The End of Traditional IT Outsourcing: How It Impacts Customers

The traditional IT outsourcing industry will be dead in five years, A.T. Kearney’s Arjun Sethi predicted in a recent interview with The culprit? Cloud computing services. Sethi’s vision of the future of the IT services industry is quite clear, but he’s unsure of the specific implications this industry transformation poses to traditional IT outsourcing customers.

To determine the buy-side effects of “the end of IT outsourcing as we know it,” talked to Kevin Campbell, group chief executive of technology for Accenture and former head of its outsourcing group. According to Campbell, the cloud-based future state holds great promise for outsourcing customers in all sectors—seamless customer connections for retailers, electronic health records that follow you everywhere, low-cost government-provided IT services—if only IT departments can meet the not insignificant challenge of integrating services in the new “cloud-sourced” environment. We hear a lot about how cloud computing is shaking up the IT services market, but not as much about what that means for the traditional IT outsourcing customer. Why is that?

Kevin Campbell: The cloud is still emerging and all its related implications haven’t been thought through. Organizations are still trying to understand what the cloud is. There is much discussion about how the cloud will affect sourcing, and while there are plenty of schools [of thought], all outsourcers are looking at what their role in the cloud might be, how it will change their relationship with customers and what opportunities it will present.

In your opinion, will the market rapidly develop cloud services capable of displacing traditional outsourcing?

It’s already happening. The question is about delivering services at scale. Everyone we’re talking to has cloud as part of their IT strategy, and many organizations are already piloting solutions and thinking about next steps. We expect the cloud to have a significant effect on the market within the next three to five years.

Who are the true early adopters—those already using cloud services for mission-critical applications or infrastructure?

We’re not seeing Global 2000 companies running their financial or ERP systems in the cloud. This doesn’t mean that what’s out there in terms of cloud services isn’t important. But for critical applications—applications that can’t go down—it’s about having the ability to work around system outage issues.

We are seeing especially strong interest in the pharmaceutical, financial services, high-tech and telecommunications sectors, and demand for the entire cloud services lifecycle across all our geographies.

What are the risks of early cloud adoption?

The risk most often discussed is security. The bad guys keep getting more sophisticated and creative. The potential exposures and the implications to the rest of the infrastructure are also becoming better understood.

However, many of the innovators in the cloud space are not accustomed to dealing with enterprise [needs]. They either come from the commercial world or start-up worlds, and they don’t have a strong understanding of enterprise requirements such as service levels or uptime demands. But the market’s understanding of the enterprise will mature over time.

Cost reduction and capital outlay avoidance are driving cloud adoption. Are customers of cloud computing services reaping those benefits yet?

Accenture defines cloud services as those that cost at least 40 percent less than current services, have minimal up-front costs, are paid for as you use them, and are ready when you need them.

There are a lot of cloud-like solutions and things with cloud-like characteristics in the market. In fact, outsourcers have worked for years to try to provide utility-like services. But the real key is delivering one-to-many usage and a standardized approach. If you can deliver that, clients are realizing significant benefits.

What are the biggest benefits that the cloud will bring to traditional IT services customers?

The promise of the cloud is that organizations will be able to focus on tools and their usage rather than the laborious process of building and constructing applications.

In retail, clouds will seamlessly alert customers about desirable products and services from anywhere, on any device. Banks will be able to reconfigure business in real time by dynamically sourcing services—credit approvals, for instance—from several service providers. Governments will use clouds as a low cost way to provide IT services to non-governmental organizations, community organizations or start-up businesses. Electronic health records, expected to be in widespread use by 2014, will be able to travel with patients between doctors, hospitals, pharmacies and insurance providers.

Commercial terms are still evolving, but increasingly cloud contracts are defined by short-term commitments, little to no up-front costs, significant unit cost reductions and variable pricing arrangements. With no contracting best practices in place, how does the customer protect himself?

There are things we can learn from traditional outsourcing contracts. While the nature of the service is different, clients are sourcing something and it’s a good place to start.

