'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
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
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"2.
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
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.
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