Cloud Sourcing

Winter 2011 Advisory Services

Leveraging the cloud—the new sourcing alternative Facilitating business growth, agility and competitive advantage via infrastructure-free IT

Table of contents

The heart of the matter

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Exploring the potential of the Cloud—a new sourcing alternative

An in-depth discussion

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Leveraging the power of Cloud Sourcing

What this means for your business

Reaping the benefits of infrastructure-free IT services

Winter 2011

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The heart of the matter

Exploring the potential of the cloud—the new sourcing alternative

Cloud computing is a dynamic business trend—one that is expected to have a significant impact on the way that business will be conducted going forward. In our experience, cloud computing is increasing its penetration into the business realm. We see leading-practice companies turning to

cloud computing, recognizing that it is far more than a better IT solution; rather, they see it as a better business solution. Indeed, cloud computing addresses several critical challenges that are top-of-mind for today’s CEOs, CFOs and CIOs—particularly in light of the current economy.

About the cloud Cloud computing defined: Cloud computing is the location-independent delivery of IT management services that provides significant evolution of service delivery to your business. Cloud sourcing: This is how PwC refers to the process of sourcing IT (infrastructure and applications) from the cloud. Two cloud models: Cloud computing comprises Public Cloud and Private Cloud models, both of which are discussed in this paper. Five defining attributes of cloud computing: • Measured service • On-demand self-service • Resource pooling • Rapid elasticity • Broad network access

Cloud computing has the potential to: • Accelerate business innovation by eliminating technology as a barrier • Facilitate delivery of more personalized, context-aware services—e.g., customer-centric services, location-centric promotions, culture-centric personalization and the like—to meet growing user demand • Improve employee productivity by providing ubiquitous access to services and data • Optimize the total cost of technology for the enterprise by sourcing certain commodity services to the cloud However, along with these and other potential rewards, cloud computing introduces new risks—particularly around data security and governance. Significant care must be taken when sourcing business services, infrastructure and applications from the cloud—a process that PwC refers to as Cloud Sourcing.

Cloud-based service delivery will empower enterprises to simplify their infrastructure and potentially reduce costs via standardized platforms, combined with new skills and management practices. We are seeing leading organizations scaling back on traditional IT to leverage the benefits of the cloud.

The heart of the matter

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As we see it, a sound cloud sourcing strategy cannot be developed in a vacuum. It is vital that the CIO invest sufficient time and effort up front collaborating with the CEO, CFO and other IT leaders. Taking a look at the big picture, the executive team should consider all aspects of cloud computing—the challenges they are facing as business leaders; the sourcing solutions that the cloud can deliver to meet those challenges; the related risks, potential rewards and impact of each option; and the overall business goals of the enterprise. Taking this holistic approach, the executive team should work together to reach agreement on the key components and objectives of the new cloud sourcing strategy.

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Armed with the insights that emerge from these collaborative deliberations, the CIO can then move quickly to categorize business services as core and/or commodity, determine which should be first in line to move to the cloud (e.g., those that bring the most reward with the least risk), and align the right cloud-sourcing model to the right business services. Ideally, a detailed three-to-five year cloudcomputing roadmap for the enterprise should emerge from this process. CIOs that take this thoughtful, holistic approach—thereby creating a factbased foundation on which to build, implement and manage a viable sourcing strategy over time—will position the organization to benefit from cloud-empowered growth, agility and, ultimately, competitive advantage.

Leveraging the cloud—the new sourcing alternative

That said, cloud sourcing is a complex undertaking fraught with risks and challenges. So how do you get it right? Where do you start? And what do you need to consider along the way? In this paper, we address the various aspects of cloud computing— its evolution, considerations, and business impact—and present some key steps to facilitate your organization’s journey to the cloud.

