Software Licensing & Master Service Agreements : Chicago Software Licensing Lawyer & Attorney : Sam Conforti Law Firm : Master Service Agreements, Negotiations, Outsourcing : Cook County, Illinois

 

Confidentiality is one of the key items negotiated in Contracts dealing with Software Licensing, and the Consulting Services necessary to implement the software package, and any Outsourcing or Hosting arrangements that may also be desired. Both parties, the Licensor and the Licensee, have valuable information that each wish to be kept secret and yet must be shared in order to go forward with the deal. In fact the sales cycle should begin with a signed Confidentiality Agreement. One might assume that this is furnished by the vendor, and in many cases that is correct. However, I have been involved in many negotiations with buyers big and small who provide their own version of their Confidentiality Agreement. The areas of concern for both parties are many and include such issues as reverse engineering, trade secrets, research, development, business activities, customer lists, products, services, technical knowledge, written or descriptive material, drawings, videotapes, operational data, blueprints, descriptions, or other papers or documents and any derivative works created from the confidential information disclosed.

These Confidentiality Agreements, also known as Nondisclosure Agreements, contain language describing what confidential and/or proprietary information will not fall under the terms of the Agreement, such as information already known to the receiving party or information already in the public domain. Disclosure by a valid court order is also allowed. And usually the parties agree that any violation of the restrictions on disclosure would cause the other party irreparable injury and thus allows such party to seek an injunction to prevent such release.

As our society and technology has advanced and methods of accessing such information have emerged, other issues in need of secrecy have developed such as HIPAA requirements and other Non-Public Personal Information, such as social security numbers, compensation, and drug testing results. As a practitioneer, I have had to deal with these issues and concerns as they developed and were presented for negotiation and also need to keep abreast of all new issues as our society and technology progress.

From time to time some of my readers have sent to me articles they have written and consider relevent to the stated purposes and goals of this blog. One such person, Gillian Holmes, has contacted me and pointed out a extremely important and relevent article in BACKGROUNDCHECK.ORG entitled “The Legislation of Privacy: New Laws That Will Change Your Life”.  The article is current and provides the reader a list of the new Privacy Laws that we as practitioneers and also US Citizens need to be made aware. The layout of the article is well done. There is a brief synopsis of the new law, its name, and legislative sponsor. This description is followed by two brief subsections; one entitled “How It will Affect You” (this is self-explanatory), and the second is entitled “Timeline” and lays out when the new law was passed or when it is expected to become law. In addition to a DIGITAL COMMERCE section with pertinent legislation for the purposes of this Blog, such as:

·         A bill of rights for consumers and a report entitled, “Consumer Data Privacy in a Networked World: A Framework for Protecting Privacy and Promoting Innovation in the Global Digital Economy”,

·         The GPS Act providing guidelines to when and how geolocation information can be accessed and used, and

·         Cyber intelligence Sharing and Protection Act (“CISPA”), and

·         The newly updated HIPAA entitled “Health Information Technology for Economic and  Clinical Health” (“HITECH”)

This article also includes information on:

·         Online predators with “The Protecting Children from Internet Pornographers Act of 2011”, and

·         Amendments to COPPA “Children Online Privacy Protection Act”, and

·         “Social Media Privacy Act” which addresses privacy boundaries crossed when potential employers require applicants to turn over passwords to social media accounts.

The article seems to be thorough and one that I highly recommend to be on your must read list.

 

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A February 28, 2013 article in bizcloud by razavi entitled “Hosted Private Cloud Services to Surpass $24 Billion in 2016” reports on International Data Corporation’s (“IDC”) optimistic outlook for Hosted Private Cloud (“HPC”) services in the near future. IDC predicts a compounded annual growth of more than 50% for the next 5 years. IDC predicts that the coming growth of HPC will transform how IT providers for outsourcing and hosting will provide their services.

The two types of deployment models for Cloud Services are:

1.       Public Cloud:  Opened to an unrestricted number of users who share services, and

2.       Private Cloud: Where a single Enterprise has defined users restrictions on access and level of allocated resources.

HPC is a hybrid of the private cloud services model and this hybrid can be further broken down into 2 models:

1.       Dedicated Private Cloud - Focus is on the needs of one enterprise with significant customer control over the contracted resources.

2.       Virtual Private Could – Contains shared virtualized resources with a wider range of customer controls and security options.

Robert Mahowald, Research Vice President at IDC and leads the SaaS and Cloud Services practice stated, “IDC anticipates that virtual private cloud will be the predominant operational model for companies wanting to take advantage of the speed and lower capital costs associated with cloud computing …”

As current IT buyers with an aging infrastructure look to the cost savings available from the Cloud, they will recognize the need to centralize their management of their cloud capabilities. These buyers are more likely to be Virtual Private Cloud customers. Enterprises with existing outsourcing and hosted environments will be looking for relief in the asset management and operational reliability area. These enterprises will probably be the Dedicated Private Cloud purchasers. Large incumbent packaged software providers and equipment providers, global systems integrators, professional services firms, and telecommunications service providers will be the beneficiaries as the Dedicated Private Cloud grows. Conversely, a new crop of vendors will benefit if the Virtual Private Cloud becomes the dominant model as IDC predicts.

Robert Mahowald stated:

“Not even the largest technology incumbents can sustain IT market leadership without achieving leadership in cloud services. Quite simply, vendor failure in cloud services will mean stagnation. Vendors need to be doing everything they can – today – to develop a full range of competitive cloud offerings and operating models optimized around those offerings.”

 

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James Staten, Vice President and Principal Analyst serving Infrastructure & Operations professionals for Forrester, has written an article entitled “2013 Cloud Predictions: We’ll Finally Get Real About Cloud” . In his article he and his team state that Enterprise IT departments have finally accepted the realities of the Cloud. Enterprise use will continue to grow through 2013 as Enterprises begin budgeting for Cloud services and development of private clouds as they prepare to deploy applications in the cloud.

Staten and his team put together what they expect will happen to Cloud Computing in the coming year. Here is a very brief synopsis of their top ten predictions:

1.       Enterprises will shake the idea that all must go into the Cloud: IT professionals will get a handle on what does and what does not belong in the Cloud based on the relative stengths and weaknesses of the platforms and how they differ with traditional methods and hosting.

2.       Cloud and Mobile will become one:  Mobile applications will connect to Cloud based back-end-services and not to your datacenter. This will shield your data from the voluminous requests from mobile clients.

3.       Cloud Service Level Agreements will change: The ability to recover quickly from setbacks (i.e. resiliency) will be built into the application itself. This avoids the need to negotiate an ironclad SLA for the Cloud when such protections are only needed for specific apps.

4.       ROI from Cloud Services and Platforms requires Cost Modeling: Model the costs to the specific applications. There are Cloud-Monitoring tools available and also the vendors use cost reporting tools.

5.       Infrastructure and Operations accepts the Cloud: In-House Developers will be using the Public Cloud and Infrastructure and Operations teams will accept this fact and use it to promote better communication regarding security and oversight.

6.       Use of the Cloud for Back-up and Disaster Recovery: Cloud computing and its pay-per-use pricing model lets you pay for long-term data storage while only paying for servers when testing or declaring a disaster.

7.       Stop thinking the Cloud is a Comodity: Even though Cloud services are highly standardized they are beginning to be backed-up by different and high-end hardware. Vendors will begin to offer these choices to meet specific market demands.

8.       Amazon Web Services will begin to lose market share: Amazon’s 70% market share will begin to erode from competitors such as Microsoft, Google, and other new entrants to the market.

9.       Virtulization does not mean the Cloud: A Virtual Environment usually does not offer self-service to the developer, fully-automated provisioning, standardized services, or cost transparency. The Infrastructure and Operations teams will learn to live with both types of enviroments.

10.  Development is not different in the Cloud:  Developers will realize that the majority of languages, frameworks, and development methodologies used in the enterprise are also in use in the cloud. There are no cloud-specific or cloud-best languages

    

 

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In my September 25^th posting in this Blog in the article entitled “Not yet Convinced? Here is Cloud Computing 101” I mentioned a case study of a company called Box in the Harvard Business Review I had been reading. The case study touted the advantages and efficiencies that Cloud Storage can provide to a global enterprise.

Recently I came across an interview of the Box CEO, Aaron Levie, conducted by James Temple of the San Francisco Chronicle’s SFGate entitled “Box CEO on growth, rivals and the inevitable IPO”. It’s a good interview. Temple asks the right questions covering a wide range of issues and does so in a non-restrictive manner which allows Levie to expound a bit in his responses. Levie’s answers gives us a bit more insight into the workings and future plans of what is sure to be one of the leaders in this new emerging area. Here are some of the highlights:

Regarding Growth: Levie explains, that in the evolving computing world as enterprises move from on-premise systems to more on-line applications and use more products like i-Pad and other handheld devices, the need for new ways to manage content will evolve. Levie states that Box is sitting at the confluence of this evolution, and mobility, and the cloud.

