Rodrick Gorden's blog ::SVLG's 2nd Data Center Energy Efficiency Summit
"In the next five years outsourcing as we know it will disappear. The legion of Indian service providers will be sidelined or absorbed. U.S. and European companies that pioneered this corner of the high tech industry will suffer similar fates if they don't wake up. Who will emerge as the new leaders? Google and Amazon.com, brands that we associate with search and retail, will become better known for outsourcing," according to Arjun Sethi and Olivier Aries in an August 2010 businessweek.com article. This would be no surprise to renowned scientist and inventor Ray Kurzweil, often lauded by such giants as Bill Gates, who said in his book, "The Singularity Is Near" (Penguin Books 2005), that the pace of technological achievement, especially in computing is going up logarithmically. The "computations per second" doubles every two years, if not every year, he writes. With the world's economies tipping on the razor's edge of survival, it is reasonable to assume that all outsourcers, especially legal process outsourcers such as famed white-shoe New York law firm giants who, since 2001 have sought to cut costs by sending rote work to countries like India, will quickly abandon those brand-new LPO firms within Indian boundaries, if it means saving even more money. The "new business paradigm" for such law firms (and one-person law firms) had been to become client-centric and lower costs by having well-educated Indian lawyers do mundane work for 10 percent of what a junior associate would charge in the heart of Manhattan. Even as the LPO industry, after just 10 years, brags about its already being a billion-dollar industry just within the U.S., the dream may be over. "Sound ludicrous? Not if you follow this industry," Sethi and Aries write, and Kurzweil would concur. "Desktop computers yielded to laptops. Web portals AOL, MSN, and Yahoo! are giving way to social media sites Facebook, Twitter, and LinkeIn. Software once distributed by disk is now available as apps over the Web-often for less than the cost of a slice of pizza. And so it goes. The same Darwinian process is creating a fresh ecosystem in outsourcing, one that will usher in an era of consolidation and a new way of working with clients," they wrote. "Outsourcing companies [still] sell customers deals that can span a decade and easily run to tens of millions of dollars. The [LPO] service provider [in India, or the Philippines and other countries] takes on the expensive, time-consuming task of building and operating the digital tools that the customer requires to vanquish the competition, often involving development of custom software to get the job done. To do that, service providers need aisles of powerful computers, armies of programmers, and lots of applications, which are housed either at the client's site or located at a third-party data center that's usually owned and paid for by the client but managed and maintained by the outsourcer. Accenture is a good example of the old model of outsourcing, which involves long-term contracts; customized software, legacy software, or both; and on-site systems integration work," the article says. But, "in the new model, outsourcers provide standard, off-the-shelf software on a 'pay-per-drink' basis. For that, they will leverage [what Kurzweil would welcome with open arms, the brand-new] so-called cloud technology, which lets users tap into computing power available via the Internet, rather than on a desktop or computer server housed [in India]," the two authors wrote. "The appeal is scale, flexibility, and efficiency: Thousands of server computers can attack a task more quickly-and cheaply-or handle a patchwork quilt of different technologies that companies use to run their businesses. This approach will let businesses outsource entire tasks such as the tracking of inventory, paying only for the information accessed or used." The relentless pressure to cut costs is what the technological evolution, which Kurzweil says will change the very definition of what it means to be "human," is all about, just as is the evolution of life that Darwin discovered--survival of the fittest and most adaptable. "Outsourcing is about saving money," Sethi and Aries wrote. "Sure the pitch usually revolves around improving business processes, but no client is going to pay more for the service than what it already costs to maintain their systems. Unfortunately, outsourcing vendors have maxed-out efficiencies, both from automation and from moving the work to lower cost-of-labor destinations, also known as 'labor arbitrage.' To get to the next level of savings, a ruthless search for greater economies of scale is necessary." That's where the cloud comes in. It shifts the center of gravity in outsourcing from physical ownership of assets and process expertise. It focuses on the skills necessary to efficiently manage computing operations that can scale and at the same time are flexible enough to handle scores of different tasks. Cloud computing provides computation, software, data access, and storage services that do not require end-user knowledge of the physical location and configuration of the system that delivers the services. Parallels to this concept can be drawn with the electricity grid, from which end-users consume power without needing to understand the component devices or infrastructure required to provide the service. Cloud computing describes a new supplement, consumption, and delivery model for IT services based on Internet protocols, and it typically involves provisioning of scalable and often virtualized resources. It is a byproduct and consequence of the ease-of-access to remote computing sites provided by the Internet. This may take the form of web-based tools or applications that users can access and use through a web browser as if the programs were installed locally on their own computers. In some cases, legacy applications (line of business applications that until now have been prevalent in thin client Windows computing) are delivered via