Cloud Computing and the Art of Sourcing

In the book “The Big Switch” Nicholas Carr makes a historical analysis to build the idea that the data centers/Internet is following the same developmental path as electric power did 100 years ago. At that time companies stopped generating their own power and plugged into the newly built electric grid that was fed with electric energy by huge generic power plants. The big switch is between today’s proprietary corporate data centers to what Carr calls the world-wide computer, basically the cloud with some huge generic data centers that provides web services that will be as ubiquitous, networked and shared as electricity now is.This modern cloud computing infrastructure is following the same structure as the electricity infrastructure: the plant (data center), transmission network (Internet) and distribution networks (MAN, (W)LAN) to give process power and storage capacity to all kind of end-devices. In this way the development of information processing is an evolutionary transformation from localized proprietary resource generation to a ‘public’ commodity/utility.

A nice metaphor but is the metaphor right? For many companies and organizations the primary process becomes more and more a complex information processing activity. So didn’t IT became a real nerve system of the modern organization instead of only just the muscle system? Next to this, the information processing becomes intermingled with the processes of other companies and organizations, dynamic “value added networks and grids” are taking form. Customers, employees, partners and suppliers are becoming integral part of these supply chains and the accompanying information processing.

This brings us to the question what cloud computing is really offering. According to NIST Cloud computing is “a model for enabling convenient, on-demand network access to a shared pool of configurable computing resources that can be rapidly provisioned and released with minimal management effort or service provider interaction.” As stated by NIST, using three service models (Software as a Service (SaaS), Platform as a Service (PaaS), Infrastructure as a Service (IaaS)); and four deployment models (Private cloud, Community cloud, Public cloud, Hybrid cloud) the Cloud computing model offers the promise of massive cost savings combined with increased IT agility. This promise is based on all kind of virtualization technologies that should improve IT interoperability, portability, and elasticity requirements dramatically.

But by taking this rather technical perspective in Cloud computing we underestimate that a great new technology can be insufficient to build a successful and sustainable business. Because of the trust in a technology’s superiority we fail to spend enough time exploring business drivers, (alternative) business models and business architecture. Yet, history is littered with great technologies, products that didn’t succeed. The transformation from a traditional IT service offering to a Cloud Based offering is not a technical endeavor but an economical endeavor. Although not perfect yet (or not yet mature) technically speaking a lot of things are all ready possible in terms of cloud computing.

If we take a look at the supply side. Many system integrators are offering cloud computing (SaaS, PaaS) but in fact they are only using the name and are offering IT services in a traditional way with traditional business models (product based in stead of service based). In reality system integrators can be very reluctant in using these new cloud technologies. Part of this resistance comes from the fact of already invested money in traditional infrastructure solutions. Another issue is that cloud computer solutions tend to be more ‘utility based‘ offerings: you pay for what you have used, not more not less. These offerings are based on other business models than in the traditional offerings. Other business models means in practice other organizational structures, defining other incentives, using different KPI’s, therefore changing the business model means extra costs. Incentives are a very important part of economic behavior. If you want to change or transform, the incentives have to be right else you will fail. Or using the language of economics: you have to pay attention to asymmetric information, moral hazard, switching and transaction costs and innovation costs.

On the demand side there is similar reluctant behavior. Corporate IT services have a need for security and privacy of their business information and data and in many cases needs unique services. Part of the business information and data is seen as a corporate property or asset. Also here cloud computing is not a technical issue but an economical one. It is the traditional ‘Make or Buy issue’, CAPEX versus OPEX, it is about switching, transaction and innovation costs, it is about the time to market and the time to create value.

Information and Information processing has become a remarkable asset for organizations, one with some particular properties. It has made the evolution from a tangible to an intangible asset where the marginal costs has become almost zero. Because of this it is worthwhile to spend some time thinking about this asset. Has it really become a commodity that you can outsource any time?

Virtualization and by this Cloud Computing technology has created new business opportunities but also created new questions. Question about ownership, make or buy, about sourcing. We started a new book project: “The Sourcing Initiative: Enabling Collaboration“. The idea is that there are a lot of issues at stake in modern enterprises. Our proposition is that the modern enterprise must fundamentally rethink its sourcing equation (People, Organization, Economics and Technology) to become or remain viable. We have dubbed this Right Sourcing. It is about getting a good understanding of this equation and about finding a coherent set of ‘design‘ principles or a coherent way of working to make underpinned sourcing decisions and prevent wrong decisions. The book should be rich and diverse in content by taking different angles/perspectives by different writers. This is a non-profit project, and the book will be published under a Creative Commons licence and be freely available online. We will use an agile approach and release iterations as we go along.

We seek contributors who have something wise/clever/interesting to say about the themes and particular about cloud computing economics.

If you think you have and want to join us, please let us know. You can have a look at the website www.sourcing-it.org.


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