How will Box differentiate itself among its competitors if storage is basically a commodity: Levie explains that he will compete with the likes of Google Drive and Apple’s iCloud by creating value on top of the storage. He explains, “As you add more content into Box, Box gets smarter about your information. We can do much better things around analyzing that content and helping you discover more relevant information.”  Box’s research and development will be targeted at allowing information sharing and collaboration thus allowing the enterprise to leverage its intellectual property.

What’s the next new thing from Box:  Levie described their customers’ needs to have their data accessible across all applications from anywhere on the globe. Customers want to avoid reproducing the same data in different environments.   Box is anticipating the “post-PC enterprise”.

Is there an IPO in the offing: Temple asked the obvious since this summer, Box closed a $125 million funding round that reportedly valued the company at $1.2 billion. Levie, the consummate CEO, handled this adroitly.

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I found a very interesting article in the November 2011 Harvard Business Review entitled What Every CEO Needs to Know About The Cloud by Andrew McAfee sponsored by Citrix. Admittedly, this White Paper is 10 months old and in our industry that can be a lifetime. However, if you are still considering a move to the Cloud, or if you have come late to the party and need a fast way to catch-up to the rest of the IT community, this article is a must read. The article was sent to me and what caught my eye was the blurb attached to it which simply stated:

“When it comes to cloud computing, today’s IT executives generally ask three important questions:

·         Why will the cloud be a big deal beyond the IT department?

·         What are the main concerns and areas of skepticism, and how valid are they?

·         And, how should we get started?

This timely resource answers these critical questions while explaining the cloud and its benefits. Read now to learn about the cloud’s perceived barriers and other apprehensions that will prevent some companies from taking full advantage of it.”

In the introduction the author describes the current on-premise computing environment and how by its very structure it is an impediment to the inevitable paradigm change that will occur. As the author explains, many large enterprises might not appreciate the benefits of Cloud Computing since they have the resources to do all things promised by the Cloud. But today’s large enterprises spend only a little over 10% of their budgets on development since the bulk of their IT budgets go to maintenance and infrastructure. A case study is presented where a global corporation utilized “Box, a provider of cloud- based content management and file sharing”. The result was that anything stored in the cloud was easily accessible to any employee around the world as long as they had an internet connected device, (i.e. computers, tablets, or smartphones). An additional benefit was that any user could administer their own account thus facilitating collaboration and increasing productivity.

Another feature I found particularly helpful in this White Paper were the use of what the author referred to as “sidebars”. These sidebars were a synopsis of areas or questions of particular concern to the reader. For example the sidebars dealt with the following issues:

1.       Overhyped criticisms of cloud computing which only provide “cover” for those not willing to do the due diligence and learn the true benefits of the technology. Questions about cost, security, and reliability of the cloud are the same or comparable issues faced by on-premise data centers.

 

2.       What is the Cloud? This sidebar lays out succinctly the three categories of offerings the cloud can provide:

 

·         IAAS (Infrastructure as a Service): Basically a group of servers providing storage and/or bandwidth for those requiring computing power without the burden of installing and maintaining it.

 

·         PAAS (Platform as a Service): This category comes fully equipped with development tools and allows an enterprise to outsource a part of their infrastructure to develop custom software or to integrate existing applications.

 

·         SAAS (Software as a Service): The largest category is a suite of applications in the cloud as opposed to the user’s laptop or the enterprises data center.

 

·         The benefits for all three categories are: 1) a renting or pay-as-you-go feature thus eliminating the initial capital outlay, 2) the vendors take care of all maintenance and administration, and 3) it is faster and easier to get more out of the cloud for each of the three aforementioned categories than from an on-premise approach.

 

3.       How to Start Moving into the Cloud: This sidebar discusses the following topics:

 

·         Identify restrictions and grey areas

 

·         Start running experiments with SaaS

 

·         Do your next development project in the Cloud

 

·         Talk with your core enterprise software vendors to understand their plans for the Cloud

 

The White Paper concludes with a very informative interview with Sameer Dholakia, Group Vice President and General Manager, Cloud Platforms Group, Citrix. The questions are pertinent and open-ended which allows for a fuller and more complete explanation. I highly recommend this White Paper for all those still sitting on the fence deciding whether to embark on the future of IT computing.

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When the paradigm shifts it’s best to heed the words of Bette Davis in the 1950 movie classic All About Eve; “Fasten your seatbelts. It’s going to be a bumpy night”.

An article in bizcloud by ameyer entitled “Six Principles for Effective Cloud Computing”, discusses a Whitepaper by ISACA. The significance of the Whitepaper is to explain the shift in IT decision making away from the chief information officer (CIO) and technology specialists and to the business unit leaders and how to deal with the risk to the Enterprise if such the shift is not implemented correctly. As Enterprises seek to reduce their IT costs and also address the demands from business units for more functionality and faster response times from their devices the internal IT team had turned to outsourcing. They have grown comfortable with this sort of arrangement. However, Cloud Computing is a fundamental shift in how technology is acquired and managed in Enterprises. This shift can cause problems within the Enterprise if its Corporate Culture and its policies and procedures cannot adapt quick enough, if at all, to this paradigm shift.

The six principles in ameyer’s article on the ISACA whitepaper are as follows:

1.       The Enablement Principle: Plan for cloud computing as a strategic enabler, rather than as an outsourcing arrangement or technical platform.

2.       The Cost/Benefit Principle: Evaluate the benefits of cloud acquisition based on a full understanding of the costs of cloud compared with the costs of other technology platform business solutions.

3.       The Enterprise Risk Principle: Take an enterprise risk management (ERM) perspective to manage the adoption and use of cloud.

4.       The Capability Principle: Integrate the full extent of capabilities that cloud providers offer with internal resources to provide a comprehensive technical support and delivery solution.

5.       The Accountability Principle: Manage accountabilities by clearly defining internal and provider responsibilities.

6.       The Trust Principle: Make trust an essential part of cloud solutions, building trust into all business processes that depend on cloud computing.

ISACA: ISACA was incorporated by individuals who recognized a need for a centralized source of information and guidance in the growing field of auditing controls for computer systems. Today, ISACA has more than 95,000 members worldwide. ISACA got its start in 1967, when a small group of individuals with similar jobs—auditing controls in the computer systems that were becoming increasingly critical to the operations of their organizations—sat down to discuss the need for a centralized source of information and guidance in the field. In 1969, the group formalized, incorporating as the EDP Auditors Association. In 1976 the association formed an education foundation to undertake large-scale research efforts to expand the knowledge and value of the IT governance and control field. Previously known as the Information Systems Audit and Control Association, ISACA now goes by its acronym only, to reflect the broad range of IT governance professionals it serves.

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I have been practicing law for approximately 25 years and concentrating my practice in the area of negotiating and drafting contracts for the purchase or sale of High Technology for the last 13 years. I recently came across Mark Grossman’s guest blog posting in IP In Brief entitled, “A How-To Guide for Negotiating Tech Deals”. This is a must read. If you are considering making any high-tech purchase, I highly recommend that you take the time to read this article in order to gain an insight and perspective that is little discussed but impacts your deal greatly. As a practitioner in this area, I found myself one early Saturday morning sitting in my office reading Grossman’s article and shouting “Yes, Yes, Yes”. I was fist-pumping and if anyone was near to me they would have gotten a high-five. His approach is straight-forward and no nonsense.

Andrew Berger’s introduction sets the stage and reveals to the reader for the first time the concepts of “unwritten industry norms” and “choreographing your concessions around areas where you’re not likely to win the battle anyway”. Grossman starts his analysis by pointing out the obvious (i.e. the first drafts of the agreements are poorly written). I think this was my first “Yes” that I heard myself say out loud while reading in my office all alone. I can’t tell you how many times I’ve received new templates or first drafts of proposed new agreements which were simply a mishmash of cuts and pastes from older useless documents. My second “Yes” and my first fist-pump was Grossman’s admission that the sales teams are in charge of the deal. I freely admit, and in the spirit of full disclosure I happily accept that the sales team is the entity that brings the deal to me. Without them I would be out of work. However, Grossman points out, without actually stating it, that the sales team views the attorney as an obstacle that must be overcome. Perhaps it was the way he explained the process of requesting a revision to some contract language to more accurately describe the issue and then commented,

“All the while, I can feel the sales team seething at me because of my absurd requirement that the contract accurately state the deal”.

That comment garnered fist pump number two and a loud chuckle. I would have enjoyed it if Grossman had discussed the mirror image on the buy side. I have represented both Buyers and Sellers. By the time the deal comes to me from the buy side (i.e. the Project Team), there is what is commonly called a “love affair” with the functionality of the proposed software package. In essence the Project Team “has been sold” and they know that they cannot live without having this software in their repertoire.   As an attorney, I get that same glare from the Buyers when revisions for clarity are requested.

