Winter 2011 Advisory Services
Leveraging the cloud—the
new sourcing alternative
Facilitating business growth, agility
and competitive advantage via
Winter 2011
Table of contents
The heart of the matter 2
Exploring the potential of the Cloud—a new
sourcing alternative
An in-depth discussion 6
Leveraging the power of Cloud Sourcing
What this means for your business 14
Reaping the benefits of infrastructure-free
IT services
The heart of the matter
Exploring the potential
of the cloud—the new
sourcing alternative
3
The heart of the matter
Cloud computing is a dynamic business trend—one that is expected to have a significant impact on the way that business will be conducted going forward. In our experience, cloud computing is increasing its penetration into the business realm. We see leading-practice companies turning to
cloud computing, recognizing that it is far more than a better IT solution; rather, they see it as a better business solution. Indeed, cloud computing addresses several critical challenges that are top-of-mind for today’s CEOs, CFOs and CIOs—particularly in light of the current economy.
About the cloud
Cloud computing defined: Cloud computing is the
location-inde-pendent delivery of IT management services that provides significant evolution of service delivery to your business.
Cloud sourcing: This is how PwC refers to the process of sourcing IT
(infrastructure and applications) from the cloud.
Two cloud models: Cloud computing comprises Public Cloud and
Private Cloud models, both of which are discussed in this paper.
Five defining attributes of cloud computing:
• Measured service • On-demand self-service • Resource pooling • Rapid elasticity • Broad network access
Cloud-based service delivery will empower enterprises to simplify their infrastructure and potentially reduce costs via standardized plat-forms, combined with new skills and management practices. We are seeing leading organizations scaling back on traditional IT to leverage the benefits of the cloud.
Cloud computing has the
potential to:
• Accelerate business innova-tion by eliminating technology as a barrier
• Facilitate delivery of more personalized, context-aware services—e.g., customer-centric services, location-centric promo-tions, culture-centric personaliza-tion and the like—to meet growing user demand
• Improve employee productivity
by providing ubiquitous access to services and data
• Optimize the total cost of technology for the enterprise by sourcing certain commodity services to the cloud
However, along with these and other potential rewards, cloud computing introduces new risks—particularly around data security and governance. Significant care must be taken when sourcing business services, infrastructure and applications from the cloud—a process that PwC refers to as Cloud Sourcing.
4 Leveraging the cloud—the new sourcing alternative As we see it, a sound cloud sourcing
strategy cannot be developed in a vacuum. It is vital that the CIO invest sufficient time and effort up front collaborating with the CEO, CFO and other IT leaders. Taking a look at the big picture, the executive team should consider all aspects of cloud computing—the challenges they are facing as business leaders; the sourcing solutions that the cloud can deliver to meet those challenges; the related risks, potential rewards and impact of each option; and the overall business goals of the enterprise. Taking this holistic approach, the executive team should work together to reach agreement on the key components and objectives of the new cloud sourcing strategy.
Armed with the insights that emerge from these collaborative deliberations, the CIO can then move quickly to categorize business services as core and/or commodity, determine which should be first in line to move to the cloud (e.g., those that bring the most reward with the least risk), and align the right cloud-sourcing model to the right business services. Ideally, a detailed three-to-five year cloud-computing roadmap for the enterprise should emerge from this process. CIOs that take this thoughtful, holistic approach—thereby creating a fact-based foundation on which to build, implement and manage a viable sourcing strategy over time—will position the organization to benefit from cloud-empowered growth, agility and, ultimately, competitive advantage.
That said, cloud sourcing is a complex undertaking fraught with risks and challenges. So how do you get it right? Where do you start? And what do you need to consider along the way? In this paper, we address the various aspects of cloud computing— its evolution, considerations, and business impact—and present some key steps to facilitate your organization’s journey to the cloud.
5
An in-depth discussion
Leveraging the power
of Cloud Sourcing
7
An in-depth discussion
Cloud computing—a new alternative for sourcing service delivery—goes beyond being just a better IT solution; rather, it can help to resolve some of the key challenges facing top management today.
