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I got asked last week to answer the following question, from a journalist looking for some quotable fodder for a piece she is writing:

I'm looking for industry specialists who can write and email to me (succinct) explanations on the difference between cloud computing and traditional outsourcing, and the likely impact of the former on the latter.

I said, "Oh, that's easy, except for the 'succint' bit." This is how I responded:

Labour arbitrage is a sourcing technology.  Like any technology, it is bounded by the context in which it was conceived, and the challenges that it was designed to solve.  Cloud computing is also a sourcing technology.  But it has emerged in a different context from labour arbitrage, and it is designed to solve different challenges -- some of the differences are obvious, some quite subtle.  Labour arbitrage manifests attributes that reflect both the good it is transacting for and the historical context in which it emerged.  Both factors lead it to favour long-term, binding contractual relationships between provider and consumer.  Labour is a capital expense, and a costly one. Maintaining it (training and whatnot) and acquiring it requires a significant upfront investment -- this investment needs to be recouped, which drives the economic structures of labour arbitrage contracts.  It is a scarcity model.  Cloud computing, on the other hand, emerged from a model of abundance -- the core of cloud computing's business model is the exploitation of excess capacity.  Finding a way to monetise that excess capacity depended on the emergence of a market for (more or less) packaged services, as opposed to raw labour.  As soon as that market -- which clearly exists -- had reached a certain level of maturity, having gone through several precursor cycles (ASP, early SaaS providers), the business models of providers like Amazon and Google became feasible.  Because of its different context, the contractual terms under which transactions in the cloud computing model happen reflect abundance, rather than scarcity.  They do not require up-front, capital investments, nor do they require long-term contractual committments.  Both of these things may add value to certain kinds of cloud computing transactions, but they are not a requirement for the model to work, as they are in the labour arbitrage model.  This enables cloud computing providers to offer a sourcing relationship to consumers that is almost entirely an operating expense, and one which can be precisely fit to the demand curve (elasticity). This enables businesses to achieve the effective equivalent of successful lean manufacturing practices with regard to services -- cloud computing holds the promise of eliminating the equivalent of excess inventory in outsourcing relationships.

This is similar to the idea that there may be a "non-linear" service model, where the cost structures inherent in a labour arbitrage based model don't fit well. See the following, for example:

As we have seen from the explosion of outsourcing, there is a lot of work to be found in this model, but it comes at a price—the need to constantly hire and train ever-larger workforces, and the need to combat rising costs and increasing commoditization and price pressure at the customer interface. Down this path, once you have hired 10,000 people, you now need to keep that machine fed—which means you must find any work you can to feed the machine.

It is really hard for such a company to transform itself from a linear, people driven business to one that isn’t. Of course it can be done, but it will take sustained, visionary leadership from the top against all sorts of near-term growth pressure to pull it off.

This point of view is meeting with some scepticism and debate within my employer. ;) What do you think?