4/7/2011

1

IT outsourcing and cloud computing:

Politecnico di T IT outsourcing and cloud computing: definitions, models, and 

emerging trends

Paolo Neirotti, Ph.D

Torino

Politecnico di Torino – DISPEAI.A.E. Grenoble ‐ Visiting Professor Paolo.neirotti@polito.it011 – 0907204

Paolo Neirotti – Copyright 2011 All rights reserved 1

Index 

• From IT outsourcing to cloud computing: a littl bit f hi tlittle bit of history– Main typologies of outsourcing contracts

– Goals, scope, drivers and risks in IT outsourcing

• Cloud computing

• Offshoring of information based services• Offshoring of information‐based services 

4/7/2011

2

IT outsourcing typologies

•• ITIT infrastructureinfrastructure outsourcingoutsourcing:: it relates the management of hardware toolsgg g(PC procurement and maintenance), the telecommunication network, datacenter operations, data security services, help desk, fleet management

•• ApplicationApplication OutsourcingOutsourcing: it relates the management of the entire life cycleof enterprise systems (implementation and customization, systemsmaintenance) (i.e.: ERP systems, CRM, etc.)

B iB i PP O t iO t i (BPO) It i l ti th t d t•• BusinessBusiness ProcessProcess OutsourcingOutsourcing (BPO). It involves entire processes that do notbelong to the core processes of customers and that are based on theintensive 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 effectsAccess 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 

4/7/2011

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)– all‐or‐nothing outsourcing

• Then selective outsourcing with a short‐term and a “best‐of‐breed” logica  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 acquiringacquiring 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 Services . g

• Industry Shakeout due to the rise of cloud computing (for Gartner in 2012 50% of US large corporations will adopt cloud services)

4/7/2011

4

The typical sourcing optionsTransaction(one‐time detailed contract

Buy‐in Contract‐out

SLAs, cash penalties for non‐performance, adjustments for volume increases or decreases, 

termination clauses

PurchasingStyle

(one time detailed contract used as a reference point)

Relationship(low detailed, incentive contracts)

Preferred supplier Preferred contractor

Resourceclient 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 outsourcingstandardization (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

• Managerial hypes and “fashions”. 

4/7/2011

5

Common risks in IT outsourcing for clients

• Loss of competencies and expertise (in particularwhen IT employees are transferred to the vendor)when IT employees are transferred to the vendor)

• Difficult to attract and retain talented ITprofessionals

• Increasing vendor dependency (exacerbated bythe consolidation of the outsourcing industry)

• Information asymmetry and room for vendors’t iopportunism

• Business and technological uncertainty mayrequire renegotiation and additional transactioncosts (due to penalties, amendments of thecontract, etc.)

Common risks in IT outsourcing

• Many hidden costst 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 ITto support the businessL f bili i idl b i• Loss of capability to innovate rapidly businessprocesses through IT

• Technological indivisibility

4/7/2011

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 andReversibilityclauses about: 1)

Evolution clausesto the technology,price and scope ofth t iVendor Search and 

Contracting Phase

Transition to the Vendor

Managing the IT Outsourcing Effort

clauses about: 1)HR, 2) physicaland intangibleassets (i.e. IP ofsw applicationsdeveloped for thecompany’s use).

the outsourcingcontract (e.g.benchmarkingclauses)

Original idea Original idea to outsourceto outsource

TIME

g

Reintegrate the IT activity or change the vendor

Beginning of the IT Beginning of the IT outsourcing relationshipoutsourcing relationship

End of the contractEnd of the contract

12

4/7/2011

7

Recent Trends in IT outsourcing

13Source: Politecnico di Milano (2009)

Cloud computingIt 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 yother customers’ slices.

• “Pay as you go” pricing models

• Private vs. Public Clouds

4/7/2011

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 yethave 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; 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  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; 0.10 ‐0.17 $/GB for data transferred / ; /out

• Amazon Flexible payment service 

• Amazon Support: 1‐to‐1 technical assistance  100‐400$/month • Amazon’s Estimated gross margin from web services: 45%

16

4/7/2011

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 marketsas 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 

evidence

Source: Amazon (2008)

4/7/2011

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 morespecifically – rise of virtualization and service orientedarchitectures IT cheaper and more flexible, integration ofdifferent applications become easier (“Lego‐like applications”)

• From the user perspective:

– Increasing diffusion of IT even among “late adopters” whoseconcern is cost containment and risk minimization

– increasing demand for computing capacity driven by massiveuse of business analytics and “Internet of things” (e.g. due tomass customization trends)

4/7/2011

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 datalegal 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 grelocation by a company of a business process from one country to another. Captive

offshoring may exist.

4/7/2011

12

An example of business process offshoring: diagnostic imaging 

23Source: 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 

wealth

4/7/2011

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 flatglobal scenario (driver for telework diffusion).  Towards a flat or a spiky world?

• Cloud computing boosting adoption of IT among late adopters and laggards?