Grossman has a very salient section on the “Norms in the Industry”. To put it simply, why waste your time arguing points that will not be changed. These “Norms” need to be understood simply due to their peculiarity. He has an excellent section explaining Warranties in the industry and how they differ from what would be expected. Limitations on Liability is another section worth reading because it goes against what a Buyer expects and readily requires from its vendors. I must confess it was good for me to read these sections simply because I have been so inculcated with these industry “Norms” that I needed a refresher on why outsiders would consider these absurd.

He concludes his article by stressing the practical side of mutuality. A software vendor can and usually does readily accept revisions to sections to make the obligations mutual. One must remember that the parties are usually starting from paper that was first drafted by the vendor and so the natural urge to make the language one-sided must be addressed and overcome where possible.

 

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Dick Benton, principle consultant at GlassHouse Technologies, has written a 2 part article on the trials and tribulations of which Cloud to use entitled; “Cloud Thunder: The Biggest Bang for the Buck, Part 1”. I thought we would deal with the first part, IaaS, and examine his analysis of INTERNAL versus EXTERNAL Infrastructure as a Service (“IaaS”). His article has a bit for everyone, the IT manager, the Finance department, and the contract draftsman. As you all know, I get a little “weak in the knees” with the technical stuff and so I will defer to the techies on those issues. But Benton has some good insight on which “Cloud” to choose and solid advice on how to get there.

Benton starts off by commiserating with the IT Manager because the virtualized world of Cloud Computing does offer many alternatives to reduce cost while at the same time increasing service. He breaks down his discussion in part 1 on IaaS to the benefits and possible disadvantages of Internal IaaS as opposed to External IaaS.

In order to chose the Internal IaaS model, Benton notes that the x86 platform must be virtualized and ITIL (“Information Technology infrastructure Library”) service model has been adopted (See: “weak in the knees” comment above). I’ll leave the previous comment for the techies to determine. The benefits of the Internal IaaS model are:

·         Availability

·         Performance

·         Security

·         Quick provisioning

·         Just as Quick De-provisioning

·         Ease of billing to identify unit cost (Giga-bytes of storage or Giga-hertz of power)

·         Automation improves Service Levels

With IaaS comes ITIL best practices which require automated self-provisioning. For the finance department the billing should have the ability to determine unit costs. And with all the above benefits, Benton still stresses that, “The biggest impediment to the introduction of IaaS under IT is that the service provider is the requirement for some form of portal/Web-based self-provisioning capability.”

Outsourcing IaaS (i.e. External IaaS) has its distinct advantages as well. But, of course, as we have discussed in the past security remains the paramount disadvantage. Your data is stored off-site and the infrastructure is shared with many other entities and dynamically managed as your data is moved from server to server. Benton points out three other necessary issues to consider:

·         Back-out strategy. If your provider does not live up to the service levels promised, how do you get your data back?

·         Scalability. Is this built into your contract? Premiums charged and can the Provider deliver in your time frame?

·         Hybrid approach. Useful when using Internal IaaS and there is extra capacity needed in an overload situation for a special project.

Benton discusses SaaS and PaaS in the second part of his article.

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In my research of items concerning the latest in the software industry, I came across three short articles of interest. I’ll give you a brief synopsis of each and a link to the article if you wish to explore further.  I’ve added a bonus “Quote of the Week” at the end. Sorry but I just couldn’t resist.

1.       Gartner Reports on the Surge in SaaS

Larry Barrett’s article on Gartner’s SaaS Market Report entitled SaaS Market Growing by Leaps and Bounds: Gartner states the latest report from Gartner shows no indication on any slowing in the demand for on-demand software applications. Gartner defines “SaaS as software that is owned, delivered and managed remotely by one or more providers”. Gartner expects 2010 SaaS sales to top $8.5 billion, an increase of over 14% of 2009 sales.

Advantages to SaaS:

·         Lower start-up costs compared to on premises deployments

·         Lower maintenance costs compared to on premises deployments

·         Ease in sharing applications and documents through the cloud

Gartner analyst Sharon Mertz stated, "As tighter capital budgets demand leaner alternatives, familiarity with the model increases, and interest in platform as a service and cloud computing grows.”  Further Mertz noted, "Greater market competition and increased focus by the mega-vendors reinforces the legitimacy of on-demand, mitigating initial objections about security and availability for many, as acceptance of SaaS as a viable model for enterprise computing services grows."

2.       Microsoft Claims Top Spot in Cloud Computing

Stuart J. Johnston’s article on Microsoft’s claim to be #1 in Cloud Computing entitled Microsoft: We’re No. 1 in the Cloud reports that Kevin Turner, Microsoft COO, proclaimed at their annual meeting for financial analysts in Redmond, Washington that Microsoft is “number one” in cloud computing. The company claims 40 million cloud computing users globally and Turner reported that "Seventy percent of the wins in the cloud that we had in [the fourth quarter of fiscal 2010]… were new Microsoft customers." He touted three of their new customers:

·         Dow Chemical Co.

·         Hyatt Hotels & Resorts

·         University of Georgia

Additionally, Turner made sure that his audience was aware of the company’s record year due in large part to a total of over 175 million licenses sold for their new Windows 7 operating system in the short nine months since its release.

3.       Public Cloud Storage Services the New Choice for Enterprises

David Needle has a new article on Public Cloud Storage entitled New Public Cloud Storage Services Target IT. In it he discusses the latest report from research firm Ovum regarding public cloud storage services. Ovum senior analyst Timothy Stammers stated:

"Not only do they relieve the burden of storing data on customers' premises, but they also have the multiplying effect of transferring to the cloud provider the responsibility of backing up that data"

Initially companies poured vast sums of cash into online storage services to no avail. Economies of scale could not be reached due to the fact that the vendors were using the same storage systems of the enterprises they wished to sell. Huge network bandwidth costs along with their customer’s refusal to accept to the unknown contributed to the collapse of this new emerging venture.

The solution and/or opportunity was as follows:

·         Slowing economy put CIO’s on the hunt for cost cutting measures

·         Cost of network bandwidth plunges

·         The unknown becomes known due to success of certain vendors, most notably Amazon and Salesforce

·         New object-oriented storage technology, i.e. much more bang for the buck

New start-ups offering these services include Nirvanix, Nasumi, and Ctera. Stammers revealed that these vendors often leverage the storage clouds from such mega-providers as Amazon, Microsoft, and RackSpace. He stated,

“To the customer it still looks like ordinary storage and there's caching to alleviate latency issues. Typically these systems also provide their own backup, but companies may also choose to do that on their own for an extra level of protection.”

4.       Quote of the Week

And finally, I just couldn’t resist this one. To paraphrase a line from a well-known cable news network, I’ll Report, You Decide. Here is my pick from David Needle’s article entitled Say What? The Week’s Top Five IT Quotes:

"First of all, moving to the cloud is not the right way to think about anything. There will be new things in the cloud -- redoing something doesn't make a lot of sense. If you want to argue we've been somewhat slow in expanding to the cloud -- fair enough -- but customers have a lot of interest in seeing that our applications maintain their core value, the data integrity and consistency. Taking that to the cloud takes a lot of work."

Kaj Van de Loo, an executive in the office of the CTO at SAP, defending his company's cloud computing strategy.

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As many of you know, SandHill.com is the online resource created for enterprise software executives. Kamesh Pemmaraju heads cloud research for the SandHill Group and writes a weekly report on the latest happenings influencing the cloud computing community. His latest report entitled Top 5 Cloud Strategies for CIOs is based on a survey of 511 software executives. The survey deals with these executive’s perceptions of cloud computing, their initiatives, implementation issues, and any perceived benefits. His report presents the top 5 strategies CIOs should follow when considering cloud computing. I will present a brief synopsis of those findings here as follows:

1.       Treat this decision like any other business decision:  Pemmaraju simply means to look at all the alternatives and do a traditional compare and contracts analysis. Look at the ROI and weigh the risks.

2.       The cloud is coming – Embrace it: Pemmaraju quotes one executive, “The cloud will come - it's happening now even if it is coming with a lot of hype and a lot of buzzwords. It's a very logical transition - like we are going from individual car craftsmanship into the era of the industrialization of IT services.” A large amount of the survey respondents have already started trials and pilot projects to jump start the learning curve for their personnel.

3.       A sandbox spurs innovation: Create an innovation sandbox in the cloud. The drag on spending due to maintenance is lifted. This new found freedom allows IT departments to redirect efforts from infrastructure constraints to more creative ways to run the business model.

4.       Cloud computing is a furtherance of Outsourcing trend: With this in mind, Pemmaraju presents a short checklist when evaluating whether to move in this direction:

a.       Perform your due diligence and pick a good cloud computing vendor.

b.      Confirm that support levels are adequate.

c.       Obtain copies of vendor certifications (i.e. SAS 70 etc.)

d.      Is your data retrievable in your desired format?

e.      How is your data isolated and protected from others?

5.       Retrain your IT staff: As one CIO respondent succinctly stated, “The jobs of people who sit there patching thousands of servers each time there is a change—those jobs are going away.” The focus will turn from infrastructure to vendor management, and program management, and business analysis.