The careful sourcing of IT—infra-structure and applications—which PwC refers to as cloud sourcing—can empower enterprises to simplify their infrastructure and potentially reduce costs by standardizing platforms and introducing new skills and manage-ment practices. As a result, we are seeing leading organizations scaling back on traditional IT service delivery to leverage the benefits of the cloud. Cloud sourcing comprises two models: Public Cloud and Private Cloud.
Leveraging the cloud to
resolve business challenges
As companies are faced with ever-higher operating and capital expen-ditures, cloud sourcing provides an alternate sourcing model for CIOs and IT leaders. When strategically thought through in terms of risks and rewards, and then carefully implemented and well-managed over time, cloud computing has the potential to meet C-Suite challenges by: acceleratingbusiness innovation; meeting growing user demand for individual- and location-centric services; improving employee productivity; and optimizing the organization’s total cost
of technology.
Consequently, we are seeing many leading-practice organizations turning to the cloud as a means of managing
IT spend and the corresponding delivery capacity and capabilities based on corporate business drivers. Figure 1 describes some of the key business drivers and the related cloud-computing enablers that warrant consideration by executive manage-ment while defining their cloud-sourcing strategies.
Figure 1: Business Drivers & Cloud-Sourcing Enablers
Business Drivers Cloud Sourcing Enablers
Cost Optimization Capital and Operational Cost Alignment Service Agility (Time-to-Market) On-Demand Provisioning
Business Technology Modernization Global Delivery Capability
Best Practices Process Efficiency and Consistency
Two cloud models:
Public Cloud deployments pass the responsibility and associated risk
for an IT infrastructure from the business to a third-party in a public cloud-sourcing model. Avoiding the constraints of traditional IT is a prerequisite for a company seeking to leverage cloud services.
Private Cloud is a popular choice for large
enter-prises and governments. Infrastructure is provided virtu-ally via the Internet, but from designated facilities, whether owned by the client or the vendor. This model mitigates the concerns of such clients for the protection of their data
8 Leveraging the cloud—the new sourcing alternative
Cloud computing—Driving
a changing marketplace
dynamic
The proliferation of mobile computing devices, combined with easy access to the Internet, are creating a greater demand for ‘anytime-anywhere-any-device’ access to applications and data. Where 20 years ago one-size-fits-all services were the status quo, today’s users demand interactive service delivery that recognizes who and where they are and what they want to access. As a result, CIOs are being asked to refresh IT architectures in order to provide customers with flex-ibility in terms of price, performance and ways to consume business services.
As we see it, sourcing services from the cloud to meet this escalating demand for innovation and flex-ibility is a viable solution for today’s CIOs. Further, cloud architecture will provide and enable new opportuni-ties for CIOs to drive growth, realign unit costs, achieve faster provisioning cycles and enhance their ability to sustain digital computing. These benefits are reflected in a recent IDC study which indicates that world-wide revenue from public IT cloud-services exceeded $16 billion in 2009 and is forecast to reach $55.5 billion in 2014, representing a compound annual growth rate of 27.4%1.
1 IDC. Worldwide and Regional Public IT Cloud Services 2010-2014 Forecast, June 2010 IDC#223549
The importance of an
enterprise-wide cloud
sourcing strategy
These days, with cloud sourcing taking an increasingly integral role in organizations’ business strategies for managing economic challenges, CIOs must quickly develop an enterprise-wide cloud-sourcing strategy aligned with business services that could be categorized as ‘core’ and/or ‘commodity.’ For many large organizations, the dominant implementation is Private Cloud, where the enterprise owns and manages its own infrastructure. However, the Private Cloud is now extending into the Public Cloud, where an enterprise operates its services on third-party infrastructure.
Three primary types of infrastructure delivery
models for the cloud:
Software as a Service (SaaS): The cloud provider controls the
hardware, network, operating system and applications. Consumers access the application remotely.