a screen-sharing technology, while the computing resources are consolidated at a remote data center-possibly in the cooler-climed countries in Scandanavia instead of a hot-weather nation such as India-location. These factors will set off a wave of global consolidation in tech services. There are too many companies in this space. Consolidation will be about protecting or building market share or adding technical skills, from connectivity and networking to deep expertise in the delivery of services-on-demand. This is why most Indian outsourcing companies are investing to get up to speed on the cloud. How quickly can they build sufficient scale? If you talk with many LPO experts, cloud computing is not mentioned. It isn't even included yet in their global LPO conferences. Perhaps they already are reading the handwriting on the wall. In their businessweek.com article, the authors handicap the winners and losers in the race to become players in the evolving outsourcing business: · The Losers: Mid-tier Indian outsourcers will be acquired by larger, more aggressive companies. Indian outsourcers are attractive because of their current client list, operations in low-cost countries, and process expertise. Most of them are too small to build enough scale and expertise in the backbone capabilities required in the cloud. Leading Indian players like MphasiS and eServe have already fallen prey to Hewlett-Packard and TCS, respectively. Some larger players such as Infosys and Wipro are at risk of losing their competitive advantage. Even the largest Indian companies are still several orders of magnitude smaller than their U.S. competitors-HP, Xerox , Microsoft, and Google. These include companies such as Patni, L&T Infotech, and Satyam (recently acquired by Tech Mahindra. Therefore we expect Indian vendors to try to gain scale via acquisitions or alliances among themselves. · The Winners: Amazon and Google are the future leaders in outsourcing. They are already providing services to such enterprises as Eli Lilly and Pfizer. They own data centers on an enormous scale and know how to operate them efficiently. They will gain capabilities they don't yet have-such as industry-specific know-how and low-cost workforces-by acquiring Indian or other global outsourcers. Meanwhile, Google already has announced a partnership with Computer Sciences and Amazon has announced a similar one with Capgemini. Indeed, Amazon has made so much headway in cloud technology that this area of their business will generate, according to an estimate recently published by UBS, something in the order of $750 million by the end of 2011. Then there's the generational issue to consider. Amazon and Google are household brands for the generation of managers and leaders that is now rising in U.S. management ranks. In their youth, these leaders entrusted personal e-mails, music files, pictures, and social interactions to these companies. We believe it will be a logical extension for this generation to hire these companies as trusted managers and hosts of their corporate services. · The Possible Winners: Software giants such as Microsoft, Oracle, and SAP have knowledge around enterprise platforms and applications that can unlock further efficiencies for clients. They also have robust and captive client portfolios. Their success will depend on the speed at which they build up capabilities they are currently missing in connectivity, infrastructure, and experience in the cloud itself. It will also depend on their appetite for risk. We are talking here about nothing less than reengineering their DNA. For example, even Microsoft has begun to forsake its license-based software to introduce new, cloud-based, office software. At the same time, Salesforce.com has aggressively grown by shifting its CRM applications around this cloud-based model. · Those on the Fence: Xerox, HP, and Accenture have the technical and financial resources to expand their capabilities. Recent acquisitions-HP/EDS, Dell/Perot Systems, and Xerox/Affiliated Computer Services-show that they understand what's coming. Nevertheless, it's uncertain that these behemoths will shift seamlessly from large integration projects to cloud-based solutions. Unless companies such as HP, Xerox, and Dell continue to increase their momentum into the cloud, they may find their multibillion-dollar acquisitions go to waste. "The outsourcing market is on the verge of experiencing its most massive transformation since the concept arose more than 20 years ago [10 years ago for legal process outsourcing]. For outsourcers, cloud computing creates an unprecedented opportunity to reshape how services get delivered. For clients, it opens up a new era characterized by the arrival of new players that are eager to build relationships and showcase their capabilities. That means more choice and a new model that will sustain the price advantage that outsourcing has hitherto provided," wrote Sethi and Aries. In a June 29, 2009 article on forbes.com, Ed Sperling wrote that w hen executives at Amazon took a hard look at the company's business a few years ago, they realized that one of the company's core competencies had become managing data and the flow of information. Not only was Amazon good at managing data--it was significantly better than many other companies. That smelled like a new revenue opportunity. As a result, three years ago, the company best known for selling books rolled out its first cloud computing services. Andrew R. Jassy, senior vice president of Web services at Amazon, told Sperling about the challenges and what customers think about the Amazon cloud. "The pricing is independent of the SLAs (service-level agreements). We have a 99.95% uptime guarantee. You get that no matter what size you are," Jassy told Sperling. "Large customers aren't starting from ground zero. They have a pretty significant infrastructure. They have legacy software they have to figure out how they're going to migrate. What they find is the value proposition is attractive from …from a scale perspective and from a time to market