avasant view of cloud computing’s impact on business & outsourcing aug 2010

8/8/2019 Avasant View of Cloud Computings Impact on Business & Outsourcing Aug 2010

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Copyright 2010 All Rights Reserved, Avasant LLC 1

Cloud Computings Impact on

Business & Outsourcing

Dr. P.K.MukherjiPresident & Managing Partner, Avasant Asia

Date: August 2010


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Introduction

Necessity is the mother of invention and innovation. The current economic downturn and pressures on ITbudgets has led to a completely new business model in the form of cloud computing. However, cloudcomputing means more than cost saving and scalability. Cloud computing allows firms to minimize use ofinternal IT systems and access IT services from remote hosted locations via the internet or a private

network. This provides a way for firms to increase capacity or add a mix of capabilities on demand,without investing in new infrastructure, training, or licenses.

The need to remain agile and competitive in todays difficult economy, has forced firms to evaluate cloudas a solution. It is expected that smaller enterprises will be the early movers to adopt the new computingmodel, leveraging internet-connectivity and the shared-resources approach. Cloud computing is alsoexpected to enhance the usage of mobile devices for accessing applications to meet local needs.

Amazon, Google and Microsoft already offer central-processing-unit cycles, data and document storage,and customer-relationship-management services with the benefit of cost-savings and scalability. Cloudcomputing, with its pay-per-use service, is allowing organizations to convert capital expenditures(CAPEX) to operating expenses (OPEX). The new business model opens the possibility of fixed costsbeing converted to variable costs, driving efficiencies in the organization. However, it is yet to beascertained if such value drivers are a reality or still a myth. As reported by analysts and research firmslike CLSA and Forrester, the general consensus emerging is that early concerns over security and risks ofinterruption of services from providers are overstated.

Cloud Computing Defined

Amid the euphoria about a new computing model, cloud computing as a concept continues to be definedand redefined. The latest definitions of cloud computing include all or some of the following:

Grid computing - Sharing of multiple hardware resources (emphasizes the interconnectionsbetween hardware that enable cloud computing).

Utility computing - Pay-per-use models, much like electricity (a pricing mechanism that formspart of a larger definition of cloud computing).

Software as a service - Leasing software versus previous licensing models (e.g.,Salesforce.com, Google Apps, NetSuite).

Platform as a service - An environment to build, test and run applications (e.g., Googles AppEngine).

Hardware as a service - Access to CPU power and storage on a pay-per-use basis, over theinternet (e.g., IBMs Blue Cloud, Amazons EC2, S3).

Is Cloud Computing The Next Generation Of Computing Architecture?

Proponents of cloud computing now call it the third era of computing infrastructure, after centralizedmainframes prior to the 1980s and the decentralized client-server architecture since the 1990s. Ironically,the clock seems to have turned a full circle on some fronts. The cloud-computing model is a step backinto the centralizing of computing and storage resources within the cloud that is enabled, most

importantly, by a significantly upgraded internet backbone worldwide.

The benefits of cloud computing architecture include conversion of capital expenditures to operatingcosts, ability to pay per use, and reduced need for prior provisioning thus optimizing capital outlay.Reduced capital commitments can help smaller companies scale hardware only when needed. Pay peruse releases excess computing and storage capacity into the cloud until needed, and essentially convertsthese to utilities. Ease of provisioning reduces over- and under-provisioning risks within the hardware-planning and acquisition process.


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For service providers, the modular architecture of the cloud computing model helps optimize thedeployment of resources by enabling just-in-time increases in infrastructure to meet growing demand,without compromising the continuity of its services to clients. The diagram below provides a high-levelrepresentation of the modular architecture that gives rise to this deployment flexibility.

Impact Of Cloud Computing On Global IT Spending

Cloud computings disruptive impact on todays global technology framework is a subject of debate.Gartner Researchs estimate of components of global end-user IT spending in 2008 is depicted below.The diagram below provides estimates of what the impact of cloud computing might be on the hardware,software, communication and services segments of the technology industry:

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Software - The software industry segment will be a potential net-loser as their traditional model ofsoftware licences, implementation and support will be impacted by the cloud computing model.

Computing Hardware - The current utilization of most data centers is below 20%. The cloudmodel will leverage a large part of this unutilized capacity. As such, the race for more computingpower and storage (MIPs and GBs) shifts away from building more capacity to better access tothe clouds installed capacity. This trend is expected to slow down expenditure s on hardware.

Telecom - As networks and connectivity take on more powerful roles, this sector is likely to be abeneficiary.

Services - A mixed future. Service providers will need to shift their focus towards developingapplications that work in and with clouds. Proprietary software/legacy software maintenancemodels will come under threat. Complex installations will give way to innovative new businessmodels that will grow around the cloud and will demand application support.


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Impact of Cloud Computing on OutsourcingA recent survey revealed that over 80% of the 100+ IT managers/decision makers interviewed areconsidering cloud computing for their business needs, and over 50% have begun adopting it on a smallscale. Although most IT managers were not convinced of using the cloud for their core IT projects, theyhave continued to proceed with cloud computing solutions for some of their non-core applications. The

approach is very similar to the one adopted in the early days of Global Sourcing, when organizationswere testing out the efficacy of the sourcing model with non-core applications.

Cloud computing will open a very large market in the Small and Medium Business (SMB) segment, whichuntil now has been hesitant to embrace outsourcing. Smaller firms will see the benefit from the cloud dueto its ability to provide these businesses with a lever to manage their IT investments and become morecompetitive.

