December 31, 2011
Few would dispute that cloud computing has a huge potential for making IT service expenditures more cost-effective and flexible. But as is often the case, what is now possible is not necessarily practical or even desirable from the standpoint of the buying customer in terms of both accommodating longstanding preferences as well as specific contractual terms.
For example, consider these aspects of cloud computing:
- Variable pricing means unpredictable in spending. One of the lessons of the early utility models of the early 2000s was that customers’ preference for predictable expenditures often trumped variability based on consumption. The same is true today with even more inherently fungible cloud services. Moreover, a sudden, wholesale shift from capital spending to expense spending is impractical for many customers.
- Rapid provisioning taxes customer lead times. Rapid provisioning, one of cloud computing’s principal calling cards, presents huge advantages compared to server provisioning times measured in months, but customer provisioning systems cannot usually take full advantage of provisioning times measured in mere minutes.
- Pricing based on resource units can bring challenges. For example, testing-as-a-service allows customers to pay on the basis of test cases executed, but few customers are as yet ready or comfortable paying in this manner.
Not surprisingly, sourcing best practice lags the possible, as it will take time for customers to adjust to the new possibilities. Outsourcing contracts are only now morphing to accommodate cloud technologies as customers increasingly trade off cloud-based services for traditional IT services. For example, term commitments, still standard practice in IT outsourcing and even in many SaaS implementations, are shrinking for cloud services such as private cloud offerings. The challenge for sourcing and vendor management professionals will be to take advantage of the new possibilities while maintaining coherency and clarity in contractual relationships, particularly in an inherently multivendor environment. The shift to cloud-based IT services alters time-honored practices in terms of apportionment of risk between customer and supplier, along with revenue and margin assumptions. Chargeback systems are also due for a revamp in light of the cloud. We will be publishing our observations about how IT outsourcing contracts are changing along with the IT outsourcing industry itself early in 2012.