perspective. We can provision servers in minutes vs. weeks. For them to even to get a server takes eight to 12 weeks. This way they can run the test, see what they can peel off and they start to build a year or two plan to peel off parts of their infrastructure." Sperling asked about start-ups: "It's so hard to get funding from venture capitalists that [these services are] a huge benefit to start-ups. They don't have to spend that CapEx on a data center or co-location or servers. It's a huge advantage to turn CapEx into a variable expense. They also don't have to deal with a legacy infrastructure. They're building their services directly on our infrastructure." "The hardest decision point [regarding outsourcing] is relinquishing control," Jassy said. "When it's in house and something goes wrong you know whose throat to choke. Most of us, when there are any issues, want to be action-oriented in fixing problems. When you're outsourcing [your data center] you don't have that same level of control. Every decision involves a risk-benefit analysis. What we're finding is companies realize they may have less control, but the benefits from a cost perspective outweigh any nervousness about the [loss of] control. That is the battle CIOs are waging." "We will need additional data centers based upon our growth over the past three years. We have a presence on the East Coast and the West Coast and in Europe, and we're starting to think about Asia. I expect we'll expand geographically because our customers are asking for that." In a January 2011 article in Outsoucing-center.com, Kathleen Goolsby wrote that " Jim Stikeleather, chief technology officer at Dell Perot Systems, says the economic value of cloud computing will have a huge impact on outsourced services. It changes companies' ability to consume IT. And RamPrasad Kan, chief technologist at Wipro Technologies, says cloud technologies are a game-changer. 'They encompass infrastructure, platforms, applications and BPO services-and this an 'IT-as-a-service' model." She wrote that cloud-based services will radically change the outsourcing business from the service providers' perspective. Stikeleather told her, "There will be many more complexities involved in a provider [an LPO based in India] offering to 'take over your IT software and hardware and move it to our environment' because cloud-based services with a variety of vendors will comprise a large component of the buyer's [the law firm's] IT." Cloud-based services also will cause an evolution and huge change in the way outsourcing providers price their services, she wrote. "Stikeleather says customers will expect their entire outsourcing solution to be billed on a 'natural forecasting unit' that correlates with the buyer's revenue items. He expects this change to cause a lot of friction over the next five years, with providers protesting 'but this is the way we've always done it.'" LPOs also will need to take on the role of a trusted partner to integrate cloud services of multiple service providers with enterprise IT, she wrote. Stikeleather said, "Outsourcing providers are going to move up the value chain, offering consulting and information management services-not in the actual delivery of IT, but in how buyers should provision and organize their systems and business workflows." In her article, Goolsby wrote that buyers should ask questions about the LPO provider's ability to manage the long-term IT transformation to a hybrid cloud environment [involving a private cloud if the law firm is big enough combined with an intersection with a multiple-user cloud]. One problem mentioned in her article is that of an accountability shift to the buyers [law firms] who will have to take on more responsibility for the architecture decisions, instead of leaving all of those IT decisions up to the LPO provider in India in order to gain the advantage of much cheaper, more flexible services. However, some questions remain about flexibility, because "standardization will be very high in the cloud," Goolsby writes, quoting another expert, "as opposed to the current [LPO] service model where there is a lot of customization. The question to buyers will be: 'Do you want it?'-not 'How do you want it?'" There are also concerns about a cloud provider shutting down for financial or legal reasons, which has happened in a number of cases. And this year's short outage within Amazon Web Services didn't alleviate concerns. As cloud computing is achieving increased popularity, issues are being voiced about security problems that may be introduced through adoption of this new model. The effectiveness and efficiency of traditional protection mechanisms are being reconsidered as the characteristics of this innovative deployment model differ widely from those of traditional architectures. The relative security of cloud computing services is a contentious issue that may be delaying its adoption. Issues barring the adoption of cloud computing are due in large part to the private and public sectors unease surrounding the external management of security based services. It is the very nature of cloud computing based services, private or public, that promote external management of provided services. This delivers great incentive among cloud computing service providers in producing a priority in building and maintaining strong management of secure services. Security issues have been categorized into sensitive data access, data segregation, privacy, bug exploitation, recovery, accountability, malicious insiders, management console security, account control, and multi-tenancy issues. Solution to various cloud security issues vary through cryptography, particularly public key infrastructure (PKI), use of multiple cloud providers, standardization of APIs, improving virtual machine support and legal support. However, President Obama has made definite moves, because of the great cost savings, to bring more and more government functions within the private, public, and mixed cloud computing models. |
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