IT outsourcing and cloud computing: definitions, models, and emerging trends. Index. From IT outsourcing to cloud computing: a

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1 Politecnico di Torino IT outsourcing and cloud computing: definitions, models, and emerging trends Paolo Neirotti, Ph.D Politecnico di Torino DISPEA I.A.E. Grenoble Visiting Professor Paolo Neirotti Copyright 2011 All rights reserved 1 Index From IT outsourcing to cloud computing: a little bit of history Main typologies of outsourcing contracts Goals, scope, drivers and risks in IT outsourcing Cloud computing Offshoring ofinformation information based services 1

2 IT outsourcing typologies IT infrastructure outsourcing: it relates the management of hardware tools (PC procurement and maintenance), the telecommunication network, data center operations, data security services, help desk, fleet management Application Outsourcing: it relates the management of the entire life cycle of enterprise systems (implementation and customization, systems maintenance) (i.e.: ERP systems, CRM, etc.) Business Process Outsourcing (BPO). It involves entire processes thatt donot belong to the core processes of customers and that are based on the intensive use of IT I.e.: Claim Processing, Payroll Services, Billing, Medical Transcription, help desk for IT services 3 A closer look at the advantages for the client Specialization and learning effects Accessexpertiseon expertise demand Experience based learning: Vendors access to a multitude of projects and clients expands their capacity to develop competencies (e.g. project management capabilities) Greater vendors ease in developing complementarity among competencies respect to clients Modularization and standardization advantage: Vendors absorption and sale of industry specific best practices 2

3 A little bit of history At the origin was the Long term mega deal (paradigmatic example: Eastman Kodak Co s outsourcing deals with IBM in 1989 under the pressure of cust costs and to get rid of IT related problems) all or nothing outsourcing Then selective outsourcing with a short term and a best of breed breed logic Today (SOA and Cloud computing). Arm s length transactions are very likely and success rates of outsourcing deals is increasing. A look at the IT outsourcing industry In the last decade increasing consolidation (Xerox acquiring ACS, Dell acquiring Perot, HPacquiring EDS, Google partnering with CSC, Amazon partnering with Capgemini). Few large players now dominate the industry: HP, Accenture, Xerox, IBM, Dell, Wipro and Tata Consulting Services. Industry Shakeout due to the rise of cloud computing (for Gartner in % of US large corporations will adopt cloud services) 3

4 The typical sourcing options SLAs, cash penalties for nonperformance, adjustments for volume increases or decreases, termination clauses Purchasing Style Transaction (one time detailed contract used as a reference point) Relationship (low detailed, incentive contracts) Buy in Preferred supplier Contract out Preferred contractor e.g. Vendor providing contract programmers whenever needed don an ongoing base Resource Result client buys use of (vendors manage the vendor s resources delivery of the IT (e.g. persons, activity) software, hardware) Purchasing Focus Vendor and clients in a Joint ventures to reduce client data centers costs (to share goals, risks and prevent vendor opportunism) Drivers of IT outsourcing Increasing software commoditization and standardization (which makessuccesssuccess of outsourcing deals more likely) Reduction in telecommunication costs and increasing availability of broadband connections. Globalization of the software and ICT services industry Managerial hypes and fashions. 4

5 Common risks in IT outsourcing for clients Loss of competencies and expertise (in particular when IT employees are transferred to the vendor) Difficult to attract and retain talented IT professionals Increasing vendor dependency (exacerbated by the consolidation of the outsourcing industry) Information asymmetry and room for vendors opportunism Business and technological uncertainty may require renegotiation and additional transaction costs (due to penalties, amendments of the contract, etc.) Common risks in IT outsourcing Many hidden costs set up costs due to redeployment, relocation, longer than expected handoff periods Management costs Lack of organizational learning in deploying IT to support the business Loss of capability to innovate rapidly business processes through IT Technological indivisibility 5

6 Critical decisions Choosing the IT activities that can be outsourced. Choosing the suppliers Writing the contracts Managing the transitioning to the suppliers Controlling the suppliers Maintaining IT key compentencies in house. 11 Original idea to outsource The phases of an IT outsourcing deal VendorSearch and Contracting Phase Transition to the Vendor Beginning of the IT outsourcing relationship Evolution clauses to the technology, price and scope of the outsourcing contract (e.g. benchmarking clauses) Managing the IT Outsourcing Effort End of the contract Reversibility clauses about: 1) HR, 2) physical and intangible assets (i.e. IP of sw applications developed for the company s use). Reintegrate the IT activity or change the vendor TIME 12 6

7 Recent Trends in IT outsourcing Source: Politecnico di Milano (2009) 13 Cloud computing It refers to the provision of computational resources and software applications on demand via the internet. The enabling technology is virtualization_ Virtual machine, namely a slice of a computer with its own operating system that is partitioned off by software from other customers slices. Pay as you go pricing models Private vs. Public Clouds 7

