Cloud Computing, outsourcing your IT infrastructure?

Shortening time to market, increasing transaction

volumes, 24 x 7 business at lesser cost puts a burden on

organizations.

The puzzle is how to organize an organization; which

business functions are part of the own organization and

which are part of the market.

Although IT infrastructure delivers no direct business

value, for many organizations information systems are

tightly interwoven within the fabric of their primary

processes that creates business value.Make, Buy or Ally?

Sourcing requires a fundamental change in thinking and doing

Rising ComputingDemands

Organizations are increasing their offerings of digital services.

This all adds up to a rapidly increasing demand for computing and storage capability.

On-time supply of these resources (processing power and storage capacity) can be an endeavor.

The new delivery model for information processing, cloud computing, seems to be an attractive solution to this.

Cloud computing offers: economy of scale, elasticity, opex instead of capex, shorter time to create value.

Business opportunities

Cloud computing is improving business agility because of the ability to rapidly and inexpensively re-provision technological infrastructure resources and commodity services.

This gives new opportunities to optimize on the five main steering criteria of information processing:

Money (capex/opex)

Time (to market, to create value)

Function

Quality

Capacity

Outsourcing to the Cloud?

The cloud computing service models, offers the promise of massive cost savings combined with increased IT agility based on the assumption of:

Improved IT interoperability and portability.

Delivering IT commodity services.

A competitive and transparent cost model on a pay-per-use basis.

And the quiet assumption that the service provider act on behalf and in the interest of the customer.

But to outsource or not to outsource to the Cloud is not only answering the question if it is profitable for the business to do so. There is more at stake.

CloudComputing

PaaS SaaS

IaaS

Split Incentives

Sourcing activities can be blocked if the interests of the buyer is not aligned with the interests of the seller.

The split incentive barrier is that there is another (hidden) cost for either the buyer or the seller.

For example split incentives occur when the party that is responsible for paying the bills, is different from the party that is responsible for capital investment decisions.

Split incentives is a well known economical issue that arise under conditions of incomplete and asymmetric information

between customer and provider.

Governance

User self-provisioning allows end-users to set up and launch services without the direct intervention of the internal IT organization.

Pay per use means that there is no such thing as IT investments anymore.

Traditional control mechanisms, such as investment and project boards, no longer works.

Cloud services makes the CIO management challenge, to create a consistent and coherent IT environment, even more difficult.

New governance and control mechanism are necessary to prevent fragmentation of the information processing of the

organization.

Property Rights

Property rights has five basic elements often referred to as a bundle of rights:

The right of possession.

The right of control.

The right of exclusion (access rights).

The right of enjoyment (earn income of it).

The right of disposition (buying or selling).

When a cloud computing sourcing deal is taking place the partitions of property rights should be grouped into

appropriate bundles and assigned so that appropriate economic incentives are created for the owners of each bundle

of property rights.

CostsA proper overview of all the costs that are involved in the diffusion of new services is mandatory:

Production costs and upfront cost to obtain the new services.

Transaction costs: resources that have to be used to carry out a market transaction, search, negotiation, verification, etc.

Switching costs: costs that are made when a customer makes a change of services and/or products.

Organizational transition costs: costs to change the current operational model of IT.

These costs and efforts can put a heavy burden on the substitution or replacement of IT services with better

alternatives.

Lock In

We can distinguish four types of lock-in:

Horizontal lock-in; restricted ability to replace with comparable service/product.

Vertical lock-in; solution restricts choice in other levels of the value chain.

Inclined lock-in; less then optimal solution is chosen because of one-stop shopping policy.

Generational lock-in; solution replacement with next-generation technology is prohibitively expensive and/or technical, contractual impossible.

There isn’t yet an operational Cloud standard for interoperability and portability and this can cause lock-in

situations.

Value Chain Evolution

Cloud providers are part of an IT value chain and they can change their role and position in this chain.

Traditionally these value chains were or are mostly linear but the way organizations are working is changing.

The linear value chain is transforming to a value grid.

Movements in the value chain can be expected in this still immature market

The challenge is how best to source the IT services it needs to deliver its business model and keep its commitments to all its stakeholders.

IT Sourcing

Without fully understanding the strategic, tactical and operational

consequences, outsourcing your IT infrastructure to the Cloud can

be risk full and bad decisions can lead to serious long term

repercussions.

Next Step

Issues that must be addressed to make cloud computing really successful:

Management issues; split incentives, governance, and the transformation to a new operational model of IT.

Strategic issues; property rights, lock in and the changing IT value chain.

Procurement issues; transaction and switching costs.

IT Business Model

Customer segments: Who will use the product?

Value proposition: Why will they use the product?

Channels: How will the product be delivered to the customers?

Customer relationships: How to develop and maintain contact with your customers in each segment?

Revenue streams: How is revenue generated from which customer segments?

Key activities: What are the key things that you need to do to create and deliver the product?

Key resources: What assets are required to create and deliver the product?

Key partners: Who will you want to partner with (e.g. suppliers, outsourcing)?

Cost structure: What are the main sources of cost required to create and deliver the product?

It all starts with a rethinking and proper comprehension of the business model that is being used for delivering IT

services.

IT Infrastructure Valuation

Based on business needs;

Business domain: a description of the type of business transaction and business functions that are involved.

Business objectives: inward and outward facing business objectives.

Demand Behavior: description of general customer behavior.

Functional requirements: which kind of service model the customer wants.

Technical requirements: technical quality attributes of the offered service.

… we can define the needed Computing Service and make a valuation of the IT infrastructure based on direct, indirect, transition and switching costs and capital expenditures (capex).

Next, make a proper IT infrastructure valuation by using a valuation framework

IT Value Framework, make a Choice

Read more about Sourcing

The book, Right Sourcing - Enabling Collaboration (ISBN 978-1481792806) puts forward the proposal that the modern enterprise must fundamentally rethink its ‘sourcing equation’ to become or remain viable.

The book is Available from E-tailers' websites like Amazon & Barnes and Noble, etc.

See http://www.sourcing-it.org