made Outsourcing Obsolete?

February 2011

What if you could access information technology and business services as easily as a homeowner accesses electricity?

That’s the promise of the “cloud,” as it’s now called: a utility model for computing capacity, software and business functionality that is redefining how organizations operate and how they serve their customers and constituents. It’s also redefining the role of service providers and outsourcing companies.

The big question: Is the cloud making outsourcing obsolete—or more important?

The utility metaphor is inevitable. It also explains why some might think that cloud technologies enable a kind of do-it-yourself approach to business services, eliminating the need for value-added outsourcing. After all, homeowners don’t need a personal contractor to integrate the coal companies, turbine manufacturers and engineers behind electricity delivery. They pay their bills and turn on a switch.

So is a similar kind of easy access to business power the inevitable evolution of the services marketplace? It might seem so. Companies already can simply provide a credit card number to a cloud IT provider and get computing capacity within minutes. They can contact a software-as-a-service provider and get ready access to robust cloud-based capabilities in areas such as sales, CRM and finance. With that kind of responsiveness and ready capability, will a CEO or CIO need a service integrator—a traditional outsourcing partner—anymore?

The answer is: Yes and no.

The cloud is indeed simplifying some aspects of the IT and business services world. But it’s also making many others more complex. Some kinds of services might actually become almost as easy as turning on the lights. On the other hand, customers often need more than just raw power. The electric company isn’t in the business of providing advice about what appliances your home needs, for example, or about how all your fancy new electronic equipment works together. Different folks need different strokes.

So 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.

The danger for corporate customers at this point in the evolution of cloud services and outsourcing is in overemphasizing the easy parts while paying insufficient attention to the hard parts.

Complex IT environments
From an IT perspective, the introduction of the cloud model actually means that CIOs now have to manage an even more complex, hybrid environment: externally provided cloud services along with their own internal systems managed in a cloud-like manner, as well as older legacy applications. From a business process perspective, integration points between different functions and processes need to be carefully (and commercially) managed, since a utility cloud provider most likely will not have a perfectly clear sense of its client’s overall business goals—to say nothing of the needs of the client’s customers.

Given the host of other challenges companies face with cloud services—security, data integrity and service availability chief among them—the important integration role played by some outsourcing providers isn’t going away anytime soon. Indeed, 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 in all likelihood usher in a totally new era of outsourcing—for providers ready to meet the challenge.

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Beyond the hype
One thing that obscures a true and serious read on cloud computing’s impact on the outsourcing industry is the inevitable hype that accompanies the introduction of any new information technology. 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 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.”

What the hype ignores is the complexity of change and the considerable stake that the current players (both buyers and providers) have in what’s happening. Companies are not, in fact, powerless entities buffeted by uncontrollable forces; most are savvy enough to understand that technology evolution requires the evolution of business models too.

It is highly unlikely that large, global enterprises will simply toss out those IT solutions that keep the lights on today in favor of the technology du jour. At the same time, IT and business process outsourcing providers are acutely aware of the implications of cloud services and are actively working to evolve and leverage their own capabilities in light of this change. Through their existing client relationships, moreover, they are in a strong position to shape how these new cloud technologies develop.

Bells and whistles
Looking beyond the hype, however, it is undoubtedly true that a number of the aspects of cloud technologies and business services do indeed qualify as revolutionary.

First, the barriers to entry for new players in any industry, and the competitive constraints on the “little guys,” are dramatically reduced by the cloud model. A smaller company doesn’t need its own data centers now to handle mass applications like email, nor does it need a costly infrastructure for hiring, training and retaining a cyclical or variable workforce that may need to be scaled up only occasionally.

This utility model extends the benefits of outsourcing—defined as the external provisioning of basic services—to a wider community of organizations. Essential services are now accessible, affordable and quicker to provision, and that, in turn, makes it easier to compete.

Second, looking at the financial side of the equation, the cloud can deliver some astounding results. Software-as-a-service applications cost less to implement and maintain than a company’s own applications. And because providers offer software for multiple clients running on their cloud, marketplace competition creates stronger incentives to continuously improve the software, making sure all the new bells and whistles are there for clients as they are made available. That generally doesn’t happen as effectively for companies running their own shops, providing services only to internal customers and competing for scarce investment dollars with other functions and business needs.