The heart of the matter

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An in-depth discussion

Leveraging the power of Cloud Sourcing

Cloud computing—a new alternative for sourcing service delivery—goes beyond being just a better IT solution; rather, it can help to resolve some of the key challenges facing top management today. The careful sourcing of IT—infrastructure and applications—which PwC refers to as cloud sourcing—can empower enterprises to simplify their infrastructure and potentially reduce costs by standardizing platforms and introducing new skills and management practices. As a result, we are seeing leading organizations scaling back on traditional IT service delivery to leverage the benefits of the cloud. Cloud sourcing comprises two models: Public Cloud and Private Cloud.

Leveraging the cloud to resolve business challenges As companies are faced with everhigher operating and capital expenditures, cloud sourcing provides an alternate sourcing model for CIOs and IT leaders. When strategically thought through in terms of risks and rewards, and then carefully implemented and well-managed over time, cloud computing has the potential to meet C-Suite challenges by: accelerating

Two cloud models: Public Cloud deployments pass the responsibility and associated risk for an IT infrastructure from the business to a third-party in a public cloud-sourcing model. Avoiding the constraints of traditional IT is a prerequisite for a company seeking to leverage cloud services. Private Cloud is a popular choice for large enterprises and governments. Infrastructure is provided virtually via the Internet, but from designated facilities, whether owned by the client or the vendor. This model mitigates the concerns of such clients for the protection of their data

business innovation; meeting growing user demand for individual- and location-centric services; improving employee productivity; and optimizing the organization’s total cost of technology. Consequently, we are seeing many leading-practice organizations turning to the cloud as a means of managing

IT spend and the corresponding delivery capacity and capabilities based on corporate business drivers. Figure 1 describes some of the key business drivers and the related cloudcomputing enablers that warrant consideration by executive management while defining their cloudsourcing strategies.

Figure 1: Business Drivers & Cloud-Sourcing Enablers Business Drivers

Cloud Sourcing Enablers

Cost Optimization

Capital and Operational Cost Alignment

Service Agility (Time-to-Market)

On-Demand Provisioning

Business Technology Modernization

Global Delivery Capability

Best Practices

Process Efficiency and Consistency

An in-depth discussion

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Cloud computing—Driving a changing marketplace dynamic The proliferation of mobile computing devices, combined with easy access to the Internet, are creating a greater demand for ‘anytime-anywhere-anydevice’ access to applications and data. Where 20 years ago one-size-fits-all services were the status quo, today’s users demand interactive service delivery that recognizes who and where they are and what they want to access. As a result, CIOs are being asked to refresh IT architectures in order to provide customers with flexibility in terms of price, performance and ways to consume business services.

As we see it, sourcing services from the cloud to meet this escalating demand for innovation and flexibility is a viable solution for today’s CIOs. Further, cloud architecture will provide and enable new opportunities for CIOs to drive growth, realign unit costs, achieve faster provisioning cycles and enhance their ability to sustain digital computing. These benefits are reflected in a recent IDC study which indicates that worldwide revenue from public IT cloudservices exceeded $16 billion in 2009 and is forecast to reach $55.5 billion in 2014, representing a compound annual growth rate of 27.4%1.

1 IDC. Worldwide and Regional Public IT Cloud Services 2010-2014 Forecast, June 2010 IDC#223549

Three primary types of infrastructure delivery models for the cloud: Software as a Service (SaaS): The cloud provider controls the hardware, network, operating system and applications. Consumers access the application remotely. Platform as a Service (PaaS): The cloud provider controls the hardware, network and operating system. Customers provide the applications, which are accessed remotely. Infrastructure as a Service (IaaS): The cloud provider controls the hardware and network. Business units manage their own applications and operating systems.

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Leveraging the cloud—the new sourcing alternative

The importance of an enterprise-wide cloud sourcing strategy These days, with cloud sourcing taking an increasingly integral role in organizations’ business strategies for managing economic challenges, CIOs must quickly develop an enterprise-wide cloud-sourcing strategy aligned with business services that could be categorized as ‘core’ and/or ‘commodity.’ For many large organizations, the dominant implementation is Private Cloud, where the enterprise owns and manages its own infrastructure. However, the Private Cloud is now extending into the Public Cloud, where an enterprise operates its services on third-party infrastructure.