8 Types of cloud computing services Software as a Service ( SaaS ) e mailing (e.g. Gmail), ERP and CRM services (e.g. Salesforce.com), which helps firms keep track of their customers. Many players; Estimated market in 2010 (Forrester Research, 2010): $11.7 billion Platform as a service ( PaaS ) development platforms for which the development tool itself is hosted in the cloud. Developers can build web applications without installing any tools on their computer and then deploy those applications few providers (e.g. Microsoft, Google, Salesforce) and their offerings have not really taken off yet. Estimated market (Forrester) in 2010: $311 millions. Infrastructure as a service (IaaS): basic computing services, from number data storage, to computing capacity, electronic payment processing, etc. Market leaders are GoGrid, Rackspace and Amazon Web Services. No reliable estimates on market size (1 billion USD) Some Recent Trends: Amazon Web Services S3 Simple Storage Service (back up included) 0.10 $/GB of data uploaded; $/GB of data downloaded Elastic compute cloud (EC2): Provision of resizable computing capacity in the cloud (scale up and scale down) $/hour of processing time 70 $ per month Simple DB provision of real time look up and querying of structured data 0.14 $ per machine hour consumed 0.10 $/GB for data transferred in; $/GB for data transferred out Amazon Flexible payment service Amazon Support: 1 to 1 technical assistance $/month Amazon s Estimated gross margin from web services: 45% 16 8

9 Some recent trends Spot markets for computing capacity arise: cloud computing as a tradable commodity in spot markets. cloud computing as a tradable commodity in spot markets. SpotCloud (Enomaly) the world s first spot market for cloud computing launched in February Follow the moon approaches (ie. virtual machines that migrate wherever demand and temperature is lowest, most often to time zones where night has fallen) Diffusion of cloud computing: some evidence Source: Amazon (2008) 9

10 Diffusion of cloud computing Evidence from a sample of large Italian enteprises Sw Application services Infrastructure services automation business intelligence finance, administration SCM procurement CRM digital preservation HR storage capacity computing capacity backup and security 48% 56% 50% 57% 57% 33% 23% 30% 27% 35% 37% 34% 30% 38% 41% 38% 27% 35% 24% 28% 19% 16% 3% 20% 14% 13% 13% 4% 10% 10% 11% 11% 12% 11% 10% 5% 37% 16% 16% 23% 12% 21% 22% 23% 0% 20% 40% 60% 80% 100% no use exploration testing use Source: Politecnico di Milano (2009) Drivers of cloud computing diffusion Similarities in IT services diffusion and evolution delivery models with electricity...but more accelerated times For many firms IT as a commodity and not as a strategic weapon From the technological l perspective: paradigm shift and more specifically rise of virtualization and service oriented architectures IT cheaper and more flexible, integration of different applications become easier ( Lego like applications ) From the user perspective: Increasing diffusion of IT even among late adopters whose concern is cost containment and risk minimization increasing demand for computing capacity driven by massive use of business analytics and Internet of things (e.g. due to mass customization trends) 10

11 Main inhibitors to cloud computing diffusion Firms concerns over: Security and confidentiality of data lack of a firm s direct control over the security measures adopted how thoroughly a previous customer s data are destroyed before the slice is reallocated to some other firm? Differences in local laws and jurisdiction (e.g. USA vs. EU) and legal constraints (i.e. in some EU countries certain types of data cannot be exported) Accessibility of data and provider s compliance to SLAs Data lock in and loss of bargaining power for the customer Bottlenecks in data transfer Economics of IT offshoring Outsourcing is a scale game, Offshoring is mainly driven by savings in labor and real estate costs Offshoring describes the g relocation by a company of a business process from one country to another. Captive offshoring may exist. 11

12 An example of business process offshoring: diagnostic imaging Source: Karmarkar and Apte (2007) BIT study 23 Offshoring trends: towards a flat world? In light of the increasing easiness to trade and off shore information service, Will they be concentrated in few areas of the world? Similar patterns to offshoring dynamics occurred inmanufscturing from the 1970s Offshoring trends are driven by labor savings and linguistic similarities As such, they are likely in linguistic areas with a bimodal distribution of wealth 24 12

13 Conclusions and burning questions Changes in the allocation of IT jobs and restructuring of supply chains in the IT industry? History repeating: security is a concern in the short tem but not on the long term (payment from barter to coin to paper money to credit card to other financial instruments to share wealth). Will be the case of cloud computing too? Cloud computing as an enabler of relocation of work on a global scenario (driver for telework diffusion). Towards a flat or a spiky world? Cloud computing boosting adoption of IT among late adopters and laggards? 13