When Thomas Friedman wrote his bestselling book The World is Flat in 2005, he was not just talking about level playing fields in terms of commerce. He also touched upon two key trends which were helping the world market to flatten, namely outsourcing and offshoring.

Outsourcing meant segregating manufacturing and services into “components” that could be performed in the most cost effective and efficient manner. This, coupled with offshoring of these components, gave rise to phrases such as “outsource manufacturing to China” and “outsource services to India.” These outsourcing strategies allowed corporations to rearrange their supply chain and orchestrate a greater value by the enterprises, which resulted in enhanced market expansion and profitability.

Componentization of Services Built on Horizontal Layers 

In this instance, componentization of services was built on horizontal layers. Enterprises were using technology “services components,” typically layered on top of one another.

Various models were created to unbundle these service components into distinct services that could then be outsourced to one or many third parties. One of the most successful initiatives in the last decade has been modular sourcing, where each service component was delivered by an entity that has built the expertise and efficiency for that component. Outsourcing companies became good at “remote infrastructure management” or “application management” or as full scale service providers. This model worked well, as long as the service component worked within these layers.

Advent of Cloud Computing & Data Brings Need for Vertical Sourcing

The advent of cloud computing has blurred the lines between these layers. The cloud has not only collapsed the first layer of the distributed data center, but has added a third and critical dimension to the service component — namely application and data leading to greater insights.

This unique phenomenon makes it possible to process data along with applications to generate real time insights so businesses can take decisions faster. In the “cloud” world, these service components will need to be organized differently.

Use Case: Financial Services

As an example, a credit card issuer can launch new products every two to three months (at best) because the insight generated has an inherent delay in the feedback because the sourcing is bundled