There is no one-size-fits-all solution. Sometimes the best solution turns out to be a combination of alternatives. To deliver greater business functionality, many enterprises are creating a hybrid service portfolio comprising Public Cloud and Private Cloud services while maintaining traditional IT services for some core systems where value and/or risk don’t warrant cloud solutions. This changing dynamic makes it paramount that organizations align the right cloud model to the right set of business functions.

Absent a cohesive enterprise-wide cloud strategy, point-solution based sourcing can have far-reaching implications into the organization’s competitive posture as it relates to financials, compliance, delivery capabilities, customer experience, and risk management. We see clients with no comprehensive strategy in place either lagging behind their expected timeframe to begin seeing the benefits of cloud sourcing, or building up risk as individual departments in the enterprise start cloud sourcing in ad hoc ways. In our experience, business solutions built on an enterprise-wide cloudsourcing strategy, combined with the right key performance indicators and risk management framework, can directly contribute to business success.

The ongoing evolution of cloud sourcing As an enabler of on-demand services via the Public and/or Private Cloud, cloud sourcing is expanding its footprint as a major element in enterprise IT. Growth is strong in both cloud applications, as well as in the cloud infrastructure. Three primary challenges are driving enterprises to the cloud—IT innovation, cost optimization and traditional IT. The matrix in Figure 2 looks at these challenges in terms of business objective, appropriate cloud model and appropriate delivery model.

Figure 2: Cloud Sourcing Matrix C-Level Challenges and Cloud Sourcing IT Innovation

IT Cost Optimization

Traditional IT

Objective

An approach to capitalize on intellectual property and information to develop new solutions i.e. contextaware solutions

An approach to consume technology in a pay-as-you-go model where infrastructure capacity is available on demand

A comprehensive model for technology that matches the demand of business application delivery with supply of IT resources

Cloud Model

Public, Private

Public, Private

Private

Delivery Model

SaaS, PaaS

SaaS, PaaS

PaaS, IaaS

An in-depth discussion

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Commodity

Service H

Service F

Service A Service K

Business alignment

The challenge is to develop a cloudservices decision matrix to determine where to leverage the cloud. You need to know which is the right solution for your organization’s unique needs and circumstances. When choosing which applications to migrate to a cloud model, you need to find the right balance between value and risk. You need to figure out where various applications and/or business functions fit in the Cloud Services Decision Grid—and where they don’t fit. We recommend that organizations assess their service portfolios, identifying those services that are core to the business versus those that are commodity, and matching that against the corresponding delivery mechanism of “Insourcing versus Outsourcing” (See Figure 3.).

Figure 3. Cloud Services Decision Grid

Service E

Service J Service D

Service G Service I

Service B Service C

Core

Finding the right cloud solution for your company

Insourcing

Leveraging the cloud—the new sourcing alternative

Delivery alignment

Outsourcing

Industry implications As more and more services are adopted and delivered via the cloud in order to reduce delivery costs, increase agility, and gain competitive advantages, we find that the maturity adoption levels of cloud-sourcing strategies vary depending on the industry, as illustrated in Figure 4.

Size and type matter Cloud sourcing varies according to the type and size of organization. Large enterprises and public-sector organizations have different priorities as well as different infrastructure starting points than do small and medium businesses. • Large enterprises—and public sector agencies in particular—are constrained by policies and regulations that limit how and where data can be located. Cloud sourcing has not matured sufficiently to address regulations designed to secure and protect personal and private data. • Large enterprises tend to have established IT service departments to serve as key intermediaries between business applications and IT infrastructure. Many customized and/or legacy applications can’t run today without the knowledge and support of in-house staff. • The larger the enterprise, the more likely it is that IT demand and service delivery will be de-centralized among independent IT departments that may be more focused on satisfying only one department’s requirements. Cloud service providers must address these issues before enterprises can successfully adopt cloud sourcing for their critical and largevolume IT services.

