Most important are the new business capabilities and models made possible by the cloud. It is cloud computing’s potential to alter corporations and markets to allow them to be more nimble, ambidextrous and agile—to create what we have termed “cloud corporations”—that offers greater chances for innovation than that of services that simply offer rented data centers at a reduced cost.
Cloud computing and industry hype
IT industry hype about technology as the prime driver of sustainable change has been associated with virtually every new generation of technology, and the era of cloud computing is no different. One recent analysis predicted that the mid-tier Indian outsourcers are soon to be acquired by larger competitors, and that large-scale integrators are already in an uncertain position.
Over the years, this type of narrative has had two perennial aspects. One is its almost religious undertone—the need to be born again and convert to the new, while leaving the old and “the sinners” behind. The other aspect, ironically, is the depiction of a secular struggle for survival (usually characterized as “Darwinian”) in which one cannot do anything about the forces at work, which will unroll inexorably in predictable and linear fashion.
Such hyperbolic stories of transformation ignore the complexity and unpredictability of change. Moreover, the transformational forces touted by the analysts are somehow expected to be invisible to clients and suppliers who become powerless to adjust to shifting market activities.
We would suggest a much longer-term trajectory of change that gives more emphasis to the suppliers who already have a major presence across the technology and service environment. There are vested interests at work within the technology marketplace. First, there is the heritage of client investments in IT and outsourcing. Second, most of the traditional suppliers are well aware of the implications of cloud services and are pursuing innovations to respond to them. These companies are also powerful enough to influence how things develop.
It is important to note that some forms of service provision are indeed ideally suited to the capabilities of cloud computing. For example, the media agency RAPP takes advantage of the scalability of cloud computing to address the unknown processing demand associated with providing video streaming services for movie launches. That is, they purchase as many, or as few, cloud services as they require. If the movie launch is particularly successful, with many thousands of people wanting to stream the movie trailer, cloud computing allows them to scale their operations rapidly; if the movie bombs, then they are not paying for unused infrastructure.
However, most organizational data processing is not of this kind but instead is focused on needs that are much more predictable and stable—and that means that the potential benefits of scalability and flexible pay-as-you-go charging models are less significant. It is not clear why an organization with a successful, collaborative outsourcing arrangement for its mainstream transaction processing activities would be looking to these aspects of the cloud at this time.
The trajectory of cloud take-up is also likely to be affected as the initial cost savings begin to be diluted. New markets, applications and industries are opening up all the time—for example, the exploding demand for mobile services and applications from 3 billion+ mobile phones—which will swallow up the cost reductions of cloud with new demands for computing and storage. Arguments that traditional suppliers will be put out of business by new technologies usually presume static demand. But is it not more likely that demand for IT services will continue to grow exponentially?
Innovation and the cloud corporation
To date, too much outsourcing has been limited to something that might more accurately be called contract management or supplier management—establishing performance terms and then managing to those terms. Over time, companies learn to look beyond that bare minimum, learning how to leverage the supplier’s capabilities to achieve value beyond the contract. In all this, most have learned the hard way by making mistakes, finding out what works and what does not across two or three generations of outsourcing.
The wise ones have been “smart in their ignorance,” taking an incremental route into more and more outsourcing—learning as they go, limiting their risk exposure and building a retained capability to run a sourcing regime aligned with their business strategy and imperatives.
A similar learning process is needed with regard to cloud computing. Much of the initial enthusiasm for cloud services is being driven by cost savings. Using large-scale cloud providers—leveraging their ability to design vast data centers with new storage architectures—can help a company reduce costs dramatically.
However, as organizations have learned the hard way in earlier eras of outsourcing, focusing only on cost minimization is unlikely to lead to sustainable innovation. The focus instead must be on how cloud computing enables a new kind of collaborative business model. What’s important is not the low-cost provision of applications to a passive customer, but instead the provision of services to a global customer base that interacts and contributes to the manner in which technology is harnessed for business advantage.
Indeed the focus by cloud service providers such as SalesForce.com on building and maintaining customer relationships suggest the cloud industry is aware of the limitations of simple pay-as-you-go models.
A new era
Our recent research suggests that a more mature and value-generating outsourcing relationship can be achieved when service providers and clients collaborate to innovate. Cloud can unleash strong forces of innovation among existing and new players, and new ways to collaborate to drive more strategic value. The most successful companies will become “cloud corporations”
Already we have seen important examples of how outsourcing can play a more positive strategic role by enhancing partnerships with complementary suppliers, and in penetrating new markets and operating in new regions. Boeing, for example, has sourced more IT capabilities to Malaysia, enabling the company to sell core products there.
If cloud computing is going to move forward we believe it will demand the successful management of more complex relationships between providers and clients. These relatively novel kinds of collaborations require distinctive leadership skills and pioneering contractual relationships where risks and benefits are shared more equally. Achieving such relationships takes time and commitment, something that is unlikely to be achieved in current commoditized cloud–based contracts. In this regard, cloud providers have much to learn from traditional outsourcers.
Our research supports the proposition that IT and business services will be delivered within a hybrid model—both internal and external sourcing, using a mixture of cloud-based capabilities and outsourcing. As cloud technologies are increasingly harnessed more effectively through an increasingly mature ability to collaborate, companies globally will both benefit from these capabilities and shape their evolution.
About the authors
Professor Leslie Willcocks, Dr. Edgar A. Whitley and Dr. Will Venters are in the Outsourcing Unit of the Department of Management at the London School of Economics and Political Science.
For more information, contact John Hindle.
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