By: Bob McDowall

Cloud computing, defined as a subscription-based or pay-per-use service that in real time, and over the Internet, extends existing capabilities of Information Technology, remains at an early stage of conceptual development. Services do range from full scale applications such as accounting and storage to niche services such as spam filtering.

Proponents of cloud computing contend that it erodes the requirements for major capital expenditures on IT infrastructure to customer applications. However, will cloud computing replace outsourcing and does Cloud computing "represents a fundamental shift in how financial companies pay for and access IT services?"

Cloud computing differs from traditional outsourcing in a number of respects. The contractual commitments, sometimes defined as subscriptions, tend to be for short periods of time, as little as a session to a month. The contracts rarely have up-front tariff charges.

The services are available are on demand but, while cloud computing services may be capable of some scaling they are most certainly not capable of unlimited instant scaling and addition of near unlimited resource. Semantically, cloud computing may be defined as "instant outsourcing."

Indian outsourcers may consider extending their outsourcing services to the cloud computing domain, where their existing IT infra-structure services have spare resources capacity. They do have the resources to fill that gap in instant outsourcing through almost unlimited scaling and addition of near unlimited resources.

Where Indian outsourcers consider formally entering the area of cloud computing services, they should position cloud computing services as separate and distinct from their existing outsourcing services, containing no overlapping services with core outsourcing, even to existing clients. Pricing models differ.

While delivery of cloud computing services may be personalized, its services and service strategy is not collaborative. Outsourcers may consider using cloud computing as a means of selling non-core applications and services, which can impede the financial incremental benefits of major outsourcing contracts.

Many institutions, particularly in the financial services sector, are unlikely to entrust major aspects of data use and application to cloud computing services, unless and until their trust in those services has grown.

So, issues such as data security, systems integration, unexpected and tactical demand for capacity will be critical service hurdles that all cloud computing providers will have to clear to engage major clients in cloud computing in core areas of their technology structure and services provision.

Major external technology service provision is likely to remain a traditional strategically based outsourcing service. The need to respond tactically and spontaneously to immediate and short term business demands will erode the non-core elements of technology outsourcing.

If cloud computing can position itself an element of strategic information technology planning, then it will start to make more substantial inroads into traditional outsourcing.

Bob McDowall is a Senior Consulting Analyst with the Aite Group.

Originally published in The Economic Times, Mumbai April 26, 2011