From an infrastructure cost perspective, the architecture that underpins a serious cloud provider’s products redefines presumptions about data storage costs and may make it a no-brainer to use a cloud provider rather than maintain a company’s own private data center. Some estimates place the cost for storage on the cloud at as little as 10 cents a month per gigabyte, compared with as much as 25 dollars a month for storage inside a company’s own firewall. For a large multinational, those savings can amount to millions of dollars per year.

A number of false assumptions lie at the heart of some claims made for cloud computing, and companies that proceed based on those assumptions could find themselves in trouble.

For example, some commentators who see the cloud as a kind of do-it-yourself model for business and IT services apparently presume that cloud-based offerings won’t require any modification or customization. For a large enterprise, that is seldom if ever the case—or will be for only small and discrete processes that do not require much coordination on a firmwide basis, and whose impact is thus less widely felt.

The idea that a cloud-based model will inherently simplify services is also a dubious proposition, even at the basic level of procuring raw computing power. Yes, an organization can easily acquire storage and run applications by renting server capacity. But from an enterprise perspective, that means that IT executives now must manage multiple external cloud providers and an internal IT environment that is in all likelihood a hybrid between traditionally run services and others run in a cloud-like manner, as well as various legacy systems that cannot readily be given up to the cloud.

Finally, and most important, there’s the not inconsequential matter of service integration, which will become considerably more complex as the number of providers increases. At the moment, such integration is not part of the business model of most utility cloud providers.

It is important to understand what integration is all about in the traditional outsourcing model, versus how it will look in a cloud-based environment. Today, integration is really about getting multiple vendors, across systems and functions, to work together to manage basic services in a common and consistent way. If an application goes down, the company providing the desktops needs to be able to work easily with applications providers to solve the customer’s problem.

In an environment where companies are sourcing business and IT processes on the cloud, however, the greater integration challenge will be integrating data consistently across multiple services and then understanding the end-to-end business process that’s being serviced so that a company can be confident that its employees and customers are being served properly.

Take a common financial process like order to cash. In a cloud or software-as-a-service environment, a company might use five different cloud-based services to run that end-to-end function. But from the company’s perspective, all executives really want to know is how quickly they can get from order to cash, and how the speed, efficiency and cost of doing so can be influenced in a positive way. At this point, monitoring and managing that integration—keeping in mind the ultimate business goal of the service—is a capability well outside the comfort zone of most cloud providers.

Utility cloud providers are also becoming aware that clients expect them to assume liability for data security and integrity. These companies are, after all, product and software vendors at heart. Being able to do more than issue periodic software updates and attend to the hardware details—to tend to the data across services and ensure its safety and integrity—requires skills, mindsets and business models that most utility providers do not currently have.

Class system
The role of outsourcing is changing dramatically and will continue to do so as companies increasingly rely on the cloud for IT processing and business services. We are, in fact, entering a period when the cloud will hasten the emergence of multiple classes of outsourcing services and providers. At least three service categories are likely to emerge. And at this point in the evolution of the industry, it is possible to identify some of the key success factors that will be in place for each one.

Category 1: Utility providers

As suppliers of IT power or basic business process functionality, the value proposition for utility providers will focus primarily on efficiency and cost.

For example, we worked with a large logistics company responsible for shipping hundreds of millions of items around the world every year, each with a unique barcode. Those barcodes represented hundreds of gigabytes of data that had to be managed each month. As part of its quality control processes, the company wanted to be able to readily identify errors such as different items accidentally being assigned an identical barcode. That meant a fairly massive undertaking in terms of the storage and computing power needed to perform that kind of analysis.

When a cloud solution was implemented for the company, it involved 150 servers at a total annual cost of $131,000. By comparison, if the company had attempted to implement the same capability within its own IT department, it would have required the purchase of a $4 million high-end server. In addition, the processing power of the cloud solution was truly remarkable: The company was able to process an entire month’s worth of data in 4.3 minutes.

