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Outsourcing is entering its third generation with the advent of the Cloud.

The first iteration of outsourcing was "your mess for less," followed by second generation strategic or selective sourcing, which included hosting and early Software-as-a-Service (SaaS) offerings.

The adoption of these second generation SaaS services was constrained by their high fixed costs and rigid contract terms. So much of what customers and vendors take for granted in their sourcing frameworks has its roots in the assumption that infrastructure is expensive and fixed.

It is extraordinary how far and how fast things can change when these constraints are removed!

Due to the emergence of Cloud Computing, Third Generation Outsourcing stands to materially revolutionize and challenge traditional outsourcing models in a way that no previous models have.

Third Generation Software-as-a-Service (3G-SaaS) uses the on-demand flexibility of Cloud infrastructure services from companies such as Amazon, Rackspace and Microsoft to deliver existing enterprise applications more flexibly and more affordably than ever before.

The capacity for 3G-SaaS to revolutionize IT sourcing is profound.

Widely used by smaller businesses, the 3G-SaaS model offers substantial competitive advantages to enterprises through a secure "pay-as-you-use" system that reduces fixed costs for IT and increases flexibility for rapidly responding to market demands.

To date, there has been a significant gap between the Cloud vendors such as Amazon, Rackspace or Microsoft and the customer, such as an enterprise prepared to SaaS-enable a core business application or an Independent Software Vendor (ISV) seeking to deploy its application on the Cloud.

This provides opportunity for value-added service providers as Cloud technology has reached a point of maturity where objections to its use by enterprise organisations are more perceptual than actual.

Vendors who are Cloud and Application Management experts already use Cloud services on behalf of enterprise customers to deliver core business applications using a 3G-SaaS model with consumption-based pricing similar to that delivered on Public Clouds.

The Public Cloud infrastructure that enables enterprises to benefit from this opportunity is already widely available in North America and Europe. Also, Amazon, Rackspace and Microsoft Azure all plan to build out their Asian Cloud presence during 2010.

Because most Cloud vendors are focused on the small to medium enterprise market, this sector is hotly contested for commoditized SaaS and Cloud services.

By contrast, the top end of the enterprise market has been slow to adopt SaaS and Public Clouds. This is primarily because it is a much more complex market and thus more difficult to address. Likewise, Independent Software Vendors have been slow to bring SaaS versions of their products to this market because of the perceived cost and complexity of doing so.

Although major enterprises have been reluctant to run core business applications in the Cloud due to concerns about security, these questions are now answered by cloud service experts.

Of course, enterprises require a risk analysis process to systematically identify and assess the relevant aspects of their chosen computing model or service. This equips them to analyze risk by examining the technical and process dimensions of a specific implementation rather than trying to second-guess the security needs of a generic service identified as "Cloud Computing."

Security in the Cloud isn't bad, it's just different. It is essential to take a measured, careful approach to security issues. This approach should apply whether you protect a person, a physical asset or your data. What changes are the risks and threats to which you respond.

In the case of the Cloud-enabled applications, techniques such as encryption and overlay tools are available to achieve significant security accreditation when implemented correctly.

Against that evaluated risk are the substantial competitive advantages offered by 3G-SaaS - managed application services in the Cloud - which include the significant reduction of fixed IT costs by enabling "pay-as-you-go" usage.

With no underlying fixed cost of infrastructure, 3G-SaaS applications in the Cloud offer very flexible billing models. While billing may vary between applications, all are aligned as closely as possible to a sensible consumption-based pricing model. Some use "number of users per hour;" others use "by transaction."
This flexibility is in stark contrast to traditional 2G SaaS options, such as Salesforce.com, which are typically billed on a minimum number of user licenses over contract terms of two years or more.

By leveraging existing Cloud service providers, the pay-as-you-go model of 3G-SaaS enables ISVs to align licensing as closely as possible to how the customer consumes the application, thus equipping them with a strategic advantage over their competitors.

Customers can choose to have no minimum contract term obligation. This could apply where a customer converts an existing on-premise solution to the 3G-SaaS model. Customers are free to leave at any time. But they won't.

If the application is new to the customer, implementation service costs will depend on their specific requirements. However, implementation timetables are massively reduced by using templated solutions and because 3G-SaaS software can be deployed instantly.

Another enterprise concern about utilizing the Cloud has arisen from the SME Cloud vendor emphasis on the primacy of multi-tenancy applications. That concern is no longer valid.

In our view, the security, integration and performance requirements of large enterprise customers are ill-suited to multi-tenant solutions. This is a key reason why SaaS has not been taken up more strongly by this market segment and why many ISVs have not modified their applications to be multi-tenant.

Today, it is demonstrably possible to manage dedicated instances of 3G-SaaS applications for specific customer needs as if they were "one" application instance and with the same economic benefits..

The powerful business driver for enterprise adoption of the Cloud for core business applications is the need to build flexibility into an organization, so it can rapidly respond to both opportunities and threats. The Global Financial Crisis has demonstrated to businesses globally that we face an unpredictable future with a greater rate of change. In that environment, winners will be those that can best adapt to new circumstances.

3G-SaaS - the combined effect of Cloud Computing and outsourcing with application management - will drive the use of IT for a significant period of time. Enterprise customers will depend upon successfully leveraging this confluence of trends to secure their business operations, IP, data and future.



About the Author

Marty Gauvin is the Founder and CEO of Virtual Ark. He is also Founder and Chairman of Tier 5, a company that designs, builds and operates data center parks and a Director of Playford Capital. Prior to Virtual Ark, Marty Gauvin founded and led the publicly listed company, Hostworks, as CEO for over 10 years to its successful sale in 2008 for $68.9m to the Macquarie Group. He is also a member of the Microsoft Service Provider Partner Advisory Council, the Dell Asia-Pacific Platinum Advisory Council, and various government innovation committees established to invest Government capital into selected venture capital funds.

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