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

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IT outsourcing and cloud computing:

lit

ecnico

 

di

 

T

IT

 

outsourcing

 

and

 

cloud

 

computing:

 

definitions,

 

models,

 

and

 

emerging

 

trends

Paolo Neirotti, Ph.D

Torino

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

(2)

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 

(3)

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,

 

Google

 

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

 

(4)

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

(5)

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

(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

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

(7)

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

(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 $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%

(9)

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

 

(10)

Diffusion

 

of

 

cloud

 

computing

50% 56% 48% 28% 24% 35% 11% 10% 13% 11% 10% 4% finance administration business intelligence automation

Evidence 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)

(11)

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

(12)

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 

(13)

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 

Figure

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