Success factors: The essential capabilities of a utility cloud services provider will be driven by the obsessions of a typical CIO, whose primary concern is the availability of services: On a percentage basis, how often is an IT service up and running when I need it?

For IT executives, the gold standard of availability and reliability has always been what they call “five nines”—that is, services available 99.999 percent of the time. Cloud providers are already coming close, by developing industrialized capabilities to deliver that level of assurance. For example, Amazon Elastic Compute Cloud (Amazon EC2) is a web service that provides resizable computing capacity in the cloud. Amazon’s service level agreements with clients already guarantee 99.95 percent availability.

Small percentage points of performance make a huge difference over the course of a year. If your network availability is 99.999 percent (a figure often achieved in the telecommunications industry), the amount of downtime over the course of an entire year is only about five minutes. By contrast, 99.9 percent availability means that applications are down almost nine hours a year.

That downtime translates into lost productivity, missed sales opportunities, poor customer service and more. For highly transaction-intensive applications in industries such as financial services, outages can cost millions of dollars per minute.

Other considerations that will be critical to the success of utility providers: recoverability—that is, if there is a failure, how fast is the service back up, and is all my data safe?—and, of course, security. At the moment, there is no denying that data security and integrity are sticking points for the ascendancy of the cloud business model. Identifying who is responsible for risk management and mitigation among the new players in the cloud ecosystem will be essential.

Category 2: Business function providers

The second category of cloud or outsourcing companies will be niche providers with deep expertise in particular functions such as sales, HR and customer support, enabling them to command a premium for their services. To use the utility analogy, while the first category is made up of the electric companies, this category is the company that provides the refrigerators, dishwashers, and home theater and audio equipment you need for the home.

For the business function provider, the value proposition will be to make sure your company gets a business function (the “appliance”) that is properly configured for your needs—in other words, not just any old refrigerator but the one that fits in your kitchen space and holds the amount of food that’s right for your family’s needs.

For example, consider one multinational risk management and insurance brokerage company that was using a variety of sales management tools in different locations, making it difficult and time consuming to generate an accurate global pipeline and forecast. Without transparency into the pipeline, sales management did not have the information it needed to make effective decisions about which opportunities required dedicated resources.

The company went with a software-as-a-service supplier—in this case, Salesforce.com—to provide a common means of enabling an accurate global pipeline and forecast. Although the initial deployment was substantial, involving 1,200 users, it took only four months. The company now has a much clearer picture of the sales pipeline, which helps it align resources more effectively; this, in turn, has improved client acquisition and penetration. By reducing the number of different sales management applications, the company has also saved significantly on application maintenance costs.

Success factors: The goal of the second grouping of providers—specialist groups with deep industry and functional knowledge—will be to design applications and services, at scale, that are readily and securely configurable to a client’s specific environment, needs and business goals. These providers will continue to offer important value to their clients, since engaging a software-as-a-service provider is significantly less expensive than a company buying and maintaining its own functionality.

One important advantage of these providers is their ability to offer access to the latest generation of software. Beyond that, however, successful companies in this category will need to be able to drive continuous improvement across their offerings, as well as to include their solution as a modular component in a more comprehensive business design.

Category 3: Integrators and value-added business designers

The third type of outsourcing provider will be one that recasts itself as a “business design” consultant in addition to serving as an aggregator and integrator of critical services. That is, such a company will help its clients become “cloud enterprises”—organizations that are more dexterous and agile because they can adapt their very business design on the fly. Offering this kind of business capability will require an outsourcing provider to develop a higher level of sophistication in integrating its own and other services and in managing them seamlessly.

Consider the complexity involved even in a rather nascent form of this business design consulting that ensues from a cloud-based environment. One global financial services company initiated a new strategy to improve its client acquisition and penetration efforts, and to enable the better allocation of scarce resources to business opportunities. The solution was a hybrid between what we’ve termed the “utility model of raw computing power” and the sales functionality delivered through a software-as-a-service model.

