Problem of loyalty

There is a shadow of mainframes over the whole idea of "in the cloud" software services providers.  Excessive centralization has its own perils, perils well known from the days of IBM360/370 and "glass datacenters".  While at the beginning growth of "cloud services"  providers increase profit margins and may even increase the quality of the service eventually each organization hits "size" wall. And one of such problems is the problem of loyalty. It cuts both ways.

First of all in case you use external providers loyalty of staff disappears and for any complex service you face "all or nothing situation": If service works everything is wonderful, but if it does not troubleshooting is extremely difficult and fixing the problem is almost impossible even  if you understands what is happening -- infrastructure belongs to other organization.

Anybody who used Web hosting (the most successful example of such services) can attest that this is a wonderful service as long as it works. But if you have a problem you have a big problem: local staff has no loyalty to the particular person or organization and competition does not work as another provider can be as bad or even worse; so switching brings you nothing but additional headache and losses. 

Even elementary problem can take several months to be resolved and I am not joking. I experience this situation myself several time with different providers, which hosted Softpanorama.  Oversubscription which leads to highly loaded servers and insufficient network bandwidth is another common problem.  There are also problems related to the "race to the bottom" in such services: the main differentiator becomes price and to attract new customers Web providers often make claims that are untrue (unlimited bandwidth is one typical example). As a result naive customers who believe in such claims are burned. 

That's why businesses tend to perceive such providers as inflexible, and, due to natural pre-occupation with profit margins, hostile to their business needs: exactly like "grass datacenter" with IBM mainframes was perceived in not so distant past. As one reader of Calculated Risk blog noted in his comments to  the post Popular Google Product Suffers Major Disruption

Lucifer (profile) wrote on Sat, 6/20/2009 - 12:06 pm

They started employing more MBAs at Google? Seriously, any creative company that "grows up" and starts taking advice from bean counters/ entrail readers and sociopaths is doomed.

Microsoft's greatest strength was that its founders never lost control.. so even though their products were inferior (at least initially), their competitors took advice from MBAs and f**ked themselves up, leaving MS as the only survivor.

It's very hard to scale service-based tech firm and keep the mojo that made the startup successful in the first place, especially via acquisitions or employing 'professional managers' to operate the company. Basically I think the story is simple -- Parkinson's law -- bureaucracies naturally grow without limit. That includes the management of large "cloud-services" providers including Google.  Excessive layers of middle managers and affiliated cronies ("shadow secretaries") count in the denominator of labor productivity. Everyone knows that many middle managers (often called PHBs) are mainly "inventing" work for themselves and other middle managers writing memos and calling meetings and stuff.  Middle management is all about sustaining internal information flow; technology makes good middle management more efficient since it enables better information flow but it makes bad middle manager even more harmful as they "invent" useless information flow (spam) and block useful information in order to survive.

Issues of quality, loyalty, knowledge of the business are automatically surfaced and as a result customers suffer. Mainframe-style utility model encourages excessive bureaucratization with rigid procedures, stupid customer service and power concentrated at the top. That means that the issues of sociopathic leadership and sycophant managers replacing founders is even more acute then in regular IT firms.  Corporate predators  prefer large companies. As a result demoralization surface and IT personnel, that is cubicle serfs, now spend a large fraction of their time in the office, surfing the internet.

Contrary to simplistic description and assumptions typical for writers like Carr mainframe warts are very difficult, if not impossible to overcome.  And they can be amplified by low cost of free services with no reliability guarantee.   Disappearance of data usually is not covered. There is a  danger of relying of semi-free (advertisement supported) services too much.

For example anybody who used low cost Web-hosting provider can attest that interests of providers run contrary to the interests of advanced users and as such often stifle advanced technology adoption even if they are supported by a particular provider because they, for example, might increase the load on the server.  Also provision of the adequate bandwidth for multiple users (and decent responses times) can be a shaky area. Especially during  rush period like 8-11 EST.  Typically customer service is far from being responsive to any complains.

Security is another important (and costly to resolve) challenge: break-in into a large provider affects all its customers. There were several high profile break-ins into large Web hosting providers during the last two years, so this is not a theoretical threat. Claiming that Web provider are a total solution for any organization is like saying that just because the Big 4 accounting firms (with their the army of  accountants, tax specialists and so on) exist, organizations can do away with internal accountants altogether.  The hybrid platforms, such as Saleforce.com's application upgrades and quality of service issue still are of major concern. 

Relying on advertisement is another mine field. Many people hesitate to send anything important to a Gmail address, knowing that the mail will be scanned (by what is an advertising company) in transit.

Still there is a lot of disappointments with this model as exemplified with the following characterization of "cloud-based" services and outsourcing:

'We thought that we are like a farmer shooing a fat rabbit, but it turned out that the rabbit is shooing at us."

This quote suggests that  providers of such services as any  outsourcers in the future might have difficulties to shake money loose from the organizations,  as customers discover that the interests are highly divergent. IBM  already discovered that this is an inherent limit of their push to the "'service oriented organization".  Recently they even experienced a backlash.