Figure 4: Cloud Sourcing Emerging Trends Industry

Business Process

Cloud Services

Banking

CRM, Loyalty, HR, Procurement

Payment Services, Printing, Desktop, Infrastructure, Backup/DR, etc.

Government

Email

Email, Collaboration Infrastructure

Healthcare

ERP, Medical Records Management

Billing, Health Applications, Telemedicine, Image Data Management, Infrastructure, etc.

Manufacturing

Supply Chain Management

Supply Chain Management

Pharmaceutical

CRM, HR, Procurement

Application Development, Analytics, Burst Load Computing, etc.

An in-depth discussion

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The cloud—Disrupting the status quo of traditional IT

Considerations in evaluating cloud models

As the business deploys more cloudbased services, there is a reduction in an organization’s need to pay for hardware installations, manage system lifecycles, and estimate capacity planning.

Each cloud-sourcing model presents unique considerations that enterprise decision makers should not ignore. Following are some key areas of focus to consider when evaluating these models in terms of your organization’s specific needs and circumstances:

Thus, cloud sourcing supports the evolution of IT services from delivery by dedicated IT staff into the standards-based, commoditized, managed IT services offered by outsourcing vendors today. It allows a business to pay on demand for IT capabilities, thereby avoiding the need to build its own IT infrastructure and operate its own service organization. Of course, behind cloud services, organizations will always have computer systems that need to be installed and replaced, and special-purpose data centers to house them.

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• Public Cloud sourcing considerations. Public Cloud implementations represent an outsourcing of infrastructure. Consequently, an immediate reduction in need for infrastructure management services by the enterprise results. When an enterprise transitions to a Public Cloud infrastructure, there is a need for services around integrating the public infrastructure with the enterprise infrastructure, as well as the associated security and risk.

Leveraging the cloud—the new sourcing alternative

• Private Cloud sourcing considerations. Private Cloud implementations can result in a significantly more automated infrastructure and application backbone in an enterprise. Many of the previously sourced operational services are performed by software managing the Private Cloud. These services focus on Private Cloud shifts from operations to design and management. An enterprise transitioning to a Private Cloud requires service providers with expertise in implementing complex cloud architectures. Many enterprises lack this expertise internally and must source externally.

Long story short: As sourcing business services from the cloud can dramatically diminish the need for IT services for application and infrastructure, the cloud is increasing its penetration into the business realm. As a result, we are seeing a changing marketplace dynamic. While cloud sourcing is disrupting the need for IT services in some cases, it is introducing the need for new kinds of services in others—a development that is ratcheting up CIOs’ interest in multiple sourcing partner (MSP) models for clouds. The rewards of cloud computing are many, but there are risks and complexities that require attention. It is vital that CIOs collaborate with their organization’s CEO and CFO to consider all available options—not just in terms of IT impact, but also in terms of shortand long-term business impact.

An in-depth discussion

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What this means for your business

Reaping the benefits of infrastructure-free IT services

Cloud sourcing and its impact on the enterprise Today’s business leaders—seeking to benefit from the flexibility and agility that cloud sourcing can deliver—are increasingly leveraging the cloud to transform their capabilities and gain competitive advantage. Organizations are implementing enterprise-wide cloud services under Public, Private or Hybrid Cloud models, and using business models such as SaaS to deliver cloud-based services for key business functions like CRM, HR and Loyalty programs. As a result of this changing dynamic, cloud sourcing is disrupting the traditional IT sourcing status quo, and we expect this to continue over the next two to three years.

