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Sourcing at Cloud Number 9

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Many companies are getting on the bandwagon of cloud. But switching to cloud is a big change and with all the euphoria and excitement around it, sourcing and procurement function has to play an important balancing act to realize its true value.


"Well it's a long way up and we won't come down tonight
 Well it may be wrong but baby it sure feels right"

These lines from singer Bryan Adams' famous song "Cloud Number 9" aptly describe the fast paced evolution in cloud computing.  Many companies are getting on the bandwagon of cloud just because top management is very excited about it and feels like a right thing to do. No doubt that the cloud offers tremendous benefits and flexibility for business and there are enough success stories to prove that point. But switching to cloud is a big change and with all the euphoria and excitement around it, sourcing and procurement function has to play an important balancing act to realize its true value.

Let me compare the situation with the automobile industry (one that is close to my heart as I worked in this industry during the initial part of my career). When Ford started the production of Model T in 1900s, almost every component was manufactured in-house to keep a simple supply chain. The extent of vertical integration was such that they even used to the make the steel for the fabricated parts. However this method had to change due to pressure on cost and by the end of 1930s, two-thirds of components for Ford came from outside suppliers.  Post world war, more and more companies started outsourcing their manufacturing processes to business partners.  The roles of sourcing, procurement and supply chain became more important to manage the external supplier relationships and increasingly complex supply chain. Concepts likes APQP (Advanced Product Quality Planning) and PFMEA (Product Failure Mode and Effects Analysis) were introduced to make sure that suppliers provide the right quality products. Even today, automobile companies have one of the most mature sourcing and procurement functions as compared to other industries.

Introduction of cloud to IT infrastructure is quite similar to what happened to Automobile industry when it moved out the manufacturing of car components.  Learning from the past, here are a few key points the IT sourcing managers should consider if their organization is moving to Cloud.

  • Technical expertise in sourcing teams: The sourcing executives in automobile companies are mostly engineers and some are even transferred from the engineering division of the same company. This is done to ensure that buyers have the right technical competency necessary to understand the component and its cost structure.  Similarly, the IT sourcing professionals should have absolute knowledge about the current IT infrastructure and associated external and internal costs.  For example, if you are not clear about the size of data to be transferred to cloud during transactions then you won't be able to assess the required bandwidth and may end up paying more than what is needed. Also IT buyers  should have a very clear understanding of proposed service model (SaaS / PaaS / IaaS) and detailed cost breakdown (hardware,  software,  bandwidth,  power,  personnel cost)
  • Adopt the right pricing model:  In the automobile Industry, various pricing models are used to optimally manage cost of material. In cases, where initial capital is needed by the supplier for development of a custom designed component, the development cost is paid up front, so that the supplier doesn't amortize and include it in the per unit prices. This is due to the fact that for a large automotive company the cost of raising capital is generally less than that of a supplier organization.  Although "No upfront cost" is the first selling pitch of cloud computing but "Pure On-Demand" may not always be the best model. You can consider paying an upfront committed fee to negotiate a lower unit price, especially when the demand is sporadic in nature.  
  • Use volume to bargain: Typically the same functional components (e.g. car seats) for different car models are sourced from the same supplier to leverage volume.  It also adds benefits like standardization and maintaining right quality levels.  When going on cloud, large organizations should consolidate the IT requirements in all business units/geographies and bargain hard for a discount.  Consolidation will also help in identifying any regional / software specific dependencies and drive standardization. 
  • Last but very important, a thorough risk and security deep dive is a must before you sign any cloud deal, as information and data security are the top risk areas when  moving to cloud.  Here again you can take cues from very rigorous supplier qualification process perfected by automobile Industry to ensure the risk free operations of a lean supply chain.

There could be more such examples where IT sourcing professionals can take inputs from other Industries and make sure that cloud computing brings the right value to business.  Please add your thoughts and share feedback in comments. 

Comments

Nice analogy.
Can you extend the same to sales and fullfillment as well.
rgds

Durgesh - Very well researched blog. In depth analogy and perspective.

The article is well written,the comparision of coud computing with automobile indutry makes it a interesting read..

Very well written blog & very insightful too. Another key aspect to be considered is that an application on cloud comes with zero customization. Thats a major shift in the mindset of users who are fond of customizing tools a lot. So, organization and users have to prepare themselves for such landscape.

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