Corporate customers of cloud services are not having much fun when negotiating with emerging cloud suppliers.
Forrester clients seeking support for their longstanding contractual preferences ranging from access to supplier data centers for due diligence to more robust terms for liability and mutual indemnity, just to name a few examples, are facing frustration when cloud suppliers refuse to accommodate them. While cloud suppliers themselves are mindful of their need to be more flexible for large enterprise customers in theory, actual concessions are few and far between, and in some cases customers either grin and bear it or walk away.
Is it only a matter of time before cloud suppliers accommodate the same kinds of concessions and flexibility routinely accommodated by traditional outsourcing firms? Not necessarily. It is tempting to think that increased flexibility on the part of cloud providers will inevitably grow as a consequence of greater maturity; the reality is more complex. The very outsourcing suppliers that have routinely accepted these requests are becoming less anxious to take additional risk in client engagements, especially while cloud suppliers are allowed to skate around potentially thorny issues like liability. Yes, the outsourcing suppliers are willing to provide an indirect contracting model for cloud services while taking on additional service delivery risk in many cases, but there are limits to their forbearance.
CGI’s plan to acquire Logica for approximately $2.6 billion, amounting to the combination of two distinctly regional entities into a single “global” provider, offers further proof of a consolidating globalized service industry — as if we needed any after the series of service industry consolidations during the last few years. This acquisition makes sense for several reasons:
Geographic synergies: In terms of complementary regional strengths, the two entities could hardly be better paired. CGI is well established in selected vertical domains such as government, financial services, telecom/utilities and others, but it remains a mystery to many customers outside of its native Canada and the DC beltway. Although present in several European locations, CGI registers only 6% of its revenues from Europe, while Logica does not play in the North American market. Not only is Logica strong in its native UK and in governmental circles like CGI, but it also has strong Pan-European presence. Once complete, CGI can legitimately claim to be a global player, although presence in Asia/Pacific remains limited for both entities.
Competitive benefits: With strong capabilities in both ADM and infrastructure services, Logica’s ongoing financial weakness made it an attractive acquisition candidate. Part of this was due to the unique challenge facing European services players that must fend off not only global players, but also the India-based suppliers, who are active primarily in the English-speaking nations such as Logica’s native UK. Existing Logica customers can take comfort that it will not likely face intensifying financial challenges, while CGI’s customers can take comfort from a generally positive reaction from the investment community.
A couple of years ago, my then-colleague Patrick Connaughton wrote a market overview about service-level management tools, which included a discussion of specific toolsets intended to help customers manage both internal and external services-based relationships. Among the technologies in this space include Digital Fuel, Oblicore, Compuware’s APM, Enlighta, Appirio, and others. Such service-level management tools, as we described them then, reflects one key aspect of toolsets like Digital Fuel and Oblicore, to monitor service levels for both internal and outsourced delivery. But the technologies also have other capabilities, including the ability to create catalogs and manage financial implications of services consumption, both internal and external.
Since that time, challenges in service consumption, including measuring and managing services relationships, have only gotten harder, complicated by the widespread trend toward multisourcing and multi-supplier relationships and new categories of cloud-based services like IaaS on the other. Given these challenges, tools like those described above would seem to have some possible value. Big industry suppliers sure seem to think so: Since we wrote our last report, NewScale has been snapped up by Cisco and Digital Fuel was bought out by VMware, with the goal in part to help customers of virtual solutions and cloud services meter their usage and help charge back for consumption. In addition, KPMG acquired Equaterra, meaning that KPMG also took ownership of Equaterra’s EquaSiis, an outsourcing governance suite developed in conjunction with Microsoft. Oblicore was acquired by Computer Associates just months prior to our report. The acquisitions have in some cases meant a change in focus for the technologies acquired, to fit more cleanly to the broader product and services agenda of the acquirer.
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.
I recently appeared on CIO Talk Radio to discuss the growing challenge brought by increased diversity of computing devices in the workplace and the bring-your-own-device (BYOD) trend. There is no question that customers are increasingly embracing their own technology in the workplace, and in many cases believe the technology they themselves own is superior to that provided by their employers. The tablet computer is certainly one big part of this, and the ultimate impact may be as disruptive as that brought by the original PC.
IT executives like Steve Phillips, Senior Vice President and Chief Information Office of Avnet, my co-panelist on the CIO Radio broadcast, are beginning to see that desktop virtualization provides a potentially useful means to separate the realm of the corporate environment from the private world of the device user in this increasingly diverse environment. Outsourcing suppliers are definitely seeing this trend. They are gearing up for the potentially significant opportunity by running pilots and helping customers implement desktop scenarios, although with some differences from the past: For one thing, a focus on a more selective tiered approach to desktop virtualization as opposed to a one-size-fits-all. That tendency, along with the accompanying high cost for bandwidth, were a stumbling point in the past, as well as several other factors described by my colleague Steven Johnson.
But what do you think? And if considering desktop virtualization, do you envision a role for service partners or will you go it alone?
Recently, it seems that IT professionals cannot turn around without seeing another industry announcement involving the word "cloud." I am guilty too -- in fact, the SVM team at Forrester has written extensively on the topic of what cloud strategies mean to sourcing and vendor management professionals. Cloud impacts every technology, service category, industry vertical, geography, and company size differently. But despite impressive growth in software-as-a-service, infrastructure-as-a-service still takes a back seat to more conventional outsourcing “towers.”
My colleague, Wolfgang Benkel, and I recently published The Forrester Wave™: Global IT Infrastructure Outsourcing, but we realize there are unique regional considerations, which we covered in separate market overview reports for North America and Europe. In terms of what client references told us about what they are actually outsourcing from their IT infrastructure outsourcing providers, services like help desk, deskside, and storage management predominate, while old (which are on their way out, i.e., mainframe) and the new (which have tremendous growth potential, i.e., IaaS) technologies are among the least represented.
We will present the findings from this Wave in a teleconference on May 12, 2011. Click here to register for the teleconference now.
KPMG’s recent acquisition of Equaterra signals some new dynamics in the market for outsourcing advisory services. The acquisition creates an intriguing combination of capabilities encompassing high-level consulting services for tax, supply chain management and IT strategy with Equaterra’s proven outsourcing transaction strengths. Moreover, it confirms a mini-wave of industry consolidation following TPI parent company’s Information Services Group (ISG) acquiring long-time benchmarking specialist Compass (more recently, ISG acquired public sector specialist STA Consulting).
The mini-wave of consolidation may seem paradoxical given that growth has returned to the outsourcing marketplace. Forrester believes the overall market for such services will grow 7.1% to $254B this year. If the outsourcing market is again growing, why are the winds of industry consolidation blowing? Although the opportunity is broadening, large mega-deals that firms like TPI and Equaterra grew to prominence on are getting scarcer and scarcer. Moreover, clients are taking a more holistic view of outsourcing alongside evaluating shared services and other organizational dynamics, creating the need for a broader value proposition extending beyond transactional services. Although many outsourcing advisory firms have gone down this path with strategy and research services, the KPMG-Equaterra combination creates an unusually strong combination. KPMG, which heretofore had lagged principal competitors PwC and Deloitte in the scale of its outsourcing advisory service, should benefit substantially from the addition of Equaterra’s resources and capabilities.