Platform as a Service (PaaS): The cloud provider controls the
hardware, network and operating system. Customers provide the applications, which are accessed remotely.
Infrastructure as a Service (IaaS): The cloud provider controls
the hardware and network. Business units manage their own applica-tions and operating systems.
9
An in-depth discussion
There is no one-size-fits-all solution. Sometimes the best solution turns out to be a combination of alternatives. To deliver greater business function-ality, many enterprises are creating a hybrid service portfolio comprising Public Cloud and Private Cloud services while maintaining traditional IT services for some core systems where value and/or risk don’t warrant cloud solutions. This changing dynamic makes it paramount that organiza-tions align the right cloud model to the right set of business functions.
Absent a cohesive enterprise-wide cloud strategy, point-solution based sourcing can have far-reaching implica-tions into the organization’s competi-tive posture as it relates to financials, compliance, delivery capabilities, customer experience, and risk manage-ment. We see clients with no compre-hensive strategy in place either lagging behind their expected timeframe to begin seeing the benefits of cloud sourcing, or building up risk as indi-vidual departments in the enterprise start cloud sourcing in ad hoc ways. In our experience, business solutions built on an enterprise-wide cloud-sourcing strategy, combined with the right key performance indicators and risk management framework, can directly contribute to business success.
The ongoing evolution of
cloud sourcing
As an enabler of on-demand services via the Public and/or Private Cloud, cloud sourcing is expanding its foot-print as a major element in enterprise IT. Growth is strong in both cloud applications, as well as in the cloud infrastructure.
Three primary challenges are driving enterprises to the cloud—IT innova-tion, cost optimization and traditional IT. The matrix in Figure 2 looks at these challenges in terms of business objective, appropriate cloud model and appropriate delivery model.
Figure 2: Cloud Sourcing Matrix
C-Level Challenges and Cloud Sourcing
IT Innovation IT Cost Optimization Traditional IT
Objective An approach to capitalize on intel-lectual property and information to develop new solutions i.e. context-aware solutions
An approach to consume technology in a pay-as-you-go model where infrastructure capacity is available on demand
A comprehensive model for technol-ogy that matches the demand of busi-ness application delivery with supply of IT resources
Cloud Model Public, Private Public, Private Private
10 Leveraging the cloud—the new sourcing alternative
Finding the right cloud
solution for your company
The challenge is to develop a cloud-services decision matrix to determine where to leverage the cloud. You need to know which is the right solution for your organization’s unique needs and circumstances. When choosing which applications to migrate to a cloud model, you need to find the right balance between value and risk. You need to figure out where various applications and/or business func-tions fit in the Cloud Services Decision Grid—and where they don’t fit. We recommend that organizations assess their service portfolios, identifying those services that are core to the busi-ness versus those that are commodity, and matching that against the corre-sponding delivery mechanism of “Insourcing versus Outsourcing” (See Figure 3.).Delivery alignment Outsourcing Insourcing Business alignment Commodity Cor e Service A Service B Service C Service D Service E Service F Service G Service H Service I Service J Service K
11
An in-depth discussion
Figure 4: Cloud Sourcing Emerging Trends
Industry Business Process Cloud Services
Banking CRM, Loyalty, HR, Procurement Payment Services, Printing, Desktop, Infrastructure, Backup/DR, etc. Government Email Email, Collaboration Infrastructure
Healthcare ERP, Medical Records Management Billing, Health Applications, Telemedicine, Image Data Management, Infrastructure, etc.
Manufacturing Supply Chain Management Supply Chain Management
Pharmaceutical CRM, HR, Procurement Application Development, Analytics, Burst Load Computing, etc.
Size and type matter
Cloud sourcing varies according to the type and size of organization. Large enterprises and public-sector organizations have different priori-ties as well as different infrastructure starting points than do small and medium businesses.
• Large enterprises—and public sector agencies in particular—are constrained by policies and regulations that limit how and where data can be located. Cloud sourcing has not matured sufficiently to address regulations designed to secure and protect personal and private data.
