The Art of the Cloud Computing Deal

Michael Vizard

It's pretty clear that the concept of cloud computing is transforming the way IT organizations think about outsourcing. Outsourcing of IT operations generally has meant that the IT assets associated with a given application were a dedicated resource managed by the outsourcer. Today, it's much more likely that the application will be running on a set of shared resources in the cloud.

But a lot of IT organizations have negotiated outsourcing contracts in the past three years on dedicated resources at a higher cost than they would be on the cloud. These customers might think they are locked into these agreements for the life of the contract, but Chris Ford, an attorney with law firm Morrison & Foerster, which specializes in IT services contracts, says IT organizations should check for "service evolution clauses" in their outsourcing contracts.

These clauses, said Ford, can compel the IT services company to upgrade services to keep pace with evolutions in technology such as cloud computing. That could mean that the IT services company could be obligated to provide a lower-cost set of IT services by taking advantage of cloud computing platforms. Most of these clauses generally state that the IT services company has to provide this evolution for free, but Ford thinks that such a free ride is unlikely. Instead, he thinks customers and their IT services providers will come to terms around some level of switching costs, but the long term savings on the services cost could still make the switch-over to a cloud computing platform compelling.

Ford and his colleagues outline this and other issues in a their annual Global Sourcing Trends report, which also includes an assumption that customers soon will be pooling their purchasing power to drive down the price of cloud computing services. Prices of these services are already under pressure due to overcapacity. But Ford argues that customers are already pooling their purchasing efforts in other areas, so it's only natural that similar efforts will be extended to IT services.


However, despite the advent of cloud computing, Ford says business process outsourcing deals will remain relatively small in 2010. Customers have become used to outsourcing IT, but the same level of comfort with business processes in general has yet to be attained. So even though cloud computing can be a driver for BPO, Ford says we will see few billion-dollar BPO deals in 2010.

Finally, Ford says the advent of cloud computing is also making it more difficult to distinguish from where IT services are being delivered. Undoubtedly, more of these services will be delivered on a global basis, but because of legal requirements and other practical issues, many services also will be delivered locally to create hybrid models of cloud computing. As a result, Ford says it's unlikely that the continued outsourcing of IT services is likely to become a major political issue because most people have simply become used to the idea.

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