Into the Cloud (Part 3)
Earlier this year, networking appliances specialist F5 Networks published a survey demonstrating the growing prominence of cloud computing within enterprise-level planning and spend-allocation. Of the 250 companies surveyed during June and July, 82 per cent responded that they were "in some stage of trial, implementation or use of public clouds"; perhaps even more significantly, 66 per cent confirmed that they had "a dedicated budget for the cloud" while a whopping 71 per cent expected "cloud computing budgets to grow over the next two years" (and of cash already allocated, 66 per cent was classified "dedicated" rather than "discretionary").
With money set aside for cloud-related use even during a period of drastic belt-tightening such as characterized the last year or so, it’s tempting to assume that organizations are seeing cloud technology as a potentially dramatic cost-saver - and indeed this would be a very sensible assumption, according to F5’s survey: efficiency (77 per cent), reducing capital costs (68 per cent) and "easing staff issues" (61 per cent) were given as the main drivers behind moves into the cloud. The old adage that one must speculate to accumulate is made manifest once again by IT managers convinced that, in the words of Stephanie Moore of UST Global (speaking in a recent interview with Phil Fersht of Horses for Sources fame), when it comes to delivering IT services, "ultimately, the technology—the application, the infrastructure, and the processes—will be delivered through a cloud configuration".
Unsurprisingly the glitter of the treasure being allocated for cloud development is having a similar effect on the world’s major service providers as a bucket of fresh steaks has on a school of sharks. As mentioned in previous installments of this article, investment on the part of the providers themselves is playing a significant role in fuelling the cloud revolution in the form of new jobs and technological advances, but only the most naïve would assume that such a large combined outlay is being proffered merely for the advancement of mankind: just as the buyer-enterprises allocating significant capital for developing cloud capabilities are doing so because of a belief that it represents the future (or at least one future) of IT provisioning, so too current providers are aware that a failure to lay the groundwork now for future cloud-based offerings could spell ruin in a matter of years.
It might be going too far to suggest that the coming of the cloud represents an existential threat to today’s leading service providers, but it will certainly create substantial difficulties for those who either fall behind in the race or choose not to participate at all. For starters, almost every one (99 per cent) of the respondents to the F5 survey said they were at least "discussing" cloud computing solutions: with the majority of those companies having moved beyond the discussion phase already, it would seem tantamount to shooting oneself in the foot for a service provider touting for business to admit that its own offerings proffer not even a nod in the direction of the cloud. The need to "keep up with the Joneses" has always been a major driver of competition and hence innovation within all business environments; in the case of the cloud, because the potential advantages for user-organizations - and the possibility of radical and irreversibly game-changing shifts in operating methods - are so obviously substantial, it would be a brave provider indeed who would decide not to put at least some of its own resources into developing a commercially attractive cloud portfolio.
Furthermore there is a clear and present danger to existing BPO providers in particular inherent in the cloud revolution, in that hitherto-pure-play IT providers are threatening to begin accumulating BPO contracts from clients realizing the advantages in handing over business processes to companies already running other aspects of their businesses (just as many BPO providers with either very strong links to, or their own, ITO provisions have in recent times swept up IT contracts from existing clients with whom they had initially developed business process-based partnerships).
An interesting take on this issue was raised by Stephanie Moore in the aforementioned interview with Phil Fersht: "If you look at UST, for example, we have lots of customers for whom we do technology work: we support their applications, we support their infrastructure. We haven't really focused on BPO. Our small BPO division is specifically within financial services in the mortgage processing area. We have gotten into BPO in a rather large way, however, through our relationships with clients because they have said, ‘Look, you are supporting our applications, you are supporting our infrastructure, can you take over our business processes as well?’ It's very opportunistic in terms of our approach but it is also very opportunistic in terms of the customer's approach. That is going to be more and more the future of the way IT services are delivered."
Even at a less-volatile juncture this prospect would be cause for a few furrowed brows among BPO providers. At a time when there is a general consensus that a degree of consolidation amongst service providers is all but inevitable, and when a major tranche of the investment into and development of cloud services is being laid out by players essentially outside the BPO community, it’s a major headache indeed. Huge though the resources of some BPO providers might be, its unlikely that many would relish the idea of a stand-up fight for supremacy with the Microsofts and Googles of this world - and while the standard response to such a hypothesis is that such software titans (immense though they are) don’t possess the BPO expertise or experience of the current service-provider top table, should either Microsoft, Google or anyone else with similar clout decide to throw themselves into business-process provision in a big way, backed by newly created proprietary cloud technology, that expertise could be hired and would bring its experience with it.
