IT outsourcing and cloud computing:
lit
ecnico
di
T
IT
outsourcing
and
cloud
computing:
definitions,
models,
and
emerging
trends
Paolo Neirotti, Ph.DTorino
Politecnico di Torino – DISPEA I.A.E. Grenoble ‐Visiting Professor
Paolo.neirotti@polito.it
011 – 0907204
Paolo Neirotti – Copyright 2011 All rights reserved 1
Index
•
From
IT
outsourcing
to
cloud
computing:
a
littl bit f hi t
little
bit
of
history
–
Main
typologies
of
outsourcing
contracts
–
Goals,
scope,
drivers
and
risks
in
IT
outsourcing
•
Cloud
computing
•
Offshoring of information based services
IT
outsourcing
typologies
•• ITIT infrastructureinfrastructure outsourcingoutsourcing::gg it relates the management of hardware toolsg (PC procurement and maintenance), the telecommunication network, data center operations, data security services, help desk, fleet management
•• ApplicationApplicationOutsourcingOutsourcing: it relates the management of the entire life cycle of enterprise systems (implementation and customization, systems maintenance) (i.e.: ERP systems, CRM, etc.)
B i
B i PP O tO t ii (BPO) It i l ti th t d t
•• BusinessBusiness ProcessProcess OutsourcingOutsourcing(BPO). It involves entire processes that do not 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
Access expertise on demand – Access expertise on 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
A
little
bit
of
history…
•
At
the
origin
was
the
Long
‐
term
mega
‐
deal
(paradigmatic
example:
Eastman
Kodak
Co’s
(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)
– Æall‐or‐nothing outsourcing
•
Then
selective
outsourcing
with
a
short
‐
term
and
a “best
‐
of
‐
breed” logic
a
best of 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 HP acquiring
acquiring
ACS,
Dell
acquiring
Perot,
HP
acquiring
EDS,
partnering
with
CSC,
Amazon
partnering
with
Capgemini).
•
Few
large
players
now
dominate
the
industry:
HP,
Accenture,
Xerox,
IBM,
Dell,
Wipro
and
Tata
Consulting
g
Services
.
•
Industry
Shakeout
due
to
the
rise
of
cloud
computing
(for
Gartner
in
2012
50%
of
US
large
The
typical
sourcing
options
Transaction
(one‐time detailed contract Buy‐in Contract‐out SLAs, cash penalties for non‐ performance, adjustments for volume increases or decreases,
termination clauses
Purchasing Style
(one time detailed contract used as a reference point)
Relationship
(low detailed, incentive contracts)
Preferred supplier Preferred
contractor
Resource
client buys use of vendor’s resources
Result
(vendors manage the delivery of the IT e.g. Vendor providing contract
programmers whenever d d i b vendor s resources (e.g. persons, software, hardware) delivery of the IT activity) Purchasing Focus
needed on an ongoing base
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 makes success of outsourcing
standardization
(which
makes
success
of
outsourcing
deals
more
likely)
•
Reduction
in
telecommunication
costs
and
increasing
availability
of
broadband
connections.
•
Globalization
of
the
software
and
ICT
services
industry
Common
risks
in
IT
outsourcing
for
clients
•
Loss of competencies and expertise (in particular
when IT employees are transferred to the vendor)
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’
t
i
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
t
t
d
t
d
l
t
l
ti
–
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
L
f
bili
i
idl b i
•
Loss of capability to innovate rapidly business
processes through IT
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
The
phases
of
an
IT
outsourcing
deal
Vendor Search and
Reversibility clauses about: 1)
Evolution clauses
to the technology, price and scope of
th t i
Vendor Search and Contracting Phase Transition to the Vendor Managing the IT Outsourcing Effort clauses about: 1) HR, 2) physical and intangible assets (i.e. IP of sw applications
developed for the company’s use). the outsourcing contract (e.g. benchmarking clauses) Original idea Original idea to outsource to outsource TIME g Reintegrate the IT activity or change the vendor Beginning of the IT Beginning of the IT outsourcing relationship
outsourcing relationship EndEnd ofof thethe contractcontract
Recent
Trends
in
IT
outsourcing
13
Source: Politecnico di Milano (2009)
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
p y
other customers’ slices. • “Pay as you go” pricing models • Private vs. Public Clouds
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 $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 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 ÆSimple Storage Service (back‐up included)
– 0.10 $/GB of data uploaded; 0.10 ‐0.17 $/GB of data downloaded
• Elastic compute cloud (EC2): Provision of resizable computing
capacity in the cloud (scale up and scale down) – 0.10‐0.80 $/hour of processing time Æ70 $ per month
• Simple DBÆprovision of real‐time look up and querying of
structured data
– 0.14 $ per machine hour consumed
– 0.10 $/GB/ for data transferred in;; 0.10 ‐0.17 $/GB/ for data transferred
out
• Amazon Flexible payment service
• Amazon Support: 1‐to‐1 technical assistance Æ100‐400$/month
• Amazon’s Estimated gross marginfrom web services: 45%
Some
recent
trends
• Spot markets for computing capacity arise: cloud computing
as a tradable commodity in spot markets. Æcloud computing
as a tradable commodity in spot markets as a tradable commodity in spot markets.
– SpotCloud (Enomaly) ‐the world’s first spot market for
cloud computing – launched in February 2011.
• “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
Diffusion
of
cloud
computing
50% 56% 48% 28% 24% 35% 11% 10% 13% 11% 10% 4% finance administration business intelligence automationEvidence from a sample of large Italian enteprises
27% 30% 23% 33% 57% 57% 50% 38% 30% 34% 41% 16% 19% 28% 14% 3% 20% 10% 11% 12% 11% 21% 37% 23% 16% 16% 12% 11% t it HR digital preservation CRM procurement SCM finance, administration … Sw Application services 37% 35% 27% 27% 38% 38% 13% 5% 14% 23% 22% 21% 0% 20% 40% 60% 80% 100% backup and security
computing capacity storage capacity
no use exploration testing use Source: Politecnico di Milano (2009)
Infrastructure services
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”
h h l i l i di hif d
• From the technological perspective: paradigm shift ‐ and more specifically – rise of virtualization and service oriented architectures Æ 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)
Main
inhibitors
to
cloud
computing
diffusion
• Firms concerns over:– Security and confidentiality of data
• Ælack 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 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
An
example
of
business
process
offshoring:
diagnostic
imaging
23
Source: Karmarkar and Apte (2007) – BIT study
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
24 As such, they are likely in
linguistic areas with a
bimodal distribution of
Conclusions
and
“burning”
questions
• Changes in the allocation of IT jobs and restructuring of
supply chains in the IT industry? 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 global scenario (driver for telework diffusion). Towards a flat
or a spiky world?
• Cloud computing boosting adoption of IT among late adopters