Because we need to bridge interests of two or more different organization, there are several significant problems in interaction with "in the cloud" providers. Among them

1. Forced upgrades. In case of external providers that platform is owned by the provider and if his financial or technological interests dictate that upgrade is necessary it will be done. That means that customers have to adapt or leave.  And upgrade for a provider with large number of customers can be huge mess that cost clients dearly.  I experienced this situation myself and can attest that the level of frustration involved is substantial and the mess can easily last several months.
    
2. Compatibility problems.  As provider uses specific technology the level of interoperability of this technology with other important for the company technologies is not under the control of the user of such services. It can lead to significant costs due to luck of interoperability. In the simplest example lack of interoperability with Microsoft Office is a serious problem for Sun which uses Open Office (Star Office to be exact). 
    
3. The loss of operational flexibility When switch to "in the cloud" provider is done on cost grounds alone, that usually creates new (and initially  mostly unrecognized) dependencies that deprive the company from much of the operational flexibility.  Typically security departments are direct beneficiary as security-related spending tend to grow dramatically as a defensive reaction of the organism. The main consequence of the bureaucratization is the loss of flexibility, and sooner or later this lack of flexibility can come back and haunt the  company.

   In the recent interview Bill Gates noted that "The IT systems are your brain. If you take your brain and outsource it then any adaptability you want (becomes) a contract negotiation". After you negotiated the contact with the "in the cloud" provider any flexibility you used to have is lost as every change explicitly or implicitly become a change of the contact negotiation.  Moreover, if the company lost its key IT staff and key architectural issues are decided by outsourcers, then essentially the company  becomes a hostage of outsourcers as it no longer has brain power to access the options and the architecture (and thus the costs) are by-and-large controlled by forces outside your control. That is much more serious risk that many PHB assume: the line between architectural decisions and implementation decisions is pretty fuzzy.  There is also associated brain-drain risk – if you outsource important functions, you irrevocable erode the capabilities within your firm.  When problems arise, internal IT staff can often resolve the problem more quickly, with less bureaucratic overhead inherent when two corporations are involved. 

   The fist category of factors that lead to loss of flexibility is connected with additional standards, policies and procedures that are usually introduced in external service provider situation.

   The other important aspect of the loss of  remnants of competitive advantage, if any, as the service provider is now the place were the critical mass of know-how and talent pool reside. That somewhat reverses "client-provider" relationship: it is service provider who now can dictate the rules of the game and who is the only party who understands the precise nature of the tasks involved and can conceal this knowledge for his own advantage from the other party. That usually is helped by the demoralization of the remaining staff in the company
    

4. Amplification of the management missteps.

   Their first and most important desire of service provider is to keep the client, even if client's situation changed and no more lend itself easily to the services provided. That can lead to huge architectural blunders. Those things are not limited to offshoring but happened often with complex projects like ERP were external consultants are involved, especially in case big consultant firms are involved. Several large companies went out of business or were bought as a result. Among example we can list FoxMeyer, AT&T Wireless.  Several companies were severely hurt (Herschel, etc). This is might actually include Compaq.
   
   As for Compaq, the story is more complex. Dot-com bust hurt "value added" companies like HP and Compaq disproportionally and increased appetite for  mergers and acquisitions activities. Dogged determination of Carly Fiorina about the merger (which served both for self-promotion and as a smokescreen for her own problems at struggling HP) and the ability of former Compaq boss, a certified public accountant Michael Capellas, to understand personal benefits from Carly Fiorina proposition proved to be a winning combination.  Capellas who proved to be  a "serial CEO", , was a big fan of SAP and that probably was a contributed factor is Compaq troubles.  When he was appointed, he promised to turn around struggling Compaq in 180 days. Now we know that after just 84 he found a much better financial solution, at least for himself. A shortcut for a turnaround ;-). It is interesting to note that in 2000, based on iPAQ success, he declared[ ComputerWeekly.com,Feb 2000] :

   "There will be an explosion in devices, all attached to the Web. We are going to simplify the PC radically." Capellas promises that future desktop computers will be easier to manage than today's machines.

Large companies have become very adept at establishing remote teams in places like India, Russia, etc. Due to their ability to offer higher wages and better environment they are able to attract local talent and run challenging research and development projects. Often, though, these outposts become disconnected from their parent companies because they fail to establish rapport with key participants in the central office. Foreign prophets are usually ignored.  There is something fundamental in this "tragedy of local talent" and communication is still a problem even in the age of videoconferences. Without "warm-body" personal contacts it is difficult to build long-term trust based relationships.

Many organizations who thought outsourcing IT was the key to success miserably failed. Whose who did not failed lost competitive advantage, experienced the demoralizing effect of  vendor lockdown and QOC hokey-pokey which just simply made no sense.  Some in-sourced the IT back, some recreated it from scratch, are still in denial.

That means that client of service providers will be implicitly pushed to lowest common denominator and cannot utilize local expertise, even if such exists. They face "helpdesk level" people and instead of benefiting from specialized provider are often proposed wrong solutions to misdiagnosed problems.  my experience with WEB providers suggests that trivial problems like an error in DNS record or wrong permissions can became real production issues.

Service providers can evolve and upgrade software independently of wishes of some or all of the customers. That means that customers who are not satisfied with the direction taken need either to adapt or abandon the service.