Nine ways the cloud will transform IT sourcing

The nine principal methods of buying IT will each feel the growth of cloud computing in a specific way, says Claudio Da Rold

Organisations already buy their IT in a number of ways, but none of those models will emerge unscathed from the impact of cloud computing, says Claudio Da Rold.

Cloud computing and the whole industrialisation of IT services will inevitably alter the way people source IT. These two developments will cause a move to services that are shared, scalable and metered.

The cloud will not only drive the shift to such services, but it will also foster the growth of sourcing models based on multiple providers. It will do so while reducing the use of single-source models and increasing the number of managed service providers. That change will make service integration and multi-sourcing management two of the most challenging jobs for IT organisations.

What are the most common sourcing methods, and what impact will cloud services have on each model?

1. Internal delivery
Delivering certain IT services in-house will remain a primary model — and one that will last a long time. But organisations need to assess what they should keep in-house, and what should be outsourced.

The emphasis in the future is likely to be on value-added jobs such as service integration, process design, information and risk management, and on end-to-end business process performances.

2. Build, operate and transfer
This model is used to establish a software development facility in a low-cost location, such as South America or India. But in the future, the build, operate and transfer model could evolve as a way to create more complex multi-sourced environments where services are cloud-based. External services are good vehicles to help clients manage complex change programmes involving new technology.

3. Shared services, captive centres
Shared services and software captive centres provide economies of scale, centralisation and low-cost locations, all with significant benefits to businesses. Over time, shared services and captive centres will need to sort out their own value proposition and sourcing strategy to make use of new delivery models and cloud-enabled services.

For example, shared services that manage business processes and the IT infrastructure could decide to focus only on application management and use a cloud-based infrastructure to make their services more flexible.

4. Brand service company
A brand service company is an internal IT or shared-service organisation that defines and builds itself to function like an external IT service company with a defined brand and value proposition. It may even be an entirely separate legal entity.

I expect this type of company to grow in popularity as a result of the rising complexity and richness of external services. Such companies are particularly well-suited to service the needs of large organisations or groups of companies by using internal and outside resources — multi-sourcing by design.

5. Joint ventures and client consortia
Joint ventures are traditionally marketing tools for selling outsourcing deals. This traditional approach will decline and become a way of putting together the capabilities of various clients and providers to deliver cloud-enabled businesses and IT services. Key to this idea is that, if companies share the same value chain, they all have an incentive to optimise it.

6. Full single-source outsourcing
This model has been losing ground over recent years, because it creates a monopoly, especially when applied to very large IT requirements. This model also sits uncomfortably with cloud-based services and consequently is likely to keep declining as cloud services grow over the next five years. The only way to make this model work using cloud computing is to...

...create a major ecosystem of service providers on a single cloud infrastructure that is used as a platform for integration and delivery.

It is in this area that Force.com, Azure, Amazon Web Services and Amazon EC2 and a few other vendors such as IBM and Oracle will operate. While the winners will become powerful players, their success will not reverse the decline of the single-source model.

7. Best-of-breed consortium
This model, often used by governmental organisations will benefit from cloud-based services, because such organisations are already used in approaching and managing complex multi-source environments.

The increasing complexity of cloud-based multi-sourcing integration clearly calls for such a model, with growing specification and regulation of the role of the prime contractor.

8. Prime contractor
The prime-contractor model resembles the best-of-breed model and is becoming popular as a way of addressing the same challenges that the best-of-breed model solves for government organisations.

In this model, one service provider manages and integrates the contributions of many to deliver a comprehensive service. The increasing complexity of cloud sourcing and service delivery will call for this type of role to grow in the future. But it could also end up being constrained in terms of duties, skills, process and certifications.

9. Selective outsourcing
This is the most common sourcing model for commercial organisations. The client engages different service providers, but the service integration — and thus the overall multi-sourcing management — is retained by the client. It is another model that will benefit from cloud computing.

But it requires increasingly sophisticated frameworks for governance and management. Internal skills in process design and integration, and information management across the different sources of technology, capabilities, processes and services are also required.

While large organisations will probably go to extremes in their multi-sourcing by taking on hundreds of suppliers, most organisations will use integration and aggregation of services to simplify multi-sourcing, as well as face the challenges of data, business and end-to-end processes.

Although aggregators and platform approaches, supported by Force.com or Azure, may help reduce the complexity and enable more integrated solutions, we will continue to see the number of suppliers rise, as organisations start using cloud-based services.

Claudio Da Rold is vice president and distinguished analyst at Gartner. He has spent more than 30 years in IT, as a researcher and in technical and management positions. His experience spans datacentre management, distributed systems, document management, project and service management, outsourcing deals and related economics..

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