From our conversations with banking executives in the past month, we note their observation that the industry has over time repositioned outsourcing as cloud computing, even though technology has advanced well enough to differentiate both. The rebranding of the politically contentious outsourcing to cloud computing continues, not only in financial services but in other sectors as well. Relative to outsourcing, cloud computing is a new term, and is less defined, confusing critics in the meantime. The initial feedback on cloud computing, however, shows less openness by the industry toward cloud computing in general but more toward private cloud — so there is a mad scramble to talk about private cloud too, never mind the notions of application service provisioning, or virtualization, or hosted services that may be accurate descriptions of what is actually being undertaken.
All these attempts to come up with something new to talk about belie a profound transformation in how banks prefer to consume and pay for technology. As purse strings tightened amid the down cycle, IT executives found that a modular approach to the consumption of IT was more easily justifiable to the board. However, even as economic pressures have eased, we still see continued interest in utility-based consumption of technology — the model has proven to be not just a stopgap measure, it is increasingly becoming the norm.
From a business case standpoint, the on-demand model (i.e., elimination of significant upfront costs, and expenditures more closely aligned with operational usage) has created strong interests in shared, utility-style service provisioning options, especially among the smaller players. Interestingly, small-tier institutions in Australia, Indonesia, and the Philippines have pressed for cloud computing–style solutions, even for their core systems and processes. The attraction stems from a desire to avail of broader and deeper technology capabilities in line with the needs of the organization, without having to incur the hefty price points of proprietary solution offerings.
In essence, financial institutions are taking to results-based principles in IT spending: "I pay for what I need and require." We see this not only in time- and materials-based pricing, SLA-based and performance-based contracts, but also in other pricing permutations to account for risks taken (by either the bank or the third party, or both) or business objectives met. So, whatever the term that is being pushed — whether it be cloud computing, or utility processing, or "new outsourcing" — it should align with the pay-as-you-go, use-as-you-please, and results-based principles that have gained ground.
Still, the debate over the relevance of cloud computing in financial services is yet to be resolved. Just when there were signs the industry was starting to buy into the business case for cloud adoption, high-profile incidences of service failures and operational outages that involved third parties have proved damaging to confidence in innovative delivery of IT. In characteristically reactive and high-handed fashion, the regulatory response has served to diminish appetite for risks associated with third-party management of sensitive data, operating infrastructure, and technology assets, regardless of underlying benefits. The recent notice from the Australian Prudential Regulation Authority (APRA) hit the nail on the head — cloud computing has to be managed similar to outsourcing and offshoring. From the notice, the industry benefitted from a clearer definition of the regulatory framework vis-à-vis cloud computing, including considerations and contingency plans required when banks take on innovative IT delivery.
As regulatory positions gain more clarity, internal guidelines on cloud computing are expected from super-regionals and international players that aim to build cross-country technology platforms. These too will give further momentum to the take-up innovative IT delivery models. They will present best practices and critical decision factors to the industry at large. Banks, especially those from less developed markets, will also look to greater availability of bandwidth and improvement of network infrastructure to push discussions on cloud computing along.