Our Next Generation IT Practice Leader Scott Bils chaired the Organizational Readiness track, which focused on best practices for enterprises adopting cloud technologies.

One of the track’s sessions titled “Will Culture Eat Your Strategy? How to Turn the Tables” focused on how cloud migration fundamentally changes the way things have always operated. Going to the cloud requires more than merely adopting the technology; rather, it requires an underlining cultural shift and that demands more than a memo saying, “We’ve gone to the cloud. Call IT if you have questions.”

I caught up with Francesco Paola, Vice President of Client Services at Cloudscaling, who was one of the session’s panelists to ask him the million-dollar question: How willing are CIOs to fund a “Cloud Account Team” to drive the adoption of the cloud?

Watch Francesco’s response:

Stay tuned for more video interviews!

6. Active Management of the Environment – To make their solutions cost effective, cloud service providers (CSPs) have architected their cloud environments to a predetermined set of standard technologies and service levels. The buyer must thoroughly evaluate the technologies and service levels proposed by the CSP to determine whether it can live with these, or otherwise end up paying more. Organizationally, the buyer should also consider a new role – cloud manager –whose purpose is to actively manage the cloud resources made available by the self-provisioning portal, i.e., provision and de-provision virtual machines (VMs) per demand. For example, there is no need to dedicate a physical server (or VM) on a full time basis for the QA or testing of an application that is only rarely changed. In this case, the appropriate course would be to store an image of the specific application, and only spin-up a new VM and download the image when changes are required, this way avoiding a recurring monthly charge for a VM that is available 24×7.

7. Transition – Although a case may be made for the potential savings of utilizing a cloud solution on a recurring basis, the transition costs may make doing so unattractive. Indeed, transition (supplier fees and internal transition expenses) may come close to costing as much as the first year billing of a cloud solution. Given that many times a CSP is expected to transition for a fixed fee and to a specific deadline, risks tend to creep in and overhead may be added to its transition fees. Additionally, these transitions usually occur in waves. The first wave proves the approach and validates the details of the plan via with a workload or group of servers that are not critical to the business. After evaluating the results of the first wave, plan changes and enhancements are made for subsequent waves. To avoid interruption to the business users, the cutovers usually occur over weekends, which make the transition take longer. We recommend jointly developing a detailed plan with the CSP to mitigate risks, clearly assigning responsibilities, and working out the details in areas in which the CSP perceives greater risk.

8. Disaster Recovery (DR) – A CSP may offer a primary site for production and non-production (development, test, and QA) workloads, and a secondary site for DR. Recovery time objectives (RTO) and recovery point objectives (RPO) requirements will drive the cost for DR, especially for data replication when a short RPO is required. A potential cost effective alternative is to dedicate the primary site for production purposes only, and the secondary site for non-production. In case of a declared DR event, production would be switched to the secondary site until the primary site is operational. The drawback to this approach is that the non-production environment would be unavailable until the primary site is again up and running.

9. Cloud Manager – Expanding a bit on the cloud manager role we touched upon briefly above…this individual would be responsible for extracting the greatest use of the cloud environment in the most cost effective way by actively monitoring the utilization levels of the environment, and making decisions whether to scale up or down for any given application or workload. The buyer should note that the skills required for this role may not exist in the organization and may be necessary to obtain outside the organization.  The skills required are not necessarily technical in nature, but rather an IT business management profile would be best suited given that the cloud manager would work directly with the CSP to plan for changes and utilization peaks to ensure it is prepared in advance for increased/decreased demand.

10. Pricing – In most cases, Software as a Service (SaaS) is priced by user, (and possibly by user profile), and thus can be precisely allocated back at the departmental level. Infrastructure as a Service (IaaS) does not identify usage at the end user level, but rather is typically invoiced at the VM level. For applications/workloads that run on a specific VM and belong to a particular department, the allocation is clean. The cost allocation for end users from multiple departments that access the same applications that run on multiple VMs is difficult to achieve at the VM level. Achieving the desired goal of invoicing IaaS services by end user/department would require software that analyzes utilization at the database level (where transactions are stored by end user ID) attached to the application.

As we noted in Part 1 of this blog series, moving from a legacy IT environment to the cloud is not trivial…it’s fraught with expenses, challenges, and making decisions – even trade-offs – in still unchartered waters. We believe these 10 procuring cloud services lessons will help you take the right steps on the path to cloud success.