Though there is room for greater standardization in business applications through adoption oftechnologies like cloud computing, many corporate boardrooms share the belief that blindly adoptingstandardization across enterprise wide applications may at times compromise the position of competitiveadvantage for an organization. Large firms having a suite of highly customized IT products and uniqueapplications already aligned to business needs, which help differentiate their business and services fromtheir competitors. These applications pose a challenge to IT departments in their bid to adopt enterprisecloud computing. Large firms are likely to demonstrate less appetite for risk while adopting the newcomputing model for these unique applications. As such, it is likely to take some time before cloudcomputing becomes the preferred model in large organizations.

For outsourcing service providers, who have longed to move away from resource linked linear growthmodels, cloud computing will become a preferred business paradigm. It will enable them to achieve non-linear growth. Pricing models will also move from being an input based model to an outcome basedmodel. Offering cloud services within their portfolio will enable service providers to expand their clientbase by reaching out to the SMB market segment. Even though new applications may not get developedfrequently, the need to customize will still remain. Consulting around integrating enterprise IT with privateand public clouds to create a hybrid environment, developing applications to migrate to cloud softwareand the related testing, certification, and governance for risk and compliance will likely emerge as key

service lines.

We believe that firms will initially begin to adopt the new model with large, stable and establishedoutsourcing companies. Outsourcing firms such as IBM, HP and Accenture will only stand to benefit frombusinesses need for services to help clients transition their IT systems into the cloud. Large enterpriseswill focus on seeking consultancy help in creating private clouds for their proprietary core applicationsbefore seeking solutions using the public cloud model.

For most enterprises, capacity planning or a data center refresh will be the right time to consider themerits of cloud computing. They will seek help from a partner offering specialized cloud services, such ascloud consulting, cloud readiness assessment services, cloud migration services, and hybrid services, tobuild a diversified portfolio of delivery options.

Crystal Ball Gazing Likely TrendsCloud computing is about remotely deployed and accessed resources (hardware and applications) thatwere earlier uniquely owned. The internet depicts the first cloud, providing connectivity between systems.A pay-per-use model (utility computing), shared resources (grid computing), as well as software,hardware or platforms as a service forms the second cloud. The third cloud, propagated by socialnetworking, will augment the local identity, context and ability of users within their proximate spaces.Handsets will be its chief medium, with connectivity as the enabler.


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Early adopters of the current cloud computing concept will be small enterprises, which will have theoption to scale without owning large-scale resources. Fortune 100 companies could easily morph intocloud providers rather than just users. There is a surplus of applications lying untapped for want ofcomputing power, and this is where the action will begin as cloud computing takes root. Globalcorporations from any industry could just as well become providers to the cloud rather than justconsumers, given their installed hardware base, analytical platforms and business intelligence.

Most organizations will carefully weigh the pros and cons of the new computing architecture beforemaking a decision to move applications to the cloud.

Pros Cons

1. Lower costs through economies of scale -Converting CAPEX to OPEX

2. Leverage from next generationarchitectures - Highly responsive to changeand easy to upgrade

3. Scalability is high

4. Performance monitoring and management

made easy - Reduced complexity of variedIT application management

5. Robust disaster recovery

1. Reliability issues

2. Lack of control - Loss of ownership,managed by a third party

3. Security of enterprise data - Mostapplications lie outside the firewall,hence higher risk

4. Risk of getting locked in to

vendors - High cost of migration

Conclusion

Clearly, the next 5 years will see a mix of traditional outsourcing with some experimentation on thecloud model. Cloud computing will make an impact, but will not replace traditional outsourcing.

Core legacy applications will continue to remain in-house or outsourced under traditional models andnot move to the cloud model. High sunk costs on recoding will discourage the cloud model for coreapplications.

Pricing models of outsourced vendors will see a high degree of innovation to compete with the pay-per-use cloud model.

Providers will move up the value chain to offer end-to-end services including cloud computing.Assisting clients in creating private clouds could potentially be a litmus test before they adopt thepublic cloud model.

Buyers will find it easier to integrate the cloud approach with existing providers, thereby reducing riskand being cost effective.

Reduced regulatory concerns on data security and reliability will help to drive cloud computingadoption.


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About the Author:

His expertise includes IT Consulting & Strategy, Global Risk

Assessment and Management, Relationship Management,

Contracting and Program Management and M&A. He has in the past

worked with Private Equity organizations on deal sourcing, deal

structuring and post deal transformation. He has also advised multiple

state and country governments on various aspects of IT/ITES

business.For more information please contact [email protected]

+91- 98210-80841

About Avasant:Avasant is a next generation sourcing consulting companyconcentrating on tailor-made solutions for organizations thatmay already be in sourcing contracts for the delivery of ITservices or business processes and for those who areconsidering sourcing to meet their strategic needs.

Our team of sourcing experts has extensive experience in

helping both commercial and governmental organizations keep

pace with rapidly changing requirements through the strategicuse of outsourcing. At the heart of our process is aligning a

sourcing strategy with enterprise needs and then executing

transactions and managing relationships to meet those needs.

Avasant has built speed of response and flexibility into the

process to differentiate ourselves from other sourcing advisers

whose standard solutions may not be as tailor-made to your

needs.

Dr. Pradeep Mukherji is the President and

Managing Partner of Avasant's Asian

operations. Dr. Mukherji has over 20 years of

experience and expertise in Consultancy and

Management of Technology Business. He

has advised leading enterprises in US,

Europe and ASPAC on strategic aspects of

Services Globalization and TransformationalOutsourcing.
http://www.avasant.com/http://www.avasant.com/mailto:[email protected]:[email protected]:[email protected]:[email protected]://www.avasant.com/

avasant view of cloud computing’s impact on business & outsourcing aug 2010

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