The difference is, if projects are short term and can be cancelled with little or no penalty, the buyer has a fair amount of leverage. So it’s important for the buyer to view and filter contracts in the context of what’s really new—what new services are being provided—in order to avoid applying conditions that don’t need to be in the agreement.

Outsourcing analysts have talked about the benefits of the multi-sourced environment for the last few years, yet IT service customers still struggle to manage multiple providers. A cloud-sourced environment is multi-sourcing on steroids. Will outsourcing customers be able to handle it?

Even the most advanced outsourcing clients understand and appreciate the need for service aggregators or integrators. In fact, we’ve had numerous discussions where clients are specifically calling out the need for this role.

A service aggregator sits between the client and all the services. He is the person who has the tools and processes in place to make sure that the end user receives integrated service across all of the platforms being provided. They must be skilled at creating an integrated plan, reporting and resolving problems, and managing the different pieces.

Some clients want to perform this role themselves but many struggle with it. An aggregator has to be best in class at service management, and not many client companies have deep service management expertise.

How will outsourcing governance have to change in a cloud-sourced environment?

The same rules and structures that currently provide governance today will work in the new environment, but they will have to be tweaked.

If a client engages multiple cloud providers—some for specialty applications and some for applications within its private cloud—the ability to solve problems becomes much more complex. The ability to problem solve when there is an incident will be the biggest governance challenge.

When there are significant potential benefits at stake, there are often significant challenges. Three years from now a mix of sourcing won’t be the exception, it will be the rule. Clients must create a solid internal control framework that takes into consideration security, data privacy and regulatory challenges to ensure all providers are following legal, governmental and corporate guidelines.

It’s critical to remember that the move to leverage cloud computing is to gain business benefits. We all need to make sure to keep our eyes on that prize.

There are a host of new terms associated with cloud computing—intermediation, aggregation, brokerage, service arbitrator. Do they have corollaries in traditional outsourcing?

It would be hard to come up with one-to-one specific terms for each of these. But there are elements of service integration, service aggregation and service management in almost all major outsourcing contracts today. The multi-sourced world has been around for a while, and while cloud is just an extension of this, it does create an environment where a client who was once using its own data center is now using multiple data centers—meaning that security and governance will become even more important. The new terminology won’t necessarily match that of traditional outsourcing.

You advise working with vendors committed to developing interoperable solutions and who have the scale and resources to be around beyond tomorrow. Can you share some examples of this type of vendor? And might traditional outsourcing customers miss out on the next up-and-coming cloud leader if they focus on the outsourcing stalwarts?

This is a nascent market. There is a mix of traditional companies, and those that are transitioning into this environment, such as Amazon and Google (GOOG). There is also a significant amount of venture capital money being invested in cloud, and new start ups will continue to emerge.

Many up-and-coming vendors are high risk, high reward. It’s important to be thoughtful when considering which business services or applications to give them. In most cases, it would be prudent to start with simple, non-critical applications, or to wait until they’ve proven their ability to deliver services to many other customers at scale.

Picking the winners will be hard. It’s a combination of having the right vision coupled with the capability to deliver. Ask both of those questions all the time.

You argue cloud services will enable IT to become a better partner to the business. That sounds like the argument we’ve heard about traditional outsourcing—farm out the commodity services to a third party so IT can focus on strategy. Yet IT organizations have had varying levels of success with this. How do customers ensure this happens as they adopt more cloud-based services?

We often say that IT projects aren’t about technology; they’re business projects that are enabled by IT. Of course, that’s not always the case. The promise of the cloud is that it can allow the IT department to focus more on the architecture, strategy, and adoption of tools and business benefits rather than focusing on the design and build of an application. It provides the opportunity for the IT department to focus on delivering business value.

IT organizations need to take a clear assessment of what skills they have, what skills they need, and the competency of their people. To ask someone who has been building applications for fifteen years to do strategy work is not a recipe for success. So if an IT group intends to repurpose some of its people, they need to receive the appropriate training and gain relevant experience.

Source: CIO

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