Insight for CXOs: Put your cloud users on a diet
Almost paradoxically, managing usage quantity is probably much more important than just haggling on price
I spent over a decade working for Michael Connors, chairman and CEO of Information Services Group (ISG) Inc., the world’s leading sourcing advisory firm. ISG is known to be the headlight on the train that companies board when they start on the information technology (IT) transformation journey for their enterprise.
One such journey is the move from existing enterprise IT operations to operations that rest entirely in the “cloud”. I believe that very few C level executives fully realize all the implications when they embark on this journey. They make the mistake of thinking that “buying” cloud-based operations for their enterprise (and thereby cutting out traditional IT service providers who have IT infrastructure management practices) is like buying a commodity. Executives labour under the misconception that they can easily switch cloud service providers, and so don’t look before they first make their “cloud” leap. So, if I were a CXO today, I could easily enter into a transaction with say, Amazon Web Services (AWS), thinking that my company could easily switch to Microsoft’s Azure if AWS hasn’t been up to snuff.
Nothing could be further from the truth, says ISG, since cloud service providers put in plenty of hooks to make sure that their services remain “sticky”. So, making this decision is a bit like deciding whether to go with Google’s Android or Apple’s iOS as the operating system for your phone. Once you have decided on one, it becomes increasingly difficult to switch to the other as the years roll by.
The general focus of outsourcing clients has been to get the best price for the services that they procure. The primary driver is to reduce the costs involved in the outsourcing effort. However, in a price-times-quantity model (PxQ), especially in the cloud, given that stickiness to a single provider is an issue, most of the money to be saved lies in the “Q” dimension, and not the “P” dimension.
ISG offers the following tips for understanding and managing the “Q” dimension in an outsourcing environment:
1. Start Q (consumption) reporting. Pareto’s 80/20 rule often applies to heavy users of outsourced services. Reporting usage statistics, especially to the top 20% of users who drive great volumes, reveals areas of consumption that have little business value and encourages heavy users to reduce their Q footprint, thereby lowering overall costs.
2. Many cost centres do not adequately charge back to users due to complex corporate accounting policies. However, failing to drive cost to the main users leads to the “free loader” trap (also called the “tragedy of the commons” trap), where people use resources without moderation if it appears to them that the usage is free. Formally showing services users the costs of their activity makes them more circumspect. Properly designed outsourcing contracts are designed to deliver an elastic cost model that facilitates doing this.
3. Set up a demand reduction incentive plan. If reducing 30% of your volumes translates into a 20% cost reduction, offer up a challenge to the user or organizations that can control these volumes. If they achieve a reduction, then hand out positive incentives such as budget relief or bonus kickers.
4. Understanding the power of a Q “ratio” analysis. Convert business drivers into relevant business ratios such as calls/users/storage/customer/requests and so on. When you look at these ratios against your entire business, areas of Q reduction become apparent. Also, Q ratio analysis allows you to benchmark your organization with others and set reasonable objectives.
5. Install a capacity model. Once you have a framework for understanding your Qs by source and by use, then you can begin some top-down reductions to pressure out Q volumes that are really unnecessary. For instance, aim to reduce the monthly capacity in the aggregate by 5%. Do not restrict users; just put in a priority demand management system, set some capacity style limits, and see what comes of this process. The first 5-10% reduction might come easier than you think.
Almost paradoxically, managing usage quantity is probably much more important than just haggling on price. Put your users on a diet.
Siddharth Pai has led over $20 billion in technology outsourcing transactions. He is now founder of Siana Capital, a venture fund management company focused on deep science and tech in India.