• Large enterprises tend to have established IT service departments to serve as key intermediaries between business applications and IT infrastructure. Many customized and/or legacy applications can’t run today without the knowledge and support of in-house staff. • The larger the enterprise, the more likely it is that IT demand
and service delivery will be de-centralized among independent IT departments that may be more focused on satisfying only one department’s requirements.
Cloud service providers must address these issues before enterprises can successfully adopt cloud sourcing for their critical and large-volume IT services.
Industry implications
As more and more services are adopted and delivered via the cloud in order to reduce delivery costs, increase agility, and gain competitive advantages, we find that the maturity adoption levels of cloud-sourcing strategies vary depending on the industry, as illus-trated in Figure 4.
12 Leveraging the cloud—the new sourcing alternative
The cloud—Disrupting the
status quo of traditional IT
As the business deploys more cloud-based services, there is a reduction in an organization’s need to pay for hard-ware installations, manage system life-cycles, and estimate capacity planning. Thus, cloud sourcing supports the evolution of IT services from delivery by dedicated IT staff into the stan-dards-based, commoditized, managed IT services offered by outsourcing vendors today. It allows a business to pay on demand for IT capabilities, thereby avoiding the need to build its own IT infrastructure and operate its own service organization.Of course, behind cloud services, orga-nizations will always have computer systems that need to be installed and replaced, and special-purpose data centers to house them.
Considerations in
evaluating cloud models
Each cloud-sourcing model presents unique considerations that enterprise decision makers should not ignore. Following are some key areas of focus to consider when evaluating these models in terms of your organization’s specific needs and circumstances: • Public Cloud sourcingconsid-erations. Public Cloud implemen-tations represent an outsourcing of infrastructure. Consequently, an immediate reduction in need for infrastructure management services by the enterprise results. When an enterprise transitions to a Public Cloud infrastructure, there is a need for services around integrating the public infrastructure with the enter-prise infrastructure, as well as the associated security and risk.
• Private Cloud sourcing considerations. Private Cloud implementations can result in a significantly more automated infrastructure and application backbone in an enterprise. Many of the previously sourced operational services are performed by software managing the Private Cloud. These services focus on Private Cloud shifts from operations to design and management. An enterprise transitioning to a Private Cloud requires service providers with expertise in implementing complex cloud architectures. Many enter-prises lack this expertise internally and must source externally.
13
An in-depth discussion
Long story short: As sourcing business services from the cloud can dramatically diminish the need for IT services for application and infra-structure, the cloud is increasing its penetration into the business realm. As a result, we are seeing a changing marketplace dynamic. While cloud sourcing is disrupting the need for IT services in some cases, it is introducing the need for new kinds of services in others—a development that is ratcheting up CIOs’ interest in multiple sourcing partner (MSP) models for clouds. The rewards of cloud computing are many, but there are risks and complexi-ties that require attention. It is vital that CIOs collaborate with their orga-nization’s CEO and CFO to consider all available options—not just in terms of IT impact, but also in terms of short- and long-term business impact.
What this means for your business
Reaping the benefits
of infrastructure-free
IT services
15
What this means for your business
Cloud sourcing and its
impact on the enterprise
Today’s business leaders—seeking to benefit from the flexibility and agility that cloud sourcing can deliver—are increasingly leveraging the cloud to transform their capabilities and gain competitive advantage. Organizations are implementing enterprise-wide cloud services under Public, Private or Hybrid Cloud models, and using business models such as SaaS to deliver cloud-based services for key business functions like CRM, HR and Loyalty programs. As a result of this changing dynamic, cloud sourcing is disrupting the traditional IT sourcing status quo, and we expect this to continue over the next two to three years.Along with the benefits that cloud sourcing can deliver, CIOs and other IT leaders are challenged by new risks that they must account for and manage over time so as to reduce their potential impact on the business. This is particu-larly true of those risks associated with: • Data ownership, stewardship and
portability
• Data security and cloud hacking • Performance guarantees
• The governance model for multiple-sourcing relationships
• Regulatory implications—SAS 70, ISO 27001, etc.