The implementation strategy was based on an extremely agile approach—starting with a common core solution and then radiating out to more configured solutions for units in different countries, all in an unusually fast, eight-week timeframe. Offshore resources were used for the raw utility needs, such as data conversion. The result was that the company met its goals for transformation at scale in a compressed, accelerated timeframe.

Success factors: Far from putting outsourcers and integrators out of business, the new cloud environment is likely to make the services of an integrator even more critical to becoming a high-performance business.

The specific role an integrator plays will change, however. Critically, it will involve managing a more complex, hybrid computing environment. For many companies, an integrator acting as a trusted broker will be needed to solve the inter-operability and security challenges of cloud services. Such an integrator will be tasked with taking a holistic view of IT and business services across an entire enterprise, helping mitigate risk and improve quality by managing some or all of those services end to end. This means that a successful integrator will have to be more than a pure consultant, and will need to have deep operational experience across all major business processes and technology solutions.

Because it is so early in the cloud computing maturity curve, consistent standards are not yet in place. If part of a process is run by one provider and another part by a different provider, the smooth and seamless integration of services is likely to be a challenge, especially as companies eventually seek to switch providers to improve performance or reduce costs. An integrator will be able to offer better governance to harmonize the pieces and also to ensure that a client is, in fact, making proper use of the computing and process resources for which it has contracted.

The integrator should also be able to provide what we can call “frictionless business design.” Aided by the other two categories of outsourcers—utility services and business function providers—integrators will work with clients to combine, recombine, commission and decommission different components of a full IT and business solution. This can reduce the friction of functions operating in obsolete ways, or of newer functions that are not adequately integrated into the business. Companies should be able to acquire a service, use it where it makes sense and then say goodbye to it when it’s no longer needed.

Finally, the ability to bring innovation to a client will be a distinctive feature of successful outsourcing providers in the cloud era. Our research and experience suggest that the next stage in outsourcing will be achieved when service providers and clients collaborate to innovate, and this is another key task of the new breed of integrator.

This novel kind of relationship between provider and client will draw on distinctive leadership skills and pioneering contractual relationships where risks and benefits are shared more equally. Achieving such relationships takes time and commitment—a commitment that is unlikely to be achieved in a commoditized, cloud–based contract but that can leverage those commoditized value points integrated into an overall solution.

New game, new rules
Clearly, there are many unknowns in this new cloud-based outsourcing environment.

Will utility providers be able to make the jump from what we might call “consumer grade” services to something that is truly robust enough to be enterprise grade? Will software companies be able to make the jump to being true service providers? Will integrators be able to manage the new complexity and encourage the kind of trusted relationships with clients necessary to act as their business designers or redesigners?

What is clear is that this is a new game that cannot be played successfully under old rules. This is another evolutionary shift in the relentless way that value migrates in an industry. What was innovative becomes commoditized, leading—for those who intend to keep playing the game—to another era of innovations.

Companies that intend to be effective in the new game need to start changing the way they manage their IT and business operations now. They need to plan for the environment of the future; they need to carefully assess the risks involved with deploying new technologies; and they need to understand at an even more detailed level the capabilities of their suppliers and providers so they can choose their integrator properly.

Most important, perhaps, is to begin to understand what it means to operate in a multisourced environment, where the different components need integrating, not just once in a while but constantly.

For further reading
Cloud computing: Where is the rain?Outlook, October 2010
Agile IT: Reinventing the enterprise,Outlook, June 2010

About the authors
Jimmy Harris is the Washington, D.C.-based managing director of cloud services for Accenture. In this role, he works with the company’s consulting, systems integration, outsourcing and integrated markets groups to identify, develop and implement cloud computing solutions for clients and enhance Accenture’s market position in cloud computing. Previously, Mr. Harris was managing director for Accenture’s Customer Contact Services and Infrastructure Outsourcing Services groups. 

Gavin Michael is Accenture’s managing director for innovation and alliances, which includes responsibilities for alliances, technology-based innovation and Accenture Technology Labs. He has more than 20 years’ experience in technology leadership. Prior to joining Accenture, Dr. Michael held several executive positions with major financial services companies, including Lloyds Banking Group and National Australia Bank Group in Sydney, Australia. He is based in San Francisco.

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