HG Alert: Outsourcing to ‘The Cloud’ - Apr 2009

Outsourcing to ‘The Cloud’: The Risks and Benefits in Brief

What is ‘the cloud’?

‘Cloud computing’ is one of the current buzz phrases of the IT industry and the cost savings it promises is drawing increasing attention from IT managers in the current economic climate. Cloud computing is still a relatively new concept and precisely what it constitutes is the subject of some debate, ranging from the provision of virtual servers over the internet (such as ‘utility computing’), to a broader definition encompassing the myriad of IT services which can be provided from outside an organisation’s infrastructure (much like conventional outsourcing)('What cloud computing really means' - InfoWorld Media Group).

For the purposes of analysing in brief the potential risks and benefits of outsourcing to ‘the cloud’, we can define it as the process of consuming, on demand and for a fee, IT services utilising hardware, software and services provided over the internet, without the need for acquiring the relevant hardware or licenses for software. Examples include the following:

  • Software as a service (SaaS) - where a program, such as Customer Relationship Management (CRM) software, or email, is provided on demand over the internet. An earlier form is the Application Service Provider (ASP) business model delivered over the internet, such as the provision of a recruitment management system which manages employment applications via a web browser. Closely related to this is the provision of Application Program Interfaces (APIs) by web service providers which enable users to tap into the service and integrate their application with the service.
  • Utility computing – the provision of storage which can be accessed for a fee on a “pay per usage” basis, just like any other utility such as electricity or gas.

What are the potential benefits?

The obvious benefits of cloud computing are the cost savings of only having to pay for what is used, rather than the initial capital and ongoing investment required to purchase servers and software. This is particularly helpful where it is difficult to accurately predict the demand for IT services, enabling an organisation to rapidly utilise additional services at times of peak demand, while not carrying the cost of expensive capacity when demand is lower. As one commentator noted, “you would no more think of owning your own IT infrastructure, than you would of owning your own power plant”('A Place in the Cloud' - CFO).

What are the potential risks?

Given that most cloud computing service offerings are in their early stages of development, it is likely that service providers will be unable on the whole to provide the same level of service standards (in terms of guaranteed uptime, etc) that are available in more conventional tried and tested outsourcing arrangements. Security and compliance with regulatory requirements (such as privacy obligations) are also a cause for concern, unless guaranteed and robust business processes via ‘the cloud’ can be illustrated.

This means that the less business-critical operations are more likely to be candidates for outsourcing to the cloud in the shorter term. Although the cost of commercial risk (such as downtime) can in part be allocated between the parties within the outsourcing contract (in the form of service credits, liquidated damages, etc), this can neither make up for the practical inconvenience and disruption caused by service failures, nor guard against the risks of non-compliance with regulatory and corporate governance requirements (such as those dealing with personal data protection)('A Place in the Cloud' - CFO).

Until some of these issues are addressed, it seems likely that many IT managers will view the risks of outsourcing to the cloud as outweighing the benefits for most business-critical operations.

For further information regarding the benefits and risks of cloud computing, please contact HopgoodGanim’s Technology, IP and Outsourcing team.