• Vendor viability
• Data challenges in multiple sourcing partners
• Capital and operational expenditure implications
• Revenue realization and tax implications
CIOs—Asking the right questions
A sound cloud-sourcing strategy should be built on a fact-based foun-dation. To that end, CIOs need to ask themselves, and answer, key questions before setting out to custom-tailor a comprehensive strategy that addresses the organization’s unique needs, circumstances and overall business goals. Just for starters, ask yourselves:
• Which strategic imperatives can cloud solutions help right now? • What belongs in the roadmap that creates incremental benefits on
the path to cloud computing?
• How can IT better align with product development to support our changing business model?
• How will our talent strategy need to change to support a cloud-based infrastructure?
Populate your strategy based on the answers to these and other key questions.
16 Leveraging the cloud—the new sourcing alternative
AMAZON / NETFLIX
We are in the movie distribution business not in the infrastructure business. NetFlix eschews DVDs and enters Canadian market with 100% Internet on-demand offeringNetflix recently announced using cloud infrastructure services from Amazon to run its online movies distribution business. The business driver for Netflix was a recognition that its core competency lies not in running complex infrastructure but in bringing innovative entertainment services to its customers.
Source: http://www.itworld. com/virtualization/131196/ netflix-shows-how-use-cloud-computing-a-mission-critical way?page=0%2C1&source=IT WNLE_nlt_saas_2010-12-22
In this instance, disruption of the IT status quo took the form of a complete outsourcing of the organization’s infrastructure services to a cloud provider. It is important to recognize that this is not a traditional outsourcing of data-center management. Rather, it is the sophisticated use of generic infrastructure services provided by a cloud service provider, who then took on responsibility for the integrity and delivery of the services, governed by contractual terms and conditions. This success story also demonstrates the flexibility of cloud sourcing to enable a fast-growing company to enter a new market with virtually no infra-structure investment. As we see it, this opportunity could not exist without the leverage that a cloud vendor provides to quickly scale up service delivery to meet an emerging business demand.
17
What this means for your business
So how do you deal with these chal-lenges and complexities? Where do you begin? Here are some key action steps that warrant consideration as you set out to tailor a comprehensive cloud-sourcing strategy:
The CIO must become a true advocate and service-delivery broker for the business.
Cloud services allow the business to go directly to the providers to procure relevant services, but the CIO should establish cloud-sourcing guiding princi-ples and interject him/herself to ensure that the services acquired not only meet the specific requirements of the business, but also adhere to the policies and requirements of the organization as a whole including material Service Level Agreements (SLAs).
Accordingly, the IT organization must develop expertise in the business’s unique requirements and constraints— such as regulatory concerns, security requirements, availability and scal-ability—and must also become fluent in the broader needs of an enterprise.
The IT organization must serve as champions for the business, providing valuable insight to support sourcing decisions.
This entails providing advice and assis-tance with:
• Cloud service opportunity iden-tification. This includes evaluating where to start introducing cloud services as well as developing the cloud-services roadmap and rolling that into the overall IT services strategy.
• Service-provider assessment and selection. The IT organization should have the best understanding of cloud-provider capabilities and should work closely with the busi-ness and the sourcing/procurement function to evaluate and select the most appropriate provider to meet the requirements of the business. • Contracting. While the
busi-ness is responsible for providing the critical business requirements, IT—in collaboration with the sourcing/procurement organi-zation—will play a critical role in translating these first into specific services and (SLAs) and then into a multi-year contract.
In addition, the IT organization must play a critical role in:
• Implementation and program management oversight. Since the proper implementation of cloud services will drive internal customer satisfaction as well as help to realize the business case, the IT organization should play a program-management role as cloud services are tactically deployed—ensuring that they meet the agreed-upon requirements, that change orders are minimized, and that the transi-tion is effectively managed.
