Customer-Supplier Relationships in the Cloud

By Graham Beck, PA Consulting Group

Organisations need to start getting to grips with imminent changes to the supplier landscape; that way, they will be ready to move if and when the time is right.

Nobody knows how fast cloud will mature or how extensively it will be taken up, but what is certain is that it will radically alter the dynamics of customer-supplier relationships.  Even organisations that are on their fourth or fifth generation of outsourcing contract may find that in some ways they have to start again from scratch.

A rapidly evolving landscape

Already the landscape is shifting. Players such as Amazon Web Services and Google have arrived to offer, among other things, pay-as-you-go access to massive hardware resources. The proposition, while hugely attractive in some ways, is also shrouded in mystery. Not only can you not see the resources that are processing your data, but you may not even know where  in the world they are. This arrangement is clearly a  departure from traditional outsourcing, where there is normally a high degree of interaction between customer and supplier.

Equally mysterious are the technological approaches used by these players. The architecture and algorithms that they use to keep systems up and running virtually all the time, and data secure, is where their intellectual property resides. Therefore they are extremely reluctant to describe these technologies in any detail, which may mean that customers are in turn reluctant to entrust mission-critical applications or sensitive data to them.

Alongside these new entrants to the market, we see traditional players repositioning to offer cloud-based services. Tier 2 outsourcing suppliers conventionally operate and in some cases, supply their client’s infrastructure. As the delivery of hardware operating systems disappears into the cloud, these suppliers are exploring new ways to generate revenue. They are therefore offering to manage cloud adoption – in particular the integration aspects – on behalf of their customers and forming alliances with the new entrants, acting as middlemen between them and the client.

Another class of traditional supplier that is being affected by the advent of cloud is the developer of software products. If, as predicted, a marketplace for commoditised services emerges, then developers will increasingly think in terms of providing that kind of service in place of packaged software. Services like salesforce.com give us a preview of how mainstream software suppliers might operate in the future.

One obstacle to cloud adoption is that the proposition only really works if little or no customisation is needed; however, given sufficient demand, we feel that software suppliers will find ways to create highly configurable products so that different organisations can use different versions of the same service without any manual intervention.

A minefield – but one that can’t be avoided for ever

Given the tension between new and existing suppliers, the new players’ unfamiliar ways of working, and the fact that familiar suppliers are re-inventing themselves as cloud experts, many of our clients tell us that the whole area looks fraught with difficulty and risk. (That’s before you even start to tackle the practical problems, such as security and compliance when you don’t know where your data is residing.)

Despite these difficulties, the cloud proposition is so attractive that businesses know they cannot just look the other way. To certain types of company, in fact, the proposition is practically irresistible. For example, a pharmaceutical company’s R&D department may need enormous amounts of computing power for crunching numbers during, say, three months of the year but may have it sitting around doing nothing for the other nine months. Being able to pay only for the capacity that they need at a given moment would bring huge savings – and while pay-as-you-go deals are theoretically possible in conventional outsourcing, relatively few companies have so far been to the trouble of setting them up.

If your competitors adopt cloud successfully and you don’t, the impact on a business’s market positioning could be catastrophic – but so could premature adoption.

We believe the answer to this dilemma is to become conversant with cloud concepts, the pros and cons of adoption, and in particular the different types of suppliers and their respective propositions, in advance, starting now. That way you can position your organisation to move rapidly if and when the time to adopt cloud arrives.

What should organisations do to prepare for relationships in the cloud?

We believe there are three main areas in which a business can prepare itself for the effect of cloud on future supplier relationships:

1) Survey the supplier landscape
Find out how existing players are repositioning themselves and what new players are offering. Talk to all of them, or to someone who has already done so. Work out what sort of suppliers you should be dealing with, now and in future.

If yours is an end-user organisation, you may not much care whether a particular application is running on Amazon’s, Google’s or someone else’s hardware; you will be buying a service from an intermediary, such as a systems integrator, who will manage the lower tiers on your behalf. In this case you will need to satisfy yourself that the integrator can provide the requisite assurances regarding security and so forth.

2) Make sure you’re free to move into the cloud
When setting up or renewing sourcing arrangements, position your organisation contractually for a possible future move into the cloud. It is more important than ever not to be locked into inflexible long-term outsourcing agreements.

Similar considerations apply to the capabilities of your IT department. Interfacing existing applications and their supporting infrastructure to a cloud environment will place greater emphasis on technical architects and the development of mature service management and governance disciplines.

3) If acquiring or replacing applications, think about a cloud future

It makes sense to evaluate prospective software suppliers to see how cloud-aware they are. Some may have already designed their products to operate in a Software as a Service environment (in the style of salesforce.com) while at the other extreme some may be blissfully unaware.

Of course, it’s not just the relationship that needs to be considered here. Since we know the cloud proposition is strongest for standard, non-tailored applications, a plain vanilla implementation will be preferable to a customised one from a cloud point of view. (We realise that today’s economic climate means that many organisations feel they have to stick with whatever applications they’ve got – and this factor could put the brakes on cloud adoption.)

Conclusion: leaving it to the professionals?

Companies should be doing all this sooner rather than later because, while the uncertainties of cloud may militate against wholesale adoption in the immediate future, things could move fast once the uncertainties are resolved. And, as we have argued, the potential rewards are too important to ignore.

It’s not just the cost savings, but the possibility of specialisation that makes cloud such an attractive proposition. Cloud allows everyone to concentrate on what they’re best at – and when it comes to running a highly reliable and available computing platform cost-effectively, let’s face it, the Amazons and Googles of the world are bound to make most of today’s IT departments look like amateurs.

However, you need to ask yourself is whether you want to be dependent on a third party to provide this capability or whether you should build and maintain this in-house, as it is key to future positioning with regard to IT supply. After all, your internal IT experts will always be better than any external supplier at understanding the needs of the business and mustering IT resources to meet those needs.

So, despite the hype, there are sound business reasons to start thinking about cloud today. That way, you can hedge your bets and make sure you are ready to move if and when the time is right.