Analysis: Time to take cloud watching seriously

To some, cloud computing is one vague term in a flock of buzzwords that don't always mean much to a business looking for a tangible way to cut costs. But with the hype in the IT community reaching new levels and large deals making headlines, it pays to know what it is and, crucially, how it could confer a huge advantage to an organisation's outsourcing strategy.

Generally speaking, cloud computing provides business applications and services that are accessible through the internet using software stored on virtual servers and it is set to have a fundamental impact on the IT outsourcing industry over the next few years. Organisations can move IT infrastructure off their servers (whether on premise or outsourced) to somewhere else in the world and outsource just the services, leading to many potential benefits in functionality, ROI and adaptability.

As the chief technology officer of IBM's emerging technology incubation centre, Pol Mac Aonghusa, explains, "It's a smart way of providing scalable IT services, overlaid with a hosting model".

Major organisations are taking notice. In November, CSC signed an extension to its existing agreement with Royal Mail to provide cloud-based collaboration technology via Microsoft's Business Productivity Online Suite, an industry first in terms of the scale for this type of service.

"The Microsoft suite will give people across Royal Mail Group the tools they need to do their jobs more effectively, enabling our business units to collaborate with each other, partners and other external organisations more freely, easily and securely while securing cost savings," says Carol Olney, Royal Mail Group's head of technology service delivery.

Behind this is the basic premise of driving down IT capital costs by using a slice of a provider's data centres and buying the necessary processing power, generally on a pay-as-you-go basis. The potential to support a global IT environment while lowering infrastructure and energy costs, which are significant spend factors for almost any technology-reliant company, is great. Running a series of servers can consume a sizeable chunk of overall energy costs. Using cloud computing to outsource server space to energy-efficient data centres with lower running costs could have the double bonus of providing a cost advantage while reducing the carbon footprint of a business's operations.

So, while the take-up among smaller enterprises, relatively low on capital and risk, has been more ambitious than among those with more at stake, the Royal Mail deal with CSC is a waypoint in a trend of larger organisations paying attention to the upfront cost savings on offer through these types of service.

Ron Brown, director of cloud computing, at CSC EMEA says that, despite the appeal of the prices, it's the agility of the model which is sometimes the most attractive proposition. "It's... been the agility of the model, the ability to bring ideas to market more quickly, that has been the key trait for the market," he says. "Looking at a basic IT project that might have taken seven to eight weeks to implement, you can now be talking a matter of minutes."

Still, for all the enthusiasm, it is not necessarily an easy sale and there are several reasons why all IT services have not yet been transferred to the cloud. Julian Millstein, senior counsellor in law firm Morrison & Foerster's global sourcing and technology transactions group, says, "We're seeing the beginning of that shift in the market. For the most part, procurement isn't using it for major applications. Initially it's something that's being taken on for one-of-a-kind elements at the moment - elements that don't have a lot of risk associated with them."

"We will see the activity being further commoditised as it goes forward," says Richard Kemp, senior commercial technology partner at Kemp Little LLP. "Providers are able to offer highly commoditised services and that means they can use the scale for leveraging cost benefits for their clients."

"[IT] outsourcing is, for the most part, function-based and I don't think we're going to see whole business functions being handed over to cloud computing - at least not yet. Rather the commodity approach will give them the flexibility to reduce costs for certain applications."

"Take HR as an example," agrees Millstein.  "Say an HR department has 20 different functions and there's ERP software that tie that together, the functionality of that piece is really important. Maybe cloud computing can't yet offer the same functionality overall to handle that - it's too complex. Instead it works best handling individual applications, but it can be much more cost-effective in those. Getting that agreement right will be the challenge."

From the point of view of the provider, CSC's Brown says, "Currently we view cloud computing as a service-delivery model. Outsourcing is more of a contractual model. But the two overlap in so many ways, and the cloud part can sometimes replace the managed services part of the contract."

The crucial concern for potential customers, and arguably the biggest barrier for the growth of this area is risk. Where previously data could be stored in servers and data centres that a business can see and manage, the cloud is much less tangible.

From the provider perspective, the challenge is to show customers that the strategies required to manage risk when outsourcing data-sensitive processes haven't changed drastically.

IBM's Mac Aonghusa says that for procurement managers the question is how they can approach cloud providers and negotiate the best for their business without compromising security. "That conversation doesn't fundamentally change with the technology," he says. "Businesses want to know how technology can fit in with what they do."

"They're already familiar with traditional data centre providers so, although the technology has changed, the model of balancing service levels with the price point and risk is one they will be familiar with."

Beyond the perception issue, providers who are able to help their clients manage the obvious risks are crucial to the next steps being taken. There is a remarkable disparity between the public cloud model, which exchanges very high speeds and low costs for lower security and resilience and traditional outsourcing contracts which are highly secure but sacrifice the speed of implementation.

Brown says: "Providers need to step in to that breach and help customers mitigate risk and go some way to underwriting solutions". The right balance of speed, price and security is still what's at stake. 

"In traditional outsourcing modes providers are realising that they need to extend more liability to themselves and, to an extent, they're doing that. The discussion between the two sides needs to develop and trust needs to be built because there's only so much you'll be able to achieve in a web-based procurement situation and that can be a barrier," comments Millstein.

There are some further nuances that need consideration. Kemp points out that: "In every case, the exit strategy is very important. A user needs to be able to move away from a cloud provider without impacting their business. This needs to be considered before, not after, the user contracts with the cloud provider."

Governance also, as is often the case with new technologies, lags behind. This hardly helps the risk factor or the perception of cloud computing as being a slightly anarchic practice.

Plenty of commentators suggest that this year, cloud computing is going to change the way IT outsourcing is done. As difficult as this claim is to substantiate, what is clear is that it would rely heavily on how customers and vendors can work out a way to manage the associated risks and adapt their solutions for individual business needs.

Which won't come easy. But for those that take advantage of the technology effectively, it could be an efficient part of a long-term outsourcing model. 

Procurement Tags -