Pemmaraju concludes his report with an analysis of the impact open source is having on cloud computing. He states that proprietary licenses are lagging in their offerings for cloud computing and so many cloud platforms are run on top of open source stacks. This will have an effect on hardware sales as most companies will be trying to avoid the big expenditures on infrastructure.

 

 

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Paul McDougall reports for Informationweek in their Global CIO Blog that the National Association of Software and Services Companies (“NASSCOM”) predicts the $58.8 billion in India’s outsourcing revenue for the fiscal year ending 2009 will grow to over $225 billion in the next decade. McDougall quote’s Som Mittal, the president of NASSCOM, an association that promotes Indian offshoring, in his article entitled Indian Outsourcing To Increase Fivefold:

“ … the potential for this industry is tremendous and the industry will not be demand constrained”

In order to achieve savings and to stay competitive in the global marketplace, more and more companies are outsourcing their business and technical functions. McDougall confirms in his article that the Obama campaign rhetoric of keeping the existing jobs in the US and preventing jobs from going overseas has not materialized. For further discussion on the Obama campaign rhetoric and the actual affects on outsourcing, see also the following postings in this Blog:

·         No Slowdown in Offshoring for the Foreseeable Future; posted April 20, 2009

·         Obama’s Tax On Outsourcing; posted June 1, 2009

The current trend has tech, financial services, and manufacturing as the core industries making up the bulk of the $58.8 billion in outsourcing revenue. However Mittal suggests that WIPRO, Infosys, and Tata, India’s outsourcing behemoths, foresee healthcare and transportation as the engines for further revenue growth.

With the coming growth an emphasis on infrastructure moves to the forefront. The traditional centers of Hyderabad and Delhi will need to be supplemented by the so-called second-tier centers like Kolkata in West Bengal in order to accommodate the growth.

 

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Actually it is not that small of a step for bandwidth. NASA has come up with a device that transmits data at the rate of 100 megabytes per second. This compares to the 1 to 3 megabytes per second from a typical high-speed internet service provider. 

I have got to hand it to Sean Michael Kerner for posting his article in Internetnews.com entitled From the Moon to the Earth at 100 Mbps. I was simply minding my own business, surfing the net for anything of interest, when I stumbled upon Kerner’s article. So my first thought was, ‘So NASA has come up with yet another innovation in order to justify its existence.’ I recalled the ever popular “Tang” and then there was Velcro, digital watches, and the ubiquitous handheld calculators. To be fair most, if not all, of the modern conveniences we enjoy today and cannot live without began or in some way had their impetus in the space program. And so I read on. This one will truly be revolutionary.

Kerner’s article linked to Jan Wittry’s article entitled The Ultimate Long Distance Communication. Wittry reports that NASA has launched the Lunar Reconnaissance Orbiter (“LRO”) to collect data about the moon to include massive amounts of images, and data about the moon’s geography, climate, and environment. This information will then be sent back to earth to help scientists create high-resolution 3-D maps of the moon’s surface. The transmission of this massive amount of data, in almost real time, is due to a NASA custom designed and handmade 13 inch device called a Traveling Wave Tube Amplifier.

I strongly suggest you read Wittry’s article and discover the various uses already contemplated for such technology (i.e. use in communication satellites for tracking oceanic flights, icebergs, volcanic eruptions, forest fires, and severe weather.) Kerner mentions the most obvious use in his article when he mentions the ability to “boost data delivery” for content delivery on the internet.

 

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Stephanie Overby has written an article for CIO.com entitled “The Truth About Obama’s “Tax on Outsourcing” in an attempt to clear up all the questions that were raised when the President attacked the Tax Code for creating loopholes if a company creates a job overseas. Overby freely admits that she can’t clear up all the mistaken beliefs because the White House may not have been as clear about its objectives as was needed. In addition to identifying the five (5) misconceptions that are circulating, she also provides some necessary definitions of terms which help the reader to better understand the issues and the real targets of any proposed legislation. Those five areas in question are as follows:

        I.            Is “Outsourcing” the same as “Offshoring”?

a.       Outsourcing means contracting to any third party. This could be to a third party within the US.

b.      Offshoring means a NON-US location.

c.       The distinction to be made is: work being done at the US company’s own foreign facility called a “Captive Center”, versus offshore work being done by a third party, in essence offshore outsourcing.

      II.            Will the tax apply to “Offshore Outsourcing”?

a.       This was the point that was not made clear initially by the administration. Overby helps us out and states that the Obama plan will only apply to US companies with “Captive Centers”.

b.      So this will affect the IT Vendors such as IBM Global Services and Accenture AND ALSO Non-IT Vendor companies that maintain a presence abroad.

    III.            Will India’s IT Services Industry suffer the most from the proposed taxation?

a.       No. IT Vendors such as Wipro and Tata will not be affected. The tax is aimed at US Multi-National companies conducting operations in foreign lands.

    IV.            Will this taxation create more US jobs?

a.       Unlikely.

b.      There has been no indication that US companies would lessen their foreign presence due to the tax. In fact “most multi-nationals set up shop overseas to access cheaper labor or new markets”.

c.       Such a tax could cause MORE offshoring to offset any increase in taxation. In fact US IT Vendors may chose to relocate entirely overseas.

      V.            Is this protectionist tax policy certain to pass into law?

a.      Daniel Masur, an outsourcing attorney and partner in the Washington, D.C. office of Mayer Brown states, "It would be viewed by the rest of the world as protectionist and would trigger a wave of retaliatory legislation, and it would be bad for American business."

b.      Masur continues and states, “However, given Congress's propensity in recent months to write major legislation over a weekend and Congress's preoccupation with populist sound bites, such a provision could be buried in the next stimulus or budget bill".

 

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Orla O’Sullivan reports for Network Computing in an article entitled, Obama Not Impeding Offshoring, TATA Says, that the campaign pledge to slow the flow of work to cheaper labor markets, either by directly employing people abroad or by engaging third-party service providers based outside of the U.S. has not occurred and in fact may be on the upswing. O’Sullivan discussed this matter with one of India’s leading providers of offshoring services, TATA Consultancy Services.

A large portion of TATA’s services are to the financial services industry, and this segment is growing with actual IT Operations taking place as banks and other financial services firms send more and more work offshore. O’Sullivan further reports that back in October of 2008 TATA purchased Citigroup Global Services Limited, Citi’s Indian offshoring services unit providing business process outsourcing. TATA’s next step is to sell its’ banking software products in the US.

As Raymond Strecker, global consulting practice head for TATA North America, describes this current spurt of growth:

“Our infrastructure business is growing the fastest. That is, inside the glass house, or data center: remote server administration, server repair, network monitoring, and various infrastructure services.”

It appears that as banks find the need to cut costs in this current global economic slowdown, that more regulations will just force these institutions to become more creative. If a bank or financial services firm finds it uncomfortable to have operations offshore, there doesn’t seem to be any prohibition from employing onshore service providers who do have operations offshore and thus indirectly reaping the benefits of cost savings.

 

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• There has been a plethora of news stories regarding the future of outsourcing and IT jobs. In my research I came across a Blog that is maintained by the Staff at the Ubikwiti website. The Blog entitled Stemming the Outsourcing of IT Jobs cites freelance writer Rachael King for BusinessWeek.com. King reports that speaking to Ohio workers President Barak Obama stated, “We’re not looking to create just any kind of jobs here; we’re looking to create good jobs that pay well and can’t be shipped overseas.” The Blog posting on the Ubikwiti website goes on to make some interesting claims, such as:
• 140,000 more jobs will be moved offshore by 2010 (Hackett Group December 2008 report).
• 25% of all IT jobs at the largest global corporations will be outsourced by 2010.
• The posting then touts some of the spending items in the current stimulus package:
• $20 Billion for health information technology and the building of its infrastructure.
• $6 Billion to improve broadband internet access.
• $11 Billion for modernizing the power grid.

The above statement by Barak Obama and the planned spending as stated above, with the intended purpose of creating jobs here at home that cannot be “shipped overseas”, does not comport very well with his newest appointment to his National Economic Council. David Sirota reports in his Blog Article, More to Promote Outsourcing Than Anyone Else In America, on an Op-Ed piece by Ron Hira, a professor at Rochester Institute of Technology and a progressive.  President Obama has appointed Diana Farrell of McKinsey & Co. to his inner circle of economic advisors. As Hira states, “Farrell's firm made millions of dollars consulting with companies, advising them to accelerate their offshoring.  And she publicly made the rounds to convince policymakers and the public that offshoring was good for them and the country.” She is also the co-author of a study entitled Offshoring: Is it a Win-Win Game?, which Hira claims did more to mislead the American public on the impact of offshoring than any other debate.

