The ins and outs of cloud

The decision on whether or not to adopt cloud computing is very similar to the decision to outsource, or to continue to insource, other services currently performed internally by a business. Most firms periodically review what they should or should not do themselves. This is known as a ‘make or buy’ decision. Each activity may be viewed on a continuum ranging from essential ‘core competencies’, which are critical to the firm’s ability to generate unique value for its customers, to those activities which are not critical strategic capabilities. Core competencies are generally knowledgebased rather than dependent on a particular set of physical assets. It is the specific skills that a firm must have to create unique value for its customers that count. For the necessarily small number of core competencies that a business selects, it must ensure that it maintains absolute dominance in them. Each business, in order to maximise its returns, will generally focus on what it does best and seek alternative providers for the functions for which it cannot gain any competitive advantage. More importantly, the business can leverage external providers’ investments, innovations and specialised professional skills that the firm would be unable or unwilling to develop internally. Structuring logistics – inhouse or outsourced? Consider the function of logistics as an example of an activity which is not usually a core competency but is an essential activity for most firms. Traditionally, logistics, or the storage and distribution of physical goods, was performed or managed in-house using the firm’s own resources in a “do it yourself ” model. More recently, third party logistics companies, such as UPS and Fedex in the USA and many others in NZ, provide inventory storage, distribution and management services which obviate the need for such skills or resources to be retained in-house. This idea also extends to many other aspects of a firm’s supply chain, which may be performed by external parties when it makes economic sense. These roles now include product design, manufacturing, distribution and product support. The reasons that a firm would use an external logistics firm, rather than their own systems, are very similar in nature to the decision to adopt cloud computing services. The benefits of using external logistics providers are usually reduced costs, higher quality services and increased capacity. On the other hand, the risk that “just-in-time” deliveries are not made on time for internal production, or customer deliveries may increase with a loss of control over the delivery process. If logistics are handled in-house in the traditional manner, and depending on the size of the business, decisions must be made about the number of warehouses, their location, their size, the number of personnel, stacking systems, information and tracking systems and numerous other factors.It is easy to imagine the difficulties in estimating required resource levels with uncertain demand and future growth. Overprovisioning of capacity to handle peak load requirements, unbalanced geographical distribution of resource, minimum costs which cannot be avoided in the short-term and difficulties in scaling up resources, are all common challenges. Will the business be able to attract and retain the best skilled people to design and build a warehouse and distribution system which would match its competitors? Is the firm in a position to maintain the technology investments required to meet its customers’ requirements? How much key executive time and energy is devoted to running the firm’s in-house logistics, which could otherwise be focused on enhancing the firm’s core competencies? This latter question, of course, addresses one of the principal advantages of outsourcing. These considerations are compared to the logistics outsourcing decision. The ability to know exactly what the cost of physical storage and distribution will be, and only pay for what is actually needed and used, is a key benefit. The scope to scale resources up and down, as required, is a major benefit. The level and nature of logistics risks will change and management will need to be satisfied that the logistics service provider’s reputation, together with legal commitments and non-performance penalty provisions within the service agreement, satisfy any concerns. Additional management time will be required to arrange the service and monitor it over time. This resource would normally be miniscule compared to an in-house solution. Other considerations include the security of information and physical product, timely delivery, and the selection of a service provider. Is outsourcing IT practical? The example of outsourcing a firm’s logistics may be applied to many other non-core activities. The firm’s provision of information technology resources is no different. A business cannot derive any competitive advantage from owning and running computer infrastructure. The same challenges that outsourcing logistics face are also reflected with outsourcing IT, such as protection of the status quo by incumbents, on-going capital expenditure, fixed costs, captive internal users, retention of high quality skills as well as the enduring unnecessary complexity within the business. For the majority of firms IT is a non-core competency service. If it makes good business sense to have an external service provider deliver some or all of the same services at a lower cost and higher security, together with other business benefits, the firm should do so. The decision analysis will be similar for other outsourcing options.