Precedents and learnings from third-party outsourcing and captive units over the decade have ensured that key elements such as talent, governance, communication and change management are tabled as part of the set-up discussions. The how-tos of a captive set-up largely revolve around following a transition methodology that attempts to create and stabilize the offshore organization. As part of this, the project management and transition teams also strive to cover many minute elements including team structure design, work-force estimation, adherence to scope of work and ongoing collaboration with onshore teams, amongst other things.

As much as the how-tos are necessary to ensure a transition, without having a clear idea of the captive’s objectives, these implementation specifics may not suffice in creating and sustaining a successful organization.

From this perspective, there are a few key questions that need to be thought about and solved for before plunging into the details of setting up a captive.

What is the captive’s vision?

The type of value added by a captive for its parent can be across three impact levels – cost, business and strategic. An extension could be a low-cost offshore office that impacts the direct cost base of its parent and improves process efficiency. On the other hand, a Shared Service Center aimed at creating business and strategic impact may result in business process and quality improvement and may even lead on to expansion into new markets. Whether we want the captive to be a cost reduction center or grow into a Center of Excellence (CoE) will emerge directly from the vision of the captive. The vision in turn drives a number of implementation issues including work-force estimation in terms of number of FTEs, type of talent, specialized skill-sets, leadership positions etc.

What is the business-case in favor of setting up the captive?

The answer to this drives directly from the vision. Whether the captive is an extension or aims to evolve into a CoE, we need to think about multiple investments. That makes a business case essential. There have been many cases in which a decision has been made to set up a captive in a best-cost location and the implementation begun. It is only at that point that stakeholders start wondering what returns they might achieve from it. Choices around scale, size, and investment in new capabilities are crucial to offset against the value we aim to derive from the captive. For instance, if we envisage an organization that evolves into a CoE, our business case needs to reflect investments along those lines so that the right planning can be done from day one.

How should the organization be structured?

We have faced this question frequently across our captive transition engagements. And, frankly, there is no “one-size-fits-all” answer here. No rule book states that the structure of the captive should mirror the parent’s organization. Similarly, nowhere is it suggested that the captive organization needs to be structured based on the nature of processes executed there. Reporting structures, level of control residing with the captive, the transition process and similar considerations play significant roles in deciding whether a horizontal-functions-based or a vertical-industry based or a hybrid model work best for the captive organization. The structure in turn is vital in solving many of our implementation issues around team structures and governance models.

While these may not be an exhaustive list of concerns one needs to think about while setting up a captive, answers to these necessary questions go a long way in sustaining the captive and making it a success story.

Moving Headquarters

Aon has stated two primary reasons for the move – to gain greater access and proximity to emerging markets in the Middle East, Asian Pacific, and to leverage London’s position as a key hub of insurance and risk brokerage business.

However, we believe an additional reason that is clearly at work but not explicitly mentioned by Aon is the tax benefits it will realize. According to the company’s filings, Aon’s global tax rate could fall to 26 percent from an expected 30 percent for 2011 due to the United Kingdom’s favourable territorial tax regime that provides tax exemptions for dividends and gains derived from non-U.K. trading subsidiaries. In addition, the move will grant Aon access to US$300 million in excess cash abroad that will not be subject to U.S. taxes.

There is some buzz in the marketplace that the move will have a negative impact on some of Aon’s U.S.-based clients. We believe that the actual business impact will be negligible. Most of its clients have an increasingly global footprint and unless there is a material change in service provision or leadership attention, a client is not likely to terminate its relationship with Aon. Additionally, only about 20 people at the leadership position will be affected by this move.

Net-net, Aon’s decision to move headquarters is both strategic and financial. Further, the strategic elements seem to focus more on its Risk Solutions business rather than HR solutions business.

Q4 2011 Results

In its February 3 earnings call, Aon’s CEO Gregory Case announced that Aon’s fourth-quarter and full-year results reflect continued progress and positioned the firm for increased growth in 2012.

Focusing specifically on the earnings call’s remarks related to its HR solutions, the business unit Everest Group primarily tracks and analyzes, our takeaways are:

Healthcare exchanges and HR BPO emerging as key growth areas. Aon is likely focusing investments in these areas to further accelerate its recent momentum in these offerings. Our analysis reflects healthcare exchange is an area with significant opportunity and is currently underserved from the supply side. Within the HR BPO business, beyond multi-process HRO (which itself is underserved given limited number of credible players left), we  expect Aon to also increase its focus on single process HRO (SPHRO) areas, such as Recruitment Process Outsourcing (RPO), Learning Services Outsourcing (LSO), etc. However, it is going to face stiff competition from incumbents in these fast-growing SPHRO areas.

