Differences Between the Cloud and Traditional Outsourcing

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1 Differences Between the Cloud and Traditional Outsourcing Chris Tiernan Managing Partner Grosvenor Consultancy Services LLP CIPS Harrow 20 January Grosvenor Consultancy Services LLP

2 Grosvenor Consultancy Services LLP Founded 1989 Has advised >200 private, public & charity sector organisations on contracting for and managing IT & service suppliers: Outsourcing & off-shoring have had mixed successes: costs & quality innovation & agility many services taken back in-house what of cloud?

3 Topics What s new in the world of cloud? How does cloud change the underlying economics of IT service provision? Creating business value The business case for cloud IT budget implications Cloud vs traditional outsourcing on a page Business strength contracting

4 What is really new with cloud? Massive investments in public use datacentres Internet provides access to >10 9 consumers & users

5 Increasing granularity Mainframes

6 Increasing granularity Mainframes Physical Servers

7 Increasing granularity Mainframes Physical Servers Virtual Servers

8 Fixed and variable costs Fixed = 1000 Variable = 100 Total cost Unit cost

9 Multiple interfaces Fixed = 1000 Interface = 50 Variable = 100 Unit costs

10 What has remained the same? Business dependence on IT services The need to go to the market & do due diligence on prospective suppliers The need to justify IT expenditure The need for high quality contracts The need to manage suppliers The need for service management, particularly problem and change management The need to realise additional value for enterprises

11 Creating enterprise value Profit for shareholders Customers Tax payers For-profit Commercial companies Government bodies Membership bodies Not-for-profit Protection rackets Donors Charities Services for members, citizens & beneficiaries

12 Effect on costs Procurement Contracting Transition/implementation Supplier management Service management? Service provision? Benefits realisation Exit?

13 Cloud business case benefits Increased user productivity and additional business or services arising from new cloud capabilities which are exploited by users to create additional value Freed up space for IT equipment Reduced equipment maintenance costs Reduced electricity costs Reductions in software licences (?) Reduced IT support personnel costs Capex or leasing avoidance for new equipment

14 Cloud investments (mostly opex) 1/3 Seeking out cloud solutions, verifying functionality & suppliers competencies Contract drafting & negotiations, including dealing with security, data protection & business continuity matters Establishing new ways of managing service provision, e.g. subscription management & performance data extraction from portals HR time & redundancies &/or re-training costs for IT personnel no longer needed P&L write-offs for redundant equipment

15 Cloud investments (mostly opex) 2/3 Contract termination costs for maintenance, support and software licences Any additional network capacity & links needed for good performance Advice and guidance to connect to cloud vendors Costs associated with moving data to the cloud & often cleaning & re-structuring it Arranging for support from any intermediaries, e.g. for helpdesk and service changes Creating vendor independent wraps to enable portability between vendors

16 Cloud investments (mostly opex) 3/3 Creation of interfaces to link different cloud solutions to pass & synchronise data between them Reorganising the way users & others will work in future Retraining users & time spent becoming familiar with new ways of working Catering for lost functionality, e.g. creating bespoke facilities Lost business, poorer service and correcting mistakes during business change, re-training & familiarisation

17 Cloud on-going costs Subscriptions & payments for peak loads, if needed Service monitoring & management, e.g. claims for poor service Management of suppliers & interfacing between them, e.g. for problem resolution & effecting changes Maintenance of interfaces Support for service management & guidance on use of cloud solutions Upgrades needed to remain compatible with cloud systems when vendors change them Lost productivity & business from IT capabilities lost through standardisation

18 Traditional outsourcing typified by: Transferring staff Transferring assets Supplier has key management roles Longer term contracts High expenditures Comprehensive service level agreements Desire to create partnership Certain roles kept in-house Strategy (business & IT) Specifying requirements Supplier selection & management Setting standards Security (& safety)

19 Cloud typified by typified by: Transferring staff Transferring assets Supplier has key management roles Longer Short term contracts High expenditures Subscription based Comprehensive Minimal service level agreements Desire to create partnership Utility Certain roles kept in-house Strategy (business & IT) Specifying requirements Supplier selection & management Setting standards Security (& safety)

20 Financial effects Budgets Lower capex - higher opex Depreciation issues reduced Variability & predictability of budgets Potentially more user accountability Business cases Just as much to consider Financial ratios, e.g. ROCE Return on investment (RoI)

21 Cloud sourcing New leading suppliers & host of others Traditional outsourcers business models Cloud service providers business models Hybrid broker business models DIY IT architecture Multiple suppliers & interfaces Contracts are not contracting Management of suppliers more complex

22 Contracting for cloud Vendor contracts can be too simple Who do they serve? Definition of services Multiple suppliers & interfaces Key obligations of each party Dealing with problems Consequences of changes When do they end?

23 Conclusions Cloud offers new solutions IT Governance & management essentially unchanged Key management practices must not be discarded Not always cheaper & can be more expensive Skills profile of IT function needs to be adjusted More suppliers & interfaces to manage ICAEW Business Case for Cloud

24 ICAEW The Business Case for Cloud 2012

25 Thank you For more information: Downloadable papers from:

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