• Governance and performance management. Since outsourcing reduces the organization’s control over assets and resources, a stronger governance framework and greater service-level monitoring are required. As part of the gover-nance framework, performance management must be established and maintained covering areas such as availability, quality, and perfor-mance improvement. Appropriate incentives and penalties are playing an increasingly important role, and must therefore be well thought through and utilized as required.
18 Leveraging the cloud—the new sourcing alternative Cloud sourcing warrants an even
greater focus on service portfolio and lifecycle management (e.g., integra-tion, cost, service retirement, avoiding service/provider lock-in, etc.). Given that there is even greater visibility to the services available in the market-place, including expected service levels and costs, leading CIOs will focus on leveraging both internal cloud services and external cloud services available from providers—thereby magnifying the impact on their organization.
The way forward—
Key recommendations
for CIOs
Based on our depth of experi-ence in the trenches, here are our recommendations:
Develop a three- to five-year cloud-sourcing roadmap for the enterprise.
This entails:
• Working very closely with the business to identify core versus commodity services and prioritize those that are most adaptable to cloud sourcing, e.g., those with the potential to deliver the most value with the least amount of risk. • For each requirement earmarked for
cloud, determining which model— Public, Private or Hybrid Cloud—is the best fit.
• Developing a policy framework to identify the requirements that are not suitable for cloud sourcing. • Setting up a cloud-governance model with representation from across the enterprise and sponsor-ship from the business executive responsible for overseeing the orga-nization’s technology.
Perform rigorous due diligence in evaluating cloud service providers.
To help ensure success in moving to the cloud, some existing providers may need to be rotated out while new service providers may need to be introduced. Provider selection criteria should include: strong cloud capabilities, a depth of experience and track record of success in cloud implementations, a commitment to your organization’s smooth transi-tion to the cloud—and particularly, a sound reputation and proven methodology for safeguarding data and avoiding pitfalls.
19
What this means for your business
Assess how the organization’s need for services will shift with the move to the cloud and plan accordingly.
Build cloud into the enterprise port-folio-management processes.
Prepare for a potential
expansion of service providers that will need to be managed as cloud adoption increases within the enterprise.
To avoid an increase in opera-tional complexity for the enter-prise, this expansion must be carefully orchestrated. Further, expect that multi-sourcing gover-nance will become increasingly prominent and plan accordingly.
Apply fuller scrutiny of
liability, compliance, and SLA commitments to effectively manage contracts with cloud service providers.
In our experience, it is important to separate marketing from an ability to deliver. Liability and compliance frame-works in the cloud are still immature.
Since cloud sourcing typically leads to cost transparency and unit cost reduction, manage to those end-points.
Fully incorporate cost tracking into the organization’s cloud-governance model.
Facilitating your
organization’s journey to
the cloud
Those CIOs who take a thoughtful and collaborative approach to building a business-focused cloud-sourcing strategy and then follow these recommendations will posi-tion their organizaposi-tions to reap the full benefits of cloud computing.
Leveraging the cloud—the new sourcing alternative 20
Cloud computing—an engine for business growth,
agility and competitive advantage
When properly planned, carefully monitored and well managed over the long term, a sound cloud-sourcing strategy can empower an enterprise to lay the foundation for next-generation business services built on an efficient and flexible infrastructure—one that can support business expansion going forward and drive revenue regardless of the geography or the market. As we see it, company leaders who continue to think of cloud computing as strictly a better IT solution will miss a considerable opportunity.
www.pwc.com
© 2011 PwC. All rights reserved.“PwC” and “PwC US” refer to PricewaterhouseCoopers LLP, a Delaware limited liability partnership, which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity. This document is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. NY-11-0646
To have a deeper discussion around cloud sourcing and how it can benefit your enterprise, please contact: Philip Garland 703-918-4523 [email protected] Charlie Aird 704-344-7651 [email protected] Jai Sudharsan 973-236-4997 [email protected] Dhiraj Pathak 708-297-1319 [email protected] Derek Sappenfield 240-481-5345 [email protected] Praveen Bhasin 775-720-8520 [email protected] John Kirkwood 416-276-4363 [email protected]
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