Challenges in the core benefits administration business. Here, Aon is facing a pricing war from disruptive competitors and has seen some client loses as well. Our analysis in the latest BAO study suggests that while Aon stills leads the overall market, some of its key competitors are growing faster. To be able to maintain its leadership position, Aon has to offer the right balance of cost and quality through innovative solutions. Its strategy to to push for high value-added point solutions, such as dependent eligibility audits and absence management services, is a step in the right direction. However, it can realize greater impact by combining these in its overall benefits administration value proposition and offering to raise the game and address the total cost of benefits question (compared to only operational cost of benefits administration).

Increased focus on mid-market. With pricing pressure and other challenges in the larger end of the benefits administration market, Aon is trying to find its next area of growth in the mid-market. We see Aon addressing this in two primary ways:

• Moving health and benefits consulting offering from HR Solutions to Risk Solutions business though only the consulting part moves over, and the benefits administration part remains with HR solutions. The key reason mentioned behind this move is to further facilitate cross-selling health and benefits services within their large base of mid-market clients on the risk solutions side. However, it also raises questions around internal organization ease to offer an advisory-led Health and Welfare administration solution, a key requirement in the mid-market. Expanding and pushing benefits administration services and solutions in the mid-market. This is already in motion for some time with integration of Aon and Hewitt benefits administration offering. With mid-market continuing to see an accelerated growth, Aon’s ability to offer an integrated Total Benefits Outsourcing (TBO) solution can help it capture the opportunity.

Expansion of international footprint. As the workforce becomes more global, Aon is looking to expand its footprint and solution to meet client needs. However, given some of the debacles on the global multi-process HRO front in the past, we believe the company will be much more thoughtful in terms of its approach compared to the past.

Greater leverage of global sourcing. Given the stated objective to realize higher operating margin, we expect the usage of global sourcing to continue to increase in Aon’s outsourcing business

Clearly, things are afoot at Aon. Its ability to execute some of these strategic changes will determine its success.

At Cloud Connect in Santa Clara, CA, on February 15, I’m going to have a “fireside chat” to discuss this “keeps me awake at night” issue. While I’m sure the conversation will take some unexpected turns, I plan to navigate our talk to some of the more challenging factors enterprise IT organizations face as they embrace cloud.

• A different mindset – To be able to fully leverage the benefits of the cloud service model, IT organizations are finding they have to adjust a number of strongly held beliefs that have served them well in supporting their current environments but constrain them as they move into the next generation cloud world. These include changing their orientation and thinking about how and when to provide customization for both applications and infrastructure, embracing the power of speed to impact by utilizing commonly available components, adjusting expectations about how security and compliance issues can be resolved…and many more. Indeed, there are a significant number of mindset adjustments that, when taken together, present a steep learning curve and cultural change requirement.
• A new framework for IT architecture – As enterprises embrace cloud service models, they find that the existing architectures, frameworks, methods, and processes need to be adjusted, and, in some cases rethought and reinvented.  .
• A new orientation toward innovation – One of the more difficult aspects of the new cloud world is the dilemma posed by a constantly evolving marketplace with a wide array of attractive options at competitive prices. The quick access to robust functionality allows and often encourages business units and other empowered stakeholders to experiment with cloud tools and applications. If they find the functionality useful, they often scale its use, creating new layers of technology outside the constraints of IT policy, compliance, and security. The lack of widely accepted industry standards and APIs and the constant evolution of the underlying technologies further complicates the enterprise IT agenda. Traditional approaches IT organizations utilize to evaluate, integrate, and mange the introduction of applications and technologies are often unable to accommodate these conditions without restricting the very flexibility and choice that make cloud services so attractive. The result of these challenges drives many IT executives to reexamine their approach to innovation, and challenges them to adopt new thinking about the lifecycle of technology, how integration is accomplished, and compliance is assured.
• Alterations to policies, processes, and the organization – As enterprises more deeply embrace these next generation technologies and associated changes, they find that to fully capture the benefits they must revisit some of their long held policies, adjust many of their existing processes, and facilitate and reinforce these with organizational alignment and change. New skills are required, other skills are in less demand, and the old ways interfere with or constrain progress in the new world. In most cases, these adjustments that will enable successful leverage of cloud computing must take place simultaneously with protection and maintenance of the work that will continue to be delivered from the legacy environment.

