By Robert L. Scheier
The term “Great Awakening” sounds almost spiritual, and for good reason: It’s the term historians use to describe periods of religious revival in U.S. history.
IDC analysts used the term repeatedly in a February 9 Webcast on “Predictions 2012: Disruption Ahead in the Global Services Market” in which they forecast that 2012 will be the year outsourcing customers, and providers, take the big leap of faith and move to the cloud big time.
“Cloud-based HR systems are having a disruptive effect,” said Lisa Rowan, Program Director, HR, Learning and Talent Strategies at IDC. “The big services firms are seeing the SaaS model gain a lot of traction in HR and considering how they are going to respond.” Proprietary cloud-delivered applications will help lower costs, and will “become the norm” for mid-market customers, she predicted.
Traditional HR BPO providers are now also competing with software vendors who have acquired providers of cloud-based HR software, said David Tapper, IDC’s Vice President of Outsourcing and Offshore Services, citing SAP’s acquisition of SuccessFactors and Oracle’s acquisition of Taleo.
Service providers, likewise, “are starting to get serious about the cloud and starting to respond to competitive pressures, to transform their traditional infrastructure hosting model into an automated, self-service type of cloud model,” said Melanie Posey, VP, Hosting and Managed Network Services.
Tapper said IDC surveys even show a precise level – 42 percent savings, or a two-year payback – as the trigger at which customers will “rip and replace” their existing infrastructure with a cloud offering.
From my recent talks with IT executives, this sounds a little premature. Yes, the cloud is big and getting bigger, but it’s more a vaguely defined model of computing than a specific “yes” or “no” technology choice. It means virtual servers, storage and networks providing elastic, pay-as-you-go services over the Web. But beyond that, you’re into religious wars over definitions and (more importantly) tough choices about what form of cloud to use when.
The IT decision-makers I speak to are, frankly, unconvinced the cloud is secure. That 42 percent savings won’t mean much to a CIO if their cloud-based Web storefront crashes two hours after your Super Bowl ad played. A board of directors won’t be impressed with the lower IT costs, or even the “best practices” embedded in a cloud-based HR application, if a hacker breaks into it and publishes your candid assessments of job candidates.
Then there’s the question of how one calculates the 42 percent savings. Does that include assessing and managing a cloud vendor? Is it for a private cloud within your own data center, a public cloud at a supplier or a hybrid? Does it assume the same uptime and performance as your own data center? And what about disaster recovery and business continuity?
On both the IT and business process outsourcing side, service providers need to move beyond the current model of growing their businesses by adding increasingly expensive staff. Off-the-shelf, cloud-based business process as a service (BPaaS) that can be inexpensively sold to multiple customers is one answer. To compete with software vendors offering, say, HR software over the Web, they may need to offer specialized consulting services or even get out of “me too” areas where they can’t add value. And in some areas like testing, cloud-based “pay as you go” servers may soon be a cost of entry for service providers.
But with all the various cloud models (public, private, hybrid) and delivery channels (Infrastructure-, Platform-, Software- and Business-Process-as-a-Service) to choose from, service providers and customers will pick and choose carefully where the cloud makes sense. Instead of rushing forward in a “Great Awakening” they’ll make some coffee, look out the window and see how their neighbor’s doing before joining the parade.
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The fact of the matter is that I think the debate is really around pace and not probability. Eventually application and data services will become another utility. Two other factors I believe that will slow the cloud migration are financial and ecosystem driven. Large ERP applications are on company balance sheets and even though shifting cost to a variable model makes sense, the balance sheet write-off makes the business case around the migration unattractive. The the business models surrounding the ERP ecosystem is very well defined around companies that advise, install, upgrade and optimize ERP’s. The ecosystem for cloud is less defined therefore the advisors to CIO’s tend to continue to advise towards a well defined ERP model. The turning point will be when existing ERP ecosystem related service providers finally develop their cloud business models and then can comfortably advise migration to cloud. Inherantly the cloud offering should be cheaper than ERP so creative thought will be needed to profitably migrate the installed base to cloud. When AOL had 40million members paying them monthly while yahoo offered free mail, AOL struggled justyfying a migrating of those members to a new free business model with revenues now coming from advertising. At the end of the day, they lost their customers and were finally forced into the online advertising business model, now with limited intalled base. I see the same thing with the ERP ecosystem. Many are dependent upon their existing and well defined revenue stream and are struggling to define their business model in the new cloud offering. CSC appears to be well on their way of defining the cloud offering in conjunction with their ERP and traditional IT outsourcing businesses so we will see how they begin to structure compelling deals in support of a clear migration path to transfer their existing installed base to a cloud offering. Once that compelling math is reached, I believe the migration will accelerate.
Thanks for the comment, Steve. What do you think of the possibility of ERP vendors such as SAP and Oracle competing head-on with service providers through their acquisitions of SaaS HR vendors? And what role do you think some of the more traditional HR and BPO vendors will wind up taking? What are the critical success factors for them to make the shift?
Great article ..
Thanks much, Paul. Do I take it you share this skepticism around the cloud and, if so, do you agree that these concerns will slow adoption?
Bob
We have been in the Cloud-computing business application development since 2004 (when it was called Rich Internet Application by Macromedia) and launch our first ground-up ERP system in the cloud back in early 2005 followed by CRM systems for recruitment, real estate, and direct sales over the following years. The adoption was painfully slow until Google Docs came out and then the pace picked up.
We still face slow shifts and decision making primarily because businesses rely on their IT department to evaluate the product and yet it is these same IT people who see the writing on the wall if they approve the change over to Cloud computing, essentially they are outsourcing most of their department and handing themselves a pink slip.
However, the pain in loss of revenue, being agile and competitive is eating businesses alive by not changing over, so there is a sombre feeling that if a company remains on traditional desktop business applications with a traditional design-dev-test-rollout approach that they will not be ready to scale to take advantage of the next big growth phase in the global market and will either miss the boat or be last years news.
As for the success of cloud computing, we have had customers with ROIs as little as six days, yet ironically it took them six months to agree to the one-hour switch over. So my argument would be that unless top management has already decided in 2011 to move into the cloud, the earliest they will be moving to the cloud until 2013.
Thanks, James. Two questions: Is security still a concern, or is it fading? Second, do you see SaaS offerings such as yours hurting the businesses of BPO providers?
Bob
Security is a concern but no more a concern than it is for traditional businesses where we have seen employees walk out with a company’s database, and in several cases, the fact that information is stored online, the knowledge that used to be in an employees possession on their laptop/desktop while they worked at a company now is securely online so when they walk out the door, they don’t walk away with the information.
As to our SaaS offerings hurting the businesses of BPO providers, there is no doubt it does, but in many cases the BPO providers are also developing or offering SaaS solutions. It is an issue of keeping up with technology or being relegated to a niche market.
Totally agree with re: security in the cloud, a matter of how it’s done. For the BPO providers, agree it is a matter of keeping up with the technology, but also moving beyond the “bill per hours worked” model to providing innovation and business results. Any BPO folks you see doing a good job on that?
Bob
Interesting article on Cloud and how IT and technology majors are tapping into the cloud and using the immense potential of the cloud to roll out ERP solutions.ERP solutions on the cloud will increase scalability and efficiency, clouds are also ubiquitous thus enabling global accessibility.The future of ERP is most certainly on the cloud.Just read an informative whitepaper, Choosing the right ERP solution for your organization @ http://bit.ly/zSEOXf
Hello, Aditya, and thanks for your comment. How do you see the move of ERP to the cloud affecting how global services firms provide BPO services? Do you see the cloud as just another delivery channel for them, or a fundamental threat to how they do business?