Nor is it safe to assume that such major players would not feel the need to move into the unfamiliar waters of BPO: if IBM (itself of course one of the biggest investors in cloud computing) and HP have both seen the BPO light with huge acquisitions in the last few years, why would the door remain closed for fellow multi-billion-dollar multinationals at the sharp end of the technology tussle? Microsoft in particular sees an obvious threat posed by the cloud to its traditional revenue streams - why buy software worth hundreds or thousands of dollars a pop when you can rent similar products provided via the cloud - and as explained last week is throwing billions into cloud technology; meanwhile that omnipresent monolith SAP, another firm whose traditional business model faces certain challenges posed by the potential of the cloud, has its own strategy for on-demand cloud-routed services (although co-CEO Leo Apotheker cautioned last year that "there are certain things that you cannot run in the cloud because the cloud would collapse. It's simple… Don't believe that any utility company is going to run its billing for 50 million consumers in the cloud." ).
One of the biggest potential nightmares for even the largest service providers is that in many ways the very parameters of cloud computing are being formulated by the frenzied development taking place way outside the BPO community and, as a result, the nature of the playing field itself is as yet undetermined - predicting the future landscape of IT is a pretty risky venture but if cloud computing is to be as revolutionary as it has the potential to be, it seems a safe bet that the major advances are more likely to emerge from the Microsoft or Google stables, or similar, than from, say, a mid-range BPO in a second-tier Indian tech hub. Even the bigger Indian BPO providers such as Infosys, with its historic grounding in IT, will struggle to maintain anything like the levels of investment which the very biggest global software companies are pouring in.
That doesn’t mean, however, that BPO providers should just shut up shop. Of course not: an awareness of future challenges, however significant, isn’t a reason to give up on a currently profitable enterprise, and although as mentioned expertise can be purchased by anyone looking to make a new entry into the BPO arena, in the short and medium terms the major BPO players still hold plenty of cards. Just because the cloud is out there and growing, doesn’t mean that buyer organizations are likely to shift their processes to cloud-focused providers en masse and overnight. The advantages of already holding strong relationships with clients are significant and certainly crucial at this particular point in time when the real nature of doing business through the cloud - and the extent to which it will be able to host service provision up to, including and perhaps surpassing the "billing for 50 million customers" posited by Apotheker - is still undetermined. Providers that can continue to provide high-quality services at competitive rates while developing their own versions of cloud computing - and while hoping that these are more or less in line with what will eventually emerge from the R&D powerhouses of Microsoft, Google et al - will be in a strong position while the overall landscape coalesces and moves into high-definition.
Therefore the next couple of years are crunch-time for the providers as far as cloud-based services go (not to mention the myriad other issues which are making the outsourcing space such a dynamic arena at present). There is an element of the tightrope-walk to this particular challenge: move too fast in development and providers risk facing a lack of clients willing to embrace the cloud on any major scale as well as potentially moving in a different direction from both competitors and possibly game-defining players from outside traditional BPO channels - and of course frittering away precious capital that might better be spent, for example, moving into different verticals or diversifying geographically. Move too slowly, or in the wrong direction, however, and providers might well find themselves being overtaken by history - and more importantly by their competitors.
What is certain is that doing nothing is not an option. At a time when new technology and new forms of delivery have truly revolutionized businesses as diverse as music and sport, publishing and personal banking, players in an industry such as outsourcing which to a certain extent takes technological revolution as its very lifeblood simply can’t afford not to place at least a part of their services upon the cutting edge. If nothing else the possibility of major non-BPO-focused players moving the technology forward to a point at which it becomes illogical for them NOT to enter the outsourcing fray should be enough to inspire BPO providers to attempt to keep up as much as possible: if one of the prospects for cloud computing is, on a consumer level, the question of "whether we want Google owning the last bastion - our desktops" , for BPO providers the equivalent question is whether or not they want Google, or anyone else, owning the business which they’ve spent so much effort on attaining and retaining.
As with much else in outsourcing it will boil down to a combination of quality and cost. It seems reasonable to assume that although as noted previously there is something of the zeitgeist to cloud computing, and an upswell in the attention being paid thereto in the media and within those elements of the business community concerned with service provision and delivery, it’s not yet a done deal - in the sense that were another such potentially game-changing concept to emerge, that too would capture plenty of attention and R&D spend. What attracts people to cloud computing far more than its exotic, exciting difference is its potential ability to bring down costs for organizations for whom cost-saving is currently paramount, and to take out many of the operational headaches which can make IT such a millstone around the corporate neck - in other words, pretty much what attracts many firms to ‘traditional’ BPO services in the first place. Buyers don’t necessarily want cloud computing for cloud computing’s sake but for what it can save and gain them. If these things can continue to be provided by extant BPO players during the next couple of years, however this is achieved, they should be able to adjust their operations accordingly and with a minimum of heartbreak if and when cloud technology fully takes over from the traditional way of doing things. Easier said than done, of course - but then no-one ever said the BPO game was easy…