As we reflect on the size, scale, and depth of the changes cloud computing drives, I want to press my discussion partner(s) to think back to our experience with the adoption of distributed computing. We are now 20 years into that journey, and many enterprises are finding that they still maintain some applications in a mainframe environment. While it’s not possible to know how long the cloud expedition will take, it seems prudent to believe that most enterprises will be on it for at least a number of years. And, as with distributed computing, we may find that some workloads have a very long tail.

Given the realities of most large IT enterprises, it is clear that in most cases we can’t expect to achieve a clean break, making it likely that the legacy organization and the people in it will have to balance the realities of the new world while dealing with the old. As IT executives contemplate the journey ahead, they can be forgiven for nostalgia for the status quo. While our conversation next Wednesday will not solve all the problems, the grief counseling may at least help us sleep better.

1. Procuring Cloud Services – Over the years, most organizations have made significant investments in facilities, hardware, software, architecture, etc., that will either be replaced or changed when they adopt cloud computing. Some will consider the move upon reaching a refresh cycle, others at the end of an application’s life, and others still when they can no longer continue operating in older, unsecure facilities. Regardless of the timing driver, we recommend anticipating the end, and rather than making capital investments in replacing old technology, begin proactively evaluating the commercial offerings of multiple Cloud Service Providers (CSPs). In our experience, the CSPs will end up proposing very different solutions, in part based on the enterprise’s specific infrastructure environment, but primarily on their own organization’s evolution as a CSP. Note that an incumbent provider may not be the best option.

2. Application and Workload Analysis – To better assist CSPs in developing a solution that is well suited to the buyer’s specific requirements, we recommend an application to server analysis be conducted. This will highlight the several attributes of the applications/workloads that the CSP will need to best determine the right environment in which to place each application/workload. These attributes include, but are not limited to application criticality and dependencies, data sensitivity, security and compliance requirements, number of end users and their distribution, latency, data volumes, disaster recovery time and point objectives, operating system currency, etc.

3. Evaluating Cloud Services –From a marketing perspective, most CSPs’ claims of cloud computing capabilities appear credible and viable. But the truth is that there is great variance among CSPs.  The best fit choice will be the CSP with capabilities in the areas that are important to the buyer. Examples include experience running ERP on a public or private cloud (whichever the buyer prefers), ability to self-provision virtual machines (VMs) in less than an hour, a pay-by-time-used model, pricing differentiated by the infrastructure being utilized and the man-power required to run operations and support, and the ability to provide end-to-end services beyond the cloud computing component. We recommend developing a precise questionnaire and performing joint solutioning sessions to uncover the true capabilities of each prospective CSP, and checking client references with similar environments.

4. The End-State Environment (Private versus Public Cloud) – Some CSPs are still proposing physical servers under the guise of a dedicated private cloud with a minimum commitment. In this model, the buyer still pays for physical servers, although presumably less than the current environment through virtualization. Ideally, and depending on the bursting attributes of the underlying applications, the ideal scenario is a public or hybrid model wherein the buyer may purchase the base (or minimum compute required), and buy additional compute as needed.

5. Making the TCO work – Organizations may look into cloud computing with the expectation of significant cost reduction. But this may be hard to achieve if the enterprise is already spending less than it ideally should be. This underspend may be evident in lack of services (e.g., gaps in ITIL implementation), services levels (service delivery based on a best effort) and end user dissatisfaction (business units procuring IT services outside of central IT). The reality is that while cloud may help avoid capital investments, the organization must realize that a move to the cloud brings with it an underlying infrastructure and capabilities that if procured separately would be much more costly to the buyer. When doing an apples-to-apples comparison, the buyer must realize that a procured cloud solution provides a level of robustness to which its existing infrastructure may not compare. To make the total cost of ownership (TCO) work, organizations must determine a baseline spend that is not necessarily what they pay today.

That’s the end of our cloud procurement lessons for today. Next time, five more.

DALLAS, February 8, 2012 ─ The global sourcing market saw a marginal decrease in outsourcing transaction volumes in 2011 compared to 2010 due to decreased transactions in the second half of the year, according to Everest Group, an advisory and research firm on global services. After a strong start, transaction volumes dropped in the second half of the year including fourth quarter activity numbers that were the lowest since Q1 2009. Although captive activity also dropped in the second half of last year, 2011 saw captive set-ups almost double in number compared to 2010. These findings and other market insights are detailed in Everest Group’s Market Vista: 2011 in Review and Market Vista: Q4 2011 reports, which capture key developments in the outsourcing and offshoring industry. A one-hour webinar will be held Feb. 16, 9 a.m. CST, to present findings and insights from both studies as well as a discussion of options for tier-2/3 service delivery locations in the United States.

