Monday, 26 September 2011

How long should cloud outsourcing contacts be?

It was announced last week that Thomas Cook (TC), the travel company, had signed a 10-year contract for cloud services with Accenture. (Computerworld article). Their aim was to make annual savings of up to (my italics)  £50 million in IT services.

Now, I don't know how much that Thomas Cook spends on IT but according to their own website their turnover in 2010 was £8.9billion and profit was £429 million. So, let's say they get close to their £50 million annual saving and all of this shows on the bottom line - a 10% profit increase - looks pretty good.

However, the whole cloud computing landscape is changing incredibly quickly - 10 months let alone 10 years is a long time and tying yourself into a long-term contract at this stage means that you may not be able to take advantage of what I suspect will be much greater savings that will emerge from the use of cloud systems in the next few years. These savings are not just going to come from IaaS (TC's savings) but from SaaS where services from different providers are put together to allow much more end-user self-service.

It seems to me that this is particularly likely in the travel industry which has, in many respects, led the way in self-service - on-line check in, print your own boarding pass, etc. So, by tying themselves to a 10-year contract, I think it is going to be harder for TC to take advantage of this innovation. Even worse, as other more agile companies do so, TC risk losing customers - they may save £50 million in IT costs but could lose much more as customers move to companies that offer better cloud services.

So, what is the balance between stability and flexibility that companies should be looking for? Obviously, constant IT change is simply disruptive and so some continuity is essential. But companies need the ability to be agile as cloud computing develops and to take advantages of both costs savings and new opportunities to partner with other innovative companies in the sector. Obviously, the balance between stability and flexibility will vary from sector to sector but having any contract for cloud services that ties you in for more than 3 years seems to me has the major risk that you will simply either be left behind as the world changes or that your projected savings will evaporate as you have to make new investments to keep up.