In October I returned to San Francisco with members of the Leading Edge Forum to scope current developments along Silicon Valley. As a bleeding-edge baby boomer I injected a little experiential scepticism into the discussions as we charged around the Bay Area in our very comfortable leather-seated Wi-Fi-enabled bus.

We met with a range of players from the large and well established (Google, Amazon, Salesforce, Facebook and PayPal) to the small and new (Jive, Cloudera and Obopay).

My first observation has to be – what recession? The Valley is still very much alive and kicking. My second observation has to be that the quite radical reshaping of the commerce of IT services through virtualisation, consumerisation and the Cloud marketplace is accelerating apace.

For a start, a range of standardised and self-configurable infrastructural services can now be confidently sourced on-demand from the cloud and paid for as used.

Security establishment
Major issues of security have been addressed by all the Valley majors – Amazon’s Virtual Private Cloud offers the means to operate with your current in-house security standards and controls if so wished, for instance – and fully costed in-house operations will never match the underlying economics of Amazon and Google’s virtualised, highly automated and wide-ranging services factories.

Operating without term contracts has both real benefits and significant challenges. It saves the customer’s CIO and his purchasing department significant investments in procurement resource and time – no complex year-long sourcing negotiations.

It does not require any customer contractual commitment, implicit or explicit, to underwrite the supplier’s capital investment: Amazon, for instance, makes standalone commercial decisions, with investment risk laid off on its highly competitive production economics and the consumption behaviours of what is now a very broad and diverse customer base.

But as CIO you’re on your own. In major part, the terms and conditions that govern such on-demand sourcing arrangements have to be accepted as given – the commerce of the cloud does not encourage face-to-face renegotiation of the dictated terms. It is up to you to ensure you have effective business continuity arrangements in place. If the nature of your business requires particular forms of regulatory compliance, assurance must be sought but may be difficult to obtain.

Nonetheless my judgement from this year’s Valley tour is that for standardised infrastructural services, this sourcing model is now gaining real traction. A senior speaker at Google, drawing on a wide industry background, judged Google’s production economics to be two orders of magnitude ahead of older rivals.

One barrier to rapid enterprise and government take-up of direct sourcing of services from the cloud is the need for significant transformation of in-house and legacy systems before such new sourcing can be easily integrated. Capgemini was the midwife for car-parts giant Valeo’s move to Google Apps, partly, I suspect, to reassure a French company faced with the very American Google, but mainly to reposition Valeo’s systems infrastructure to be able to source from the cloud.

The significant development here is this new commercial construct. On one hand, we have a standalone contract between Valeo and Capgemini to deliver the necessary systems transformation. On the other, an arrangement for Valeo to source Google Apps from the Cloud – any contractual formality was, I gather, for one year only, since when Valeo has sourced on demand, and paid for as used.

Why is this such a significant development? Simply because it shows us, as an industry, a constructive way out of the commerce of The Deal that has demonstrably done so much damage to our reputation over the last two decades.

Raw deal
The Deal has come to be rooted in the deliberately complex intertwining of financial engineering, systems transformational stuff, and the ongoing supply of IT services. In the hands of the sophisticated vendor, cashflows can be manipulated between all three exercises to the vendor’s benefit in a contemporary version of the three-card trick, and change control is then often deliberately exploited to augment the flow of cash from the customer into the system.

Now look at the new model. The systems transformation is delivered under a standalone contract with clear boundaries and clear outputs, and is paid for as such.

The ongoing service provision thus enabled is sourced out of the cloud from a services vendor whose business is the delivery of the service and nothing more. There is no contractual or financial link between the systems transformation work on the one hand, and the ongoing sourcing of the services on the other.

A clean and transparent commerce based on each supplier specialising on that it does best. I suggest that this may yet prove to be the Valley’s biggest and most lasting gift to the IT services industry.