The inconsistency of the above has to give one pause. On one hand Obama states he does not want to ship jobs overseas and on the other hand he appoints, arguably, one of the most pro-outsourcing executives in this country to a top economic post. Now we throw into the mix an article in Financial 24 entitled Outsourcing Gets Crimped by Recession and its report of the troubles in India and the outsourcing field is wide open. Financial 24 reports on the convergence of several factors that may bust the Indian market for outsourcing. These factors converging at once are:

·         The global recession – no more needs to be said on this one

·         The Mumbai Terror Attacks of November 2008. This caused great concern regarding India’s ability to provide adequate security, especially for US Companies.

·         The financial scandal of India's fourth-largest outsourcing provider, Satyam. There are many questions whether there is enough regulatory oversight of India-based outsourcing providers.

In light of the serious situation facing the Indian outsourcing market, here is a list of the next emerging outsourcing destinations:

1. Cebu City, Philippines
2. Shanghai, China
3. Beijing, China
4. Ho Chi Minh City, Vietnam
5. Krakow, Poland
6. Kolkata, India
7. Cairo, Egypt
8. Sao Paulo, Brazil,
9. Buenos Aires, Argentina
10. Shenzen, China
11. Hanoi, Vietnam
12. Chandigarh, India
13. Curituba, Brazil
14. Prague, Czech Republic
15. Pasig City, Philippines
16. Dalian, China
17. Coimbatore, India
18. Santiago, Chile
19. Colombo, Sri Lanka
20. Johannesburg, South Africa

"20 emerging outsourcing destinations" by Sriram Vadlamani.

 

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Bahan Sadegh, CEO and co-founder of NETtime Solutions and a veteran of the on-demand software industry, has written an article with the SMB Customer in mind.  Sadegh has created a list of questions for the SMB to consider before choosing its SaaS Vendor entitled 10 Questions To Ask A Potential SaaS Vendor.  His list is very informative and it would be wise to keep handy when considering which SaaS Vendor to select.  I cannot attest to the fact that this is an inclusive list, but I will tell you that his discussion of the points he has identified gives the reader enough information to perform their due diligence and ask more questions and there really are more than 10 points to know if one includes all the “sub-points” Sadegh includes.  I will try to provide a brief synopsis of his 10 Questions below:

1.     Billing should be pay-as-you-go: We all know there is a business cycle and your invoice should reflect this cycle.  Also, there should never be any maintenance fee on your invoice.

 

2.     Security:  Sadegh has a very good list of questions to ask in this very important area.  Instead of trying to paraphrase his words, I think it best to directly quote him on this matter:

“Ask your potential SaaS vendor:

-       Does the data center that is housing the servers have physical security 24/7?

 

-       Is the perimeter of the data center secured (do guards walk the perimeter at least once per 24 hours)?

 

-       Who has permission to the access these servers (only internal employees or do contractors also have access)?

 

-       Is there a log that captures who came in and when they left? If so then how often are those logs audited?

 

-       Does the application use industry standard 128-bit encryption?

 

-       If multiple customers are housed on the same server then are they logically/physically separated to ensure your data is not viewed by unauthorized eyes?

 

-       Has the staff of the SaaS vendor who has access to your data gone through a criminal background check? It’s important to know whether or not convicted felons have access to your sensitive personal data.

 

-       Does the vendor have a formal BCP (Business Continuity Plan)? Is the vendor willing to share it with you and does it satisfy your concerns?”

 

 

3.     Solution must be web based:  There should be no requirement to install an application on any computer.     Also any SaaS application should be able to run on any platform and any browser.  In the event of a computer crash, you must have access to your application.

 

4.     An experienced vendor:  Make sure the vendor has experience in hosting.  A vendor experienced in hosting has already addressed such issues as scalability and security and is not merely repackaging their application as SaaS. (NOTE:  See point 8 below regarding MSP’s).

 

5.     Upgrades should be automatic:  You want to be on the latest version and have the most current functionality.  There should be no need to retrain your users.  The upgrades should be seamless.

 

6.     Integration:  You should have the ability to transfer between the web based applications and any on-premise applications.

 

7.     Data must be backed up regularly:  Nightly onsite back-ups and weekly offsite back-ups should be the minimum.  Does the vendor test how to restore their database?

 

8.     Who is hosting the solution:  Is this an in-house hosting arrangement or has the SaaS vendor contracted out with a Managed Service Provider (“MSP”)?  Get a SAS 70 report and verify that in the data center every system has at least one independent backup to ensure availability in the event of system failure; this is known as N+1 configuration.

 

9.     Scalabilty:  Can the SaaS vendor grow as your company grows?  Ask about their largest customer and ask them about their plans for growth.

 

10.  Is the SaaS system monitored:  An easily overlooked question.  Do they have monitoring software and do they test their firewalls?

 

Sadegh concludes his checklist by suggesting that the SaaS Customer perform a bi-annual review of their service with the above checklist in mind.

 

 

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Software vendors can increase their revenues during this prolonged recession.  How do these vendors make lemonade out of this lemon of a global economy?  They must look to their installed customer base.  Mike Smerklo, President & CEO of ServiceSource, has written an OpEd piece for SandHill entitled Delivering Predictable Revenue Streams.  ServiceSource is in the Service Performance Management business which aims to increase their clients’ service revenues by increasing the number of customers on maintenance and increasing the dollars spent on maintenance.

In economic downturns, such as we are now experiencing, customers defer new product purchases.  Although this is not a positive for software sales, it does increase the value that can be placed on enhanced maintenance and support services.  Software companies must continue to invest for the next generation of products, but enhanced maintenance today can drive revenue and provide the reliability that customers need.

Smerklo cites a Gartner study that the potential market for maintenance and support is over $180 billion annually and that only $150 billion is spent on maintenance every year.  It is easy to see that there is another $30 billion in potential maintenance and support not being tapped.  He increases our lexicon from the more familiar term “market share” to a new term he labels “service share”.  This is the total maintenance revenues available from the installed base.  And he lays out for us a complete 4 part service management strategy as follows:

1.     Technology Platform:  The vendor’s CRM must measure transaction data on the maintenance side down to the granular level.

2.     Business intelligence:  The analytical capabilities of the vendor must be able to show what the customers are buying and why some are saying no.

3.     Customer contact:  Must have the ability to help the customer extract the most out of their solutions.  This will enhance the relationship and could pay dividends down the road on renewals and purchases of new product.

4.     Benchmark against the competition:  Need to know your specific service metrics in comparison to the industry overall.

The Service Performance Management alternatives are as follows:

1.     Do Nothing:  All focus on product revenue and market share can come back to bite you especially on renewals.

2.     Build your own service management platform:  This could be costly.

3.     Partner with a Service Management Performance provider:  They have the expertise and the capabilities to manage on a global basis.

 

 

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Due to the current economic conditions, IT departments are coming under increasing pressure to do more with less.  However, over the last few years upper level management has become leery of divesting themselves of the servers and network to a service provider.  In prior postings to this Blog I have provided reasons why outsourcing can benefit the enterprise, 10 Reasons to Outsource, and also a comprehensive checklist to consider prior to making the decision, Checklist Before Outsourcing Your IT.  In an effort to continually update this topic as events evolve, this posting is another in this series and concentrates on the concerns one might have regarding the Service Provider.  To get the full detail underlying the following points to consider when evaluating which Service Provider is best for your enterprise read Outsourcing Your Infrastructure: Ten Points to Consider When Making the Move.  Here is a brief summary of those ten points:

 

·         Uptime:  Greater reliance on the internet makes “On” the only option.  The global marketplace makes this a necessity.  The options could be straight hosting, managed service, or SaaS.

·         Redundancy and Business Continuity:    loss of customer call center could result in lost orders.

·         Data Restoration:  eDiscovery Laws require a significant and competent back-up plan.

·         Response Time and Site Performance: providers have high-performance servers and high-speed access, but do they have only one location.

·         Scalability to meet growth: Can the Service Provider add capacity quickly to meet the rapid increase in demand, in other words, does the Service Provider have the financial capital available to rapidly add more servers.

·         Customer Support:  This is the “value-add” dimension that differentiates one Service Provider from the other.

·         Security:  Must be able to adhere to the Data Privacy laws such as Sarbanes-Oxley, and Gramm-Leach-Bliley.

·         Cost Reduction and One-Stop Billing:  Abandon the ala carte approach to IT infrastructure.  Bundled services are discounted.

·         Optimized IT resources i.e. dedicated servers:  Allows IT staff to redirect their efforts to delivering their own services.  Plus services on demand priced on usage is better offered from a service provider’s business model.

·         Financial improvements:  Eliminates the need for cash oulay for hardware and turn the cost into an operational expense as the enterprise pays for a service.

