Companies that are successful in sourcing and managing the consumption of cloud adopt a more dynamic, analytical, and demand-driven mindset.
Here is an excerpt from an article written by Abhi Bhatnagar, Will Forrest, Naufal Khan, and Abdallah Salamifor the McKinsey Quarterly, published by McKinsey & Company. To read the complete article, check out others, learn more about the firm, and sign up for email alerts, please click here.
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Lesson 1: Sourcing and managing consumption of cloud is a dynamic exercise
Over the years, enterprises developed a robust model for sourcing IT infrastructure assets. It is episodic in nature based on asset refresh cycles and follows a structured sequence: requirements to request for proposal (RFP) to negotiations to award. Success in this model requires solid negotiation and contracting skills and the ability to engage the business at the right touchpoints in the process. The RFP juncture came to constitute the major point at which value was captured. Once the contract was signed, the organizational focus normally shifted to other areas until the next negotiation cycle.
Cloud economics mandates a fundamentally different approach. While cloud service provider (CSP) selection and negotiation are critical components of the cloud journey—determining, for example, the price of services and discount levels—many of the decisions impacting value capture come afterwards. The very flexibility that cloud provides means that enterprises must continuously make dynamic consumption decisions about which services and specifications are needed when and for how long. Each of these decisions can have significant cost implications if not deliberately managed. One manufacturing company we know was able to leverage its traditional procurement muscle to negotiate competitive discounts from its CSPs, only to be surprised by the high cloud-consumption projections—up to twice its spend commitment—a year into cloud adoption. This prompted the company to consider renegotiations with its CSPs and to accelerate the shift in its internal approach to cloud to a more demand-focused model.
The need to continuously manage cloud consumption is accentuated by the rapidly evolving vendor marketplace and its continuous introduction of new offerings, features, pricing mechanisms, and regions. For instance, AWS has changed prices—mostly dropping them—more than 60 times since its launch in 2006. It introduced more than 20 new top-level services last year alone. Sourcing and managing the consumption of cloud in this world requires a deep understanding of the cloud ecosystem and continuous engagement with the business as partners.
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