Everest Group’s quarterly and annual Market Vista reports include analyses of outsourcing transaction trends, captive-related developments, market activity by locations, location risks and opportunities, key service provider developments, and implications for sourcing industry stakeholders.

“In 2011, the first two quarters showed a continuation of the upward, positive market traction we began to see in 2010, but activity dropped during the last two quarters, leveling out the year and thereby resulting in almost a repeat of the previous year,” said Eric Simonson, managing partner of Research. “We also saw strong captive activity in the first two quarters of 2011, which further validated our firm’s long-held opinion and research findings that the captive model can be a viable core component of sourcing strategies for many organizations. Our outlook for 2012 is cautious given several factors including financial volatility in Europe, anti-offshoring sentiments in the United States and United Kingdom, and the adoption of new technologies, particularly in ITO deals.”

Last year saw 1,929 outsourcing transactions compared to 1,979 in 2010, and annual contract value (ACV) of transactions decreased compared to the previous two years. Contract renewal and restructuring activity was higher in 2011 compared to previous years, accounting for one-fifth of transaction volumes and almost one-third of the market’s total annual contract value (ACV). IT Outsourcing (ITO) contracts accounted for two-thirds of total transaction activity; 32 percent were Business Process Outsourcing (BPO) contracts.

The Market Vista: Q4 2011 report includes a special focus section on the emerging offshoring locations of El Salvador, Guatemala, Mauritius, South Africa, Thailand, Turkey, Ukraine and Vietnam. The Q4 report also examines global locations with French language capabilities, continued political unrest in Egypt, China’s new insurance scheme for expats, downside of Sao Paulo’s rapid IT market growth, and effects of the rapidly depreciating Indian rupee. Additionally, the Q4 report includes the companion study, Global Location Insights: Perspectives on Tier 2/3 Cities of the United States as Locations for IT Services Delivery.

Other findings in the Market Vista: 2011 in Review and Market Vista: Q4 2011 reports include:

• Financial services and manufacturing sectors continued to dominate outsourcing activity while healthcare activity increased significantly and public sector adoption dropped.
• While North American transactions decreased marginally last year, activity in the United Kingdom increased by 32 percent compared to the previous year.
• Although Q4 saw the signing of four mega deals, each valued at over US$1 billion in total contract value (TCV), the trend for mega deals shows a continued and steady decrease over the past three years with 11 signed in 2011 compared to 19 in 2010.
• Asia continued to see the most new captive developments but notable activity also occurred in Eastern Europe, Middle East and Africa.
• Last year saw the emergence of Brazil and Poland as mature global sourcing locations, underscoring their relevance in the global delivery footprint of leading players.
• Political unrest in North Africa, examined in the Market Vista Q2 2011 report, reinforced the importance of risk management in sourcing portfolios.
• Currency depreciation eroded arbitrage potential in Brazil, Chile and Malaysia while the rapidly depreciating Indian rupee created near-term opportunities for service providers and new entrants.
• Revenues of leading service providers increased in 2011 compared to 2010, but operating margins fell.
• Service providers continued to consolidate with Market Vista Index providers reporting about 50 merger and acquisition activities in 2011.

“The last year witnessed the continued trend towards service provider consolidation with many high-profile mergers and acquisitions,” said Salil Dani, research director. “Within leading providers, the offshore-centric providers witnessed higher growth in both revenue and operating margins compared to traditional global majors.”

Market Vista reports comprise key developments among 20 leading global service providers. Traditional service provider profiles include Accenture, ACS Xerox, AON Hewitt,  Atos, Capgemini, Convergys, CSC, HP Enterprise Services, IBM, Dell Services and Unisys. Offshore-centric service provider profiles include Cognizant, EXL, Genpact, HCL, Infosys, Mahindra Satyam, Tata Consultancy Services, Wipro and WNS.

The webinar will be held Feb. 16, 9 a.m. CST; 3 p.m. GMT Standard Time. To register, please visit: research.everestgrp.com/Events/Webinars.

Market Vista is a subscription service with four reports published per year, including location datasets, Breaking Viewpoint briefings, Market Vista Primer and Global Locations Insights newsletter. For information about Market Vista reports or other research services, please visit research.everestgrp.com, e-mail info@everestgrp.com or call +1-214-451-3110.