 

 

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I recommend an Economist Intelligence Report entitled IT Excellence: Achieving Optimised Business Outcomes.  This whitepaper begins with the premise that “IT departments are increasingly being called upon to define and pursue excellence”.  The consensus seems to be that IT’s role has evolved to one of a business partner that must align itself with the company’s overall business objectives.  The editorial board of the Economist Intelligence Report put together this report based on in-depth interviews conducted with Dow Corning CIO, Abbe Mulders, and Applied Materials CIO, Ron Kifer.  It is interesting to see how both individuals recognize the pervasive nature of IT in their organizations and their commitment to realizing the most from their departments.  Each has an interesting approach.  I’ll briefly summarize below:

 

Dow Corning:

 

Mulders has embraced the Six Sigma (defined) statistical approach with its continuous improvement toward defined goals.  Business units within the company collaborate and produce a future strategic plan which includes IT as a full partner.  The senior executives of the functional business units along with senior IT executives hold quarterly meetings to review and adjust priorities.  This collaborative approach allows the participants a view into the infrastructure, allowing for more effective decision-making, investment and execution of their 5 year strategic business plan.  The Six Sigma approach requires some kind of return.  Mulders’ teams focus not only on the progress but also on the quality of those returns and reports an 80% achievment of targets 12 months after an implementation.

 

Applied Materials:

 

Applied Materials is a leader in nanomanufacturing technology and produces semiconductor chips, flat panels, solar arrays, and energy-efficient glass.  Ron Kifer’s approach to IT excellence starts with the premise that IT not only enables business strategies, but must take a leadership role in such business processes.  Kifer maintains that in order to compete in the global market each business functional area must be able to support all others.  This is what he calls “cross-functional support”.  He believes the pursuit of IT excellence optimizes the other business functions.  He looks at core competencies to get the most effective results.  He believes he has accomplished this through the outsourcing of major components of his IT infrastructure.  In order to make the most out of this approach Kifer explained that vendor management became a priority for the company and they needed to “reorganise and develop skills in negotiation and management of vendor relations”.

 

 

This whitepaper report also includes a Q&A with each CIO.  It’s interesting reading.

 

 

 

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There are many items to consider before deciding to adopt a SaaS approach to your IT operation.  Marcia Gulesian, a software developer, project manager, CTO, CIO, and author of numerous feature articles on IT, has captured the salient points in her article SaaS: Financial, Legal & Negotiation Issues.  As the title to her article suggests, the financial implications should be addressed first.  Gulesian has a very descriptive section on the differences between buying the software application and leasing it.  She discusses the differences of owning an asset and its tax advantages of the deductibility of depreciation as opposed to the leasing option.  There is a brief explanation of cash flows between the two alternatives, finding your opportunity cost, and making your determination on the comparison of the present values of the cash flows from the cost of owning versus the cash flows from the cost of leasing.  Before we go too far afield, my readers can attest to the fact that I always try to define our terms before delving into the nuances that the subject line suggests.

Wikipedia’s definition of SaaS is very complete yet succinct:

“Short for Software as a Service, SaaS is a software delivery method that provides access to software and its functions remotely as a Web-based service. SaaS allows organizations to access business functionality at a cost typically less than paying for licensed applications since SaaS pricing is based on a monthly fee. Also, because the software is hosted remotely, users don't need to invest in additional hardware. SaaS removes the need for organizations to handle the installation, set-up and often daily upkeep and maintenance. Software as a Service may also be referred to as simply hosted applications.”

I also have a posting in this blog, which I must admit has become quite popular based on the number of hits registered to it, entitled SaaS is the Future.  In it I discuss how a Managed Service Provider (“MSP”) can help software developers get their product to the market faster since the infrastructure barriers and capital expenditures are significantly lessened.  In another posting about Unified Communications I have quoted Mat Taylor, a senior software architect with British Telecom, regarding the benefits of SaaS:

"The ability to get things done faster, get workers more engaged in a business scenario, provide better customer service, are all big productivity wins that benefit the bottom line"

In light of the above discussion surrounding “lower total cost of ownership and quicker time-to-value”, Gulesian cautions us that the other factors to include in the financial calculation is the maintenance and support fees that come with ownership as compared to the SaaS fees which includes these items.

SO WHAT DO I INCLUDE IN THE SAAS CONTRACT?

Gulesian points out three areas that must be addressed in the contract:

·         Integration with your non-SaaS systems

·         Loss of control of data

·         Dependence on the provider for security

The CIO and his or her team are the main players to address the integration issue.  Although the next two points also require the IT organization’s participation and input, these are matters that must be addressed upfront in the agreement itself.

Risk of loss of your data is paramount.  In the event that the SaaS provider is unable to provide the support anticipated, it is essential that you have access to the applications as well as your proprietary data.  Inability of the provider to provide support may happen for a myriad of reasons such as bankruptcy of the provider or a real or threatened patent infringement claim and subsequent injunction.  The preferred approach to protect against such loss is to insist that the provider place its code into an ESCROW account.  Language can be drafted which will instruct the trustee  of the escrow ( an independent and trusted third party) to release the code to the beneficiary (i.e. you) upon the happening of certain events which are defined in the escrow language in your SaaS agreement.  One shortcoming to this occurrence is the downtime that may be involved in getting your systems up and running, but this is a necessary protection that you must include in your contract.

Transition assistance is another item to consider.  In the future you may wish to change the SaaS application currently in use.  Language should be included to require the provider’s assistance in developing the data migration strategies and the procedures to be followed so you can move your data to another application.

Since the SaaS model is economical by nature (see Wikipedia definition above), traditional discounting expectations are not available.  Pricing is based on users or seats.  The more users subscribed, the more likely the cost per user can be discounted.  So plan accordingly and try to build in volume discounting per blocks of users.

Other items Gulesian notes for inclusion in the agreement are:

·         Service Level Agreements (SLAs) regarding

§  Availability

§  Response times

§  Notifications of outages

·         Regulatory compliance

·         Data integrity

·         Data Privacy

·         Frequency of backups

·         Disaster Recovery

Gulesian’s article hits the main points and I highly recommend it to my readers.

 

 

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This post is aimed specifically at the SMB enterprise and those consulting such enterprises. Recently in a post to this blog on February 3, 2008, I posted an article detailing a checklist for those enterprises that have already faced the questions on whether to outsource or not entitled Checklist Before Outsourcing Your IT.  That article has attracted a large number of readers.  In the article that follows I hope to aid those SMB’s that are still grappling with the decision on whether such a move is in their best interest.  In my research I have found an article written by Rojo Sunsen entitled 10 Ways Outsourcing Can Help Grow Your Business.  Sunsen succinctly defines outsourcing and then follows this definition with a rather direct and to the point list on the benefits to the enterprise.  I have paraphrased Sunsen’s list below; however I highly recommend the complete article in order to gain the fuller picture and what such a move can do to grow your business.

1. Employee training is reduced and allows such time to be directed to the company’s core competencies.

2. Capital outlays for equipment and software are reduced and can be placed into more revenue generating endeavors.

3. Save on the expenditure of employee recruitment to fill positions for intra-company administrative functions.

4. Hand-in hand with point #3 above is the time that is saved performing certain administrative tasks that are ancillary to the enterprises core functions.

5. Yet another savings to points #3 and #4 above are the employee benefits costs that are no longer required such as “taxes, medical, vacation time, holidays, worker’s comp., unemployment costs, etc.”

6. Office space opens up which could be better used performing the tasks required on the revenue side of the business; or alternatively, space could be sublet or a company’s leasing requirements can be reduced.

7. Order processing and delivery of products or services can be enhanced thus creating better customer satisfaction which can result in future return business.

8. More emphasis can be placed on increasing market share with the abovementioned improvements and savings.

9. In line with point #8 above is the ability to accept larger orders or take on more orders due to the economies of scale which should come about due to the outsourcing.

10. Lastly, your outsourcer can become a valuable ally in your marketing efforts and provide an additional outlet and/or network of customers.

 

Implicit in the above savings tips is the ability to redirect funds usually budgeted for the administrative side of the business and put these monies to better use on the revenue generating side of the P&L.

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Well we’ve all guessed that the question in the title of this post was coming. It seems that the answer is obvious. As wages increase for the software engineers in India’s silicon valleys of Bangalore and New Delhi, what self-respecting cost-cutter wouldn’t look elsewhere? Not so fast my friends. For a full understanding of the pluses and minuses of a move to China read the article in the blog Recruiting in China entitled China Marches into Outsourcing. The author has an interesting insight into the workings and plans for China’s information technology outsourcing industry.

India was there before China with BPO, Business Processing Outsourcing. Their revenue for 2007, $18 billion, dwarfs China’s for the same period. The author does make an observation that some may take exception to regarding the ability to speak English. I leave it to the reader to make your own determination. Here is the direct quote:

With its history as a British colony, India has workers with strong English skills and familiarity with Western culture. That gives companies there a big edge when bidding for jobs that require reading reports and talking to Americans.

I always get a little nervous when a totalitarian dictatorship comes up with a “plan”, anyone remember Comrade Stalin’s 5 year plans? Well it appears that our friends in the PRC have come up with one called the “Thousand, Hundred, Ten” project. The title is derived from China’s plan to situate 1000 Chinese outsourcing vendors in 10 cities servicing 100 foreign clients. The plan targets foreign clients other than the current Asian clients and moves the vendors out of the bigger and more familiar Chinese cities of Shanghai, Beijing, and Shenzhen to the less costly towns for housing and wages of Wuhan, Jinan, and Changsha. Government incentives abound from two-year tax waivers to subsidies for employee training to cash infusions for certain industry sectors (e.g. $56 million for the animation industry in Changsha).

China does have some hurdles to overcome. Most of their current IT outsourcing is to Japanese firms. The outsourcers that have set-up shop in Changsha are relatively small and prone to failure. The work performed is not the glamorous engineering and design, but the more mundane coding and software testing. Consequently the talented engineers leave for the more exciting cities on China’s coastline with more opportunities.

Search, as you may, for any mention of the over 500,000 Chinese in re-education camps (we call these political prisoners) or for any mention of Tibetan monks being beaten, but you will not find it. I’d put that down as another hurdle China needs to overcome.

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Maybe you’ve seen this commercial. A maintenance man at a power plant is mopping the floor of the control room of a power plant. He accidentally knocks over a cup of coffee sitting on the control panel and the metropolis in the background suddenly goes dark. The maintenance man doesn’t panic. He quickly goes over to the ‘red button’, pushes it, and the “Energizer Bunny” suddenly drops down from his hidden compartment in the ceiling and attaches itself to the control panel. The bunny then begins to bag his familiar big bass drum ferociously. Sparks begin to fly and all of a sudden the city’s lights come back to life and all is well again. This is a light-hearted example of a very important issue.  The “Energizer Bunny” in this commercial is an example of the power plant’s Business Continuity planning. The point is that bad things happen and an enterprise has to be prepared to deal with these bad events.

 

The Blog 360⁰ Vendor Management has published a very helpful article regarding Disaster Recovery entitled An Outsourcing Vendor’s Business Continuity and Disaster Recovery Plan. In it the author discusses some essential points that any Outsourcer should consider when contemplating their Disaster Recovery Plan. Since the Blog 360⁰ Vendor Management’s stated purpose is “to impartially discuss the down-to-earth, day-to-day fundamental basics of outsourcing … thereby make you a more effective outsourcing leader”, I have deferred to their judgment and included this post in the Outsourcing category of my Blog. I would, however, like to point out that the following points seem to me to be universal (See the “Energizer Bunny” discussion above) and should be easily applied to any IT department other than an Outsourcing Vendor. The following are those salient points contained in the 360⁰ Vendor Management article cited above to consider for your Business Continuity Plan:

 

• Consider the Impact, not the Event - Generally speaking there are four types of impacts that you need to plan for: loss of people, loss of facilities/building, loss of connectivity, and loss of applications. Any given event can cause one or more of these impacts. For example, a political coup could cause your operations team to have insufficient quantities of personnel (loss of people) and loss of connectivity (if the telecommunications company shuts down). Plan for the impacts, not the disaster.
• Consider Time Frame of Impact - An impact can last 5 minutes, 50 minutes, 5 days, 5 months, or be permanent. When an event creates an impact, your plan should provide clear direction based on the expected duration of the impact.
• Have Clear Procedures - A plan that says “open new center in a hotel conference room” is insufficiently detailed. The plan should have clear procedures for retraining, relocating personnel, reconnecting systems, and procuring goods/services necessary to recover. For example, relocation of personnel should have a clear plan for sources of transportation, roadmaps with specific routes to take, and temporary housing.
• Plan for Staged Recovery - Few serious impacts can be instantaneously resolved. For example, telecommunications circuits are generally recovered one at a time. People will return to work slowly.
• Consider Side Effects - A major weather disaster is typically followed by disease. So, while a hurricane is unlikely to cause a loss of people, the cholera, stomach diseases, or other health concerns could.
• Test the Plan - Finally, test your plan at least once per year by first calling a pre-planned meeting and role-playing resolution and actions. Later, call an emergency meeting when leaders are not prepared. Take notes on the actions (do not critique in the middle - let the disaster and recovery unfold). Afterwards, analyze the actions and provide feedback. Expect your business continuity and disaster recovery plans to improve each time you rehearse.

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I recently came across a very interesting article. The article begins by stating what most of us already know, (i.e. more than two-thirds of companies outsource their IT services and India gets a large chunk of that business). Be patient while reading this article and get through that first bit of rehashing the already known facts. The article sites some very interesting and reputable statistics which puts the current situation into a different perspective. It brings into question what I alluded to in the title of this post, when you come right down to it will the infrastructures of India keep pace with the massive rate of growth of the IT service providers or will such infrastructures collapse from India’s inability to repair and replace or build new infrastructures.

Let’s start off with some one of those facts from recent studies:

The number of developers in India who service primarily US markets is 250,000. In the United States there are about 500,000 developers, where roughly half are in product development. This makes the Indian programmer pool equal to the available domestic programming pool.

Indian software exports alone exceeded 17 billion last year, representing a four billion increase in one year (Gartner Group).

Bangalore has built a sort of Silicon Valley a few miles out of town. However experts are beginning to wonder if the Bangalore infrastructure can hold up under the intense pressures put upon it from the ever increasing expansion. Continuing on with some more of the facts:

Now Indian IT professionals, with their newly found wealth, have continually been buying motorcycles and cars adding 900 a day to the already overcrowded streets (The Bangalore Paradox).

Other problems include “a water shortage, inadequate sewers, and an erratic power supply” (The Bangalore Paradox).

As a user (or should I say hostage or victim) of the Chicago metropolitan highway system, the next fact I can particularly empathize with the IT professionals of Bangalore:

The poor road systems make a small 7 mile drive take roughly an hour to complete.

The Gartner Group reports further that:

A survey of 25 large organizations with a combined $50 billion in outsourcing contracts found that 70% have had negative experiences with outsourcing projects and are now taking a more cautious approach. One in four companies has brought outsourced functions back in-house and nearly half have failed to see the cost savings they anticipated as a result of outsourcing” (Gartner Group). Also, a reported 20% of outsourcing deals do not produce cost savings while 10% of those deals actually wind up increasing costs. In 2005 alone, 50% of all outsourcing projects will not deliver their expected value and will be labeled unsuccessful (Gartner Group).

Others see the outsourcing possibilities as endless. 

General Electric’s “70-70-70″ plan is an example of this. GE plans to outsource “70 percent of its head count, push 70 percent of that outsourcing offshore and locate 70 percent of its workers in India.” (Gartner Group).

The future of US outsourcing to India remains to be seen. Will they be able to keep up with the increasing demand and concomitantly provide the quality and timeliness expected? As a betting man, I’d have to say yes. There is just too much at stake to let this deteriorate and fail.

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I recently had a fellow practitioner, Tim Nuckles, ask me to review an article he had written. As the title above suggests, his topic is very current and provides some very insightful suggestions. In keeping with my stated goal for this Blog, I highly recommend it to me readers. 

His premise begins by stating that the IT worker shortage, as most IT Directors and HR departments can attest, is real. Nuckles lists and analyzes some very real and helpful alternatives to help the “Tech Buyer” navigate through this present condition.

It follows that a tight IT worker market affects not only the organization seeking such workers, but also the outside vendors who employ these workers in great numbers and count on them for their “engagement capacity and growth opportunities”.

Nuckles suggests the following when deciding to use outside vendors for IT projects:

1.     RFI/RFP process:  Streamline the response time. Tailor your RFI to the specific requirements of the project. In order to obtain more responses in a faster time, layer your RFI’s by making them subject to amendment and supplement. Request only the most detailed information from the most qualified vendors. Put all standard procurement terms in an attachment or direct the vendor to a website.

2.     Pricing: Now may not be the time to squeeze a vendor on their rates. The alternative is to leverage the vendor’s refusal to discount to extract better fee holdbacks, software buyback options, creative testing and acceptance models, and penalties for milestone delays.

3.     Bundling: The prospect of future revenue for future products and/or services may incentivize the vendor on current pricing or lock in the future rate.

4.     Get the Vendor’s A-Team: Identify those resources through referrals, demos, and test cases. The on-site presence of such individuals assures the project will move forward at a faster pace. Be cautious about demanding a fixed fee arrangement. Such arrangements cede more control to the vendor and as cost margins grow the A-Team will get pulled and put on more profitable projects.

5.     Offshore Outsourcing: This may have its pricing benefits but comes at a cost in other areas.

6.     Off The Shelf vs. Customization: Consider changing your requirements to match the OTS functionality as much as possible.

Nuckles discusses all of the above keys issues in greater detail in his article.

Tim Nuckles is a Wisconsin technology attorney whose practice is dedicated to technology transactions and the workout of troubled technology projects. You may visit the firm’s web site at www.nuckleslaw.com.

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As a practicing attorney involved in contract drafting and negotiation, I know the value of checklists. As I am sure my fellow legal colleagues can relate, one of the things we dread is a client who asks “Did you consider …?” or, “What about …?” If our only response is something like, “Let me check that contract again and get back to you”, we’re in trouble. Contract drafting is an attempt to anticipate as many reasonable consequences as possible. When I was lecturing in Contract Law, I would tell my students that contract drafting anticipates litigation (i.e. if you do or do not act in the following manner, then the liability shall be as follows). Robert Bell has created an IT outsourcing checklist in his article 31 Risk in Offshore IT Outsourcing Contracts: Or Buying Promises.  I cannot vouch for its completeness, but I thought it a good idea to post it here as a tool to be used in your decision making process. In order to reprint this checklist, I must follow the “Reprint Guidelines” and publish the entire article, which follows:

No matter how much due diligence you attempt, making a decision on contracting with an onshore or offshore IT service provider is much like buying promises. To some extent you are going to have to trust in your selected partner to be committed to providing your company with the high quality services that they have promised. Your lawyers will surely not agree but offshore contracts are only worth the integrity of the company that you are contracting with. Dun & Bradstreet does not include this metric (integrity) in corporate profiles yet and it is not on a credit report either. One of my partners in Brazil would often tell me “Henry we are highly motivated for this opportunity”, but I did not fully understand the value of that statement until we got into the trenches together. Here are a few of the promises you are accepting or questions you may have doubts about when signing that offshore IT staff augmentation or support contract: 1. Will I really get the hours I am paying for? 2. Is my intellectual property and information secure? 3. Am I really going to be provided with qualified professionals? 4. Will billing rates go up after I train the new team in my business? 5. Can I reach this vendor when I need immediate support? 6. Will this vendor work with me when the going gets rough? 7. Is this a stable country politically, socially, and economically? 8. Are currency exchange rates an issue? 9. Is this a safe country for business travel? 10. Is this vendor’s location in a safe part of town? 11. What is the cost of business travel to this location? 12. What is the cost for offshore professionals from there to travel to the U.S.? 13. Can professionals at this location get a U.S. passport and visa for U.S. visits? 14. Are U.S. contracts legally binding in this country? 15. How long does it take to get a visa and passport for team members to make training and onsite orientation trips to my location? 16. What will it cost for visas and passports for your offshore team? 17. Will the offshore team have someone full time who is experienced in managing offshore projects? 18. Is this a stable company, i.e. good credit and strong experienced management? 19. Does this vendor’s company have the interpersonal skills to work with my company? 20. Does this offshore vendor have executive management that speak English and will be responsive and share your since of urgency? 21. Are this vendor’s team management and executive management going to be available in your workday time zone on short notice when you need them? 22. Can this vendor grow with your companies needs? 23. Do they have commercial liability insurance, errors and omissions insurance? 24. Can they buy commercial liability insurance in their country? 25. Will they work in your workday time zone? 26. Does this company have a secure network infrastructure? 27. Is their network infrastructure professionally designed and firewall protected? 28. Is their facility physically secure? 29. Are extreme weather conditions a factor affecting travel, security, or work schedules in this country? 30. Does this location pose natural disaster risk to your business? 31. Is this vendor going to be flexible as your needs change? No matter how much time on money you spend developing a clam tight contract with an offshore outsourcing provider you never want to have to consider international litigation or international arbitration for contract disputes. Unless your needs are well defined and static, which I have never seen, the requirements better be very general in that contract or they will need review and changes before the ink gets dry. In any offshore project establishing good relationships are key to clear communications. Vision TRE has been nurturing relationships with our offshore partner locations in Brazil and Panama for years. We have business relationships in South and Central America that have been proven dependable over the years. Integrity, trust, mutual cultural respect, and a shared since of urgency make these relationships valuable to any company that contract with us to establish an offshore team. About Robert Bell     We are a small family run Online Cosmetic Retail store at www.cosmeticsfairy.co.uk with great prices and useful cosmetic information / tips pages. View all Articles by Robert Bell This work is licensed under a Creative Commons Attribution-NoDerivs 2.5 License.

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FOXNews.com has picked up an Associated Press story that Wednesday, January 30th, two undersea cables were cut resulting in a huge interruption to India’s bandwidth. The Internet Service Providers' Association of India reported that “the country had lost half its bandwidth.” The cut cables, which lie in the Eastern Mediterranean Sea, first affected the Middle East, including the Dubai Stock Exchange. The slowdowns and outages quickly spread through the Persian Gulf States, Pakistan, India, and Bangladesh. Customer Service call centers located in India were severely impacted as engineers attempted to reroute the traffic through satellites and cables in Asia. As of now the cause of the cuts is unknown. It is estimated that repairs to the cut cables could take up to a week.

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InternetNews reports that Gartner predicts outsourcing will grow by more than 8% this year to approximately $441 billion. The trend in this continued use of outsourcing seems to be moving away from large vendors to more of the smaller vendors with specialized products or services that can meet a company’s particular needs. Gartner’s survey results indicate a recent change in company’s strategies and priorities vis-à-vis outsourcing. There has been a decidedly huge increase in the percentage of companies from 2005 to today that have established a disciplined process in their approach to determine if they will outsource.

"[We're] seeing our clients set up internal processes and applications to create a service model for other internal organizations to leverage," Hemant Ramachandra, managing director of BearingPoint's Technology Solutions unit, wrote in an e-mail to InternetNews.com. "This can be software-as-a-service or even application as a service. Setting up the right governance structure is critical to ensure that outsourcing is leveraged appropriately."

In 2007 IBM increased its market share for IT outsourcing to 8.1%. EDS was second with a 5.3% increase followed by a 3.3% increase for ADP.

In know what you’re thinking. Woe is me. All of our jobs are going overseas. This is the initial knee-jerk reaction when one hears about outsourcing and its inevitable increased use. But this does not have to be the only truth. As our economy evolves and adapts to the changes in our society and new needs arise, the way we work and the makeup of our workforce will necessarily evolve as well. The largest increases in new businesses in the US are in small business and a large percentage of those new small businesses are home based. New companies will also need to be created to meet the changing model from ASP to the new approach of Web-based Software as a Service (“SaaS”), which allows businesses access to software functionality for a more cost effective monthly fee instead of the cost of the application’s license fee and the upfront cost of more hardware. Who these new companies will employ is yet to be determined.

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Scientists have figured out a way to cut down delays when internet surfers are trying to access popular sites and as a result have increased revenues by 20% for one web hosting company. In order to improve the internet server response time to changing user demand, scientists modeled the server system after the dance that honey bees do in order to redirect their fellow bees to more plentiful nectar. It’s called the waggle dance and the end result is a way to redirect the hive’s workforce at that moment to a flower patch with a better nectar supply, directing the bees to the type of flower, distance, and direction. For the bees, this “feedback loop” continually identifies the shifts in nectar allocation and works to equalize their retrieval system.

Web-Hosting companies assign certain servers to internet sites. Spikes in user demand flood the designated server for that site thus causing lockouts or delays, while other servers sit idle. Users leave the site in frustration taking the potential for revenue generating activities with them. Researchers have applied the bees idea of feedback to allocate more plentiful supply (in this case server space) to increase efficiency of the server system. The end result is increased revenues.

To learn more about the scientist advertisement system, which replaces the bees waggle dance, read Bryn Nelson’s column in MSNBC’s Technology & science.

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IBM has revealed that it has approximately 73,000 employees in India. Based on the headcount at the end of 2006 of 355,766 employees and a projected rate of growth equivalent to 2006, IBM now has approximately 20% of its workforce in India. And why not? India offers a skilled workforce without the high cost of labor that usually accompanies such workers in the West. The projected annual revenue from the Indian market for 2007 at $1 billion is yet another reason for IBM to ramp up its workforce in the sub-continent. The BRIC countries (Brazil, Russia, India, and China) are expected to have high growth rates in the coming years and IBM Chairman, Sam Palmisano, wants to direct more of IBM’s investments into these emerging economies. Jesse J. Green Jr., IBM’s Vice President of Financial Management, is optimistic and stated, “we see continuing good stability in the BRIC countries in general and good opportunity for growth in those countries as well.”  (See Associated Press article)

 

I think that it is commendable that IBM execs are aware of the labor savings and the potential for increased revenues from emerging markets. Many of us have direct investments in IBM or indirect investments through 401K’s and other investment funds. As a public company IBM is acting according to its mandate to increase investor value. However as a good corporate citizen there are other considerations as well, such as social, political, ethical, and religious. How much outsourcing of skilled labor is too much outsourcing? My only cautionary note is not to overdue and abuse the situation. Employee growth in these emerging markets should be, and I am sure that it is, managed growth to meet the needs of the growing market but not at the expense of these other considerations. We all remember the dot.com boom and then the bubble that burst. We are all aware of the real estate boom of recent years and the subsequent subprime mortgage bubble that has panicked much of Wall Street and Western Europe as well as investors from the Middle East and the Pacific Rim. India is a nuclear power and borders Pakistan another nuclear power and its antagonist. Does IBM really want to put all of its eggs in one basket?

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