Along with the benefits that cloud sourcing can deliver, CIOs and other IT leaders are challenged by new risks that they must account for and manage over time so as to reduce their potential impact on the business. This is particularly true of those risks associated with: • Data ownership, stewardship and portability • Data security and cloud hacking

• Regulatory implications—SAS 70, ISO 27001, etc. • Vendor viability • Data challenges in multiple sourcing partners • Capital and operational expenditure implications • Revenue realization and tax implications

• Performance guarantees • The governance model for multiplesourcing relationships

CIOs—Asking the right questions A sound cloud-sourcing strategy should be built on a fact-based foundation. To that end, CIOs need to ask themselves, and answer, key questions before setting out to custom-tailor a comprehensive strategy that addresses the organization’s unique needs, circumstances and overall business goals. Just for starters, ask yourselves: • Which strategic imperatives can cloud solutions help right now? • What belongs in the roadmap that creates incremental benefits on the path to cloud computing? • How can IT better align with product development to support our changing business model? • How will our talent strategy need to change to support a cloudbased infrastructure? Populate your strategy based on the answers to these and other key questions.

What this means for your business

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AMAZON / NETFLIX We are in the movie distribution business not in the infrastructure business. NetFlix eschews DVDs and enters Canadian market with 100% Internet on-demand offering Netflix recently announced using cloud infrastructure services from Amazon to run its online movies distribution business. The business driver for Netflix was a recognition that its core competency lies not in running complex infrastructure but in bringing innovative entertainment services to its customers. Source: http://www.itworld. com/virtualization/131196/ netflix-shows-how-use-cloudcomputing-a-mission-critical way?page=0%2C1&source=IT WNLE_nlt_saas_2010-12-22

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In this instance, disruption of the IT status quo took the form of a complete outsourcing of the organization’s infrastructure services to a cloud provider. It is important to recognize that this is not a traditional outsourcing of data-center management. Rather, it is the sophisticated use of generic infrastructure services provided by a cloud service provider, who then took on responsibility for the integrity and delivery of the services, governed by contractual terms and conditions. This success story also demonstrates the flexibility of cloud sourcing to enable a fast-growing company to enter a new market with virtually no infrastructure investment. As we see it, this opportunity could not exist without the leverage that a cloud vendor provides to quickly scale up service delivery to meet an emerging business demand.

Leveraging the cloud—the new sourcing alternative

So how do you deal with these challenges and complexities? Where do you begin? Here are some key action steps that warrant consideration as you set out to tailor a comprehensive cloudsourcing strategy: The CIO must become a true advocate and service-delivery broker for the business. Cloud services allow the business to go directly to the providers to procure relevant services, but the CIO should establish cloud-sourcing guiding principles and interject him/herself to ensure that the services acquired not only meet the specific requirements of the business, but also adhere to the policies and requirements of the organization as a whole including material Service Level Agreements (SLAs). Accordingly, the IT organization must develop expertise in the business’s unique requirements and constraints— such as regulatory concerns, security requirements, availability and scalability—and must also become fluent in the broader needs of an enterprise.

The IT organization must serve as champions for the business, providing valuable insight to support sourcing decisions. This entails providing advice and assistance with: • Cloud service opportunity identification. This includes evaluating where to start introducing cloud services as well as developing the cloud-services roadmap and rolling that into the overall IT services strategy. • Service-provider assessment and selection. The IT organization should have the best understanding of cloud-provider capabilities and should work closely with the business and the sourcing/procurement function to evaluate and select the most appropriate provider to meet the requirements of the business. • Contracting. While the business is responsible for providing the critical business requirements, IT—in collaboration with the sourcing/procurement organization—will play a critical role in translating these first into specific services and (SLAs) and then into a multi-year contract.

In addition, the IT organization must play a critical role in: • Implementation and program management oversight. Since the proper implementation of cloud services will drive internal customer satisfaction as well as help to realize the business case, the IT organization should play a programmanagement role as cloud services are tactically deployed—ensuring that they meet the agreed-upon requirements, that change orders are minimized, and that the transition is effectively managed. • Governance and performance management. Since outsourcing reduces the organization’s control over assets and resources, a stronger governance framework and greater service-level monitoring are required. As part of the governance framework, performance management must be established and maintained covering areas such as availability, quality, and performance improvement. Appropriate incentives and penalties are playing an increasingly important role, and must therefore be well thought through and utilized as required.

What this means for your business

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Cloud sourcing warrants an even greater focus on service portfolio and lifecycle management (e.g., integration, cost, service retirement, avoiding service/provider lock-in, etc.). Given that there is even greater visibility to the services available in the marketplace, including expected service levels and costs, leading CIOs will focus on leveraging both internal cloud services and external cloud services available from providers—thereby magnifying the impact on their organization.

The way forward— Key recommendations for CIOs

Perform rigorous due diligence in evaluating cloud service providers.

Based on our depth of experience in the trenches, here are our recommendations:

To help ensure success in moving to the cloud, some existing providers may need to be rotated out while new service providers may need to be introduced. Provider selection criteria should include: strong cloud capabilities, a depth of experience and track record of success in cloud implementations, a commitment to your organization’s smooth transition to the cloud—and particularly, a sound reputation and proven methodology for safeguarding data and avoiding pitfalls.

Develop a three- to five-year cloud-sourcing roadmap for the enterprise. This entails: • Working very closely with the business to identify core versus commodity services and prioritize those that are most adaptable to cloud sourcing, e.g., those with the potential to deliver the most value with the least amount of risk. • For each requirement earmarked for cloud, determining which model— Public, Private or Hybrid Cloud—is the best fit. • Developing a policy framework to identify the requirements that are not suitable for cloud sourcing. • Setting up a cloud-governance model with representation from across the enterprise and sponsorship from the business executive responsible for overseeing the organization’s technology.

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Leveraging the cloud—the new sourcing alternative

Assess how the organization’s need for services will shift with the move to the cloud and plan accordingly.

Since cloud sourcing typically leads to cost transparency and unit cost reduction, manage to those end-points.

Build cloud into the enterprise portfolio-management processes.

Fully incorporate cost tracking into the organization’s cloudgovernance model.

Prepare for a potential expansion of service providers that will need to be managed as cloud adoption increases within the enterprise.

Facilitating your organization’s journey to the cloud

To avoid an increase in operational complexity for the enterprise, this expansion must be carefully orchestrated. Further, expect that multi-sourcing governance will become increasingly prominent and plan accordingly.

Those CIOs who take a thoughtful and collaborative approach to building a business-focused cloudsourcing strategy and then follow these recommendations will position their organizations to reap the full benefits of cloud computing.

Apply fuller scrutiny of liability, compliance, and SLA commitments to effectively manage contracts with cloud service providers. In our experience, it is important to separate marketing from an ability to deliver. Liability and compliance frameworks in the cloud are still immature.

What this means for your business

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Cloud computing—an engine for business growth, agility and competitive advantage When properly planned, carefully monitored and well managed over the long term, a sound cloud-sourcing strategy can empower an enterprise to lay the foundation for next-generation business services built on an efficient and flexible infrastructure—one that can support business expansion going forward and drive revenue regardless of the geography or the market. As we see it, company leaders who continue to think of cloud computing as strictly a better IT solution will miss a considerable opportunity.

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Leveraging the cloud—the new sourcing alternative

www.pwc.com

To have a deeper discussion around cloud sourcing and how it can benefit your enterprise, please contact: Philip Garland 703-918-4523 [email protected]

Derek Sappenfield 240-481-5345 [email protected]

Charlie Aird 704-344-7651 [email protected]

Praveen Bhasin 775-720-8520 [email protected]

Jai Sudharsan 973-236-4997 [email protected]

John Kirkwood 416-276-4363 [email protected]

Dhiraj Pathak 708-297-1319 [email protected]

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© 2011 PwC. All rights reserved.“PwC” and “PwC US” refer to PricewaterhouseCoopers LLP, a Delaware limited liability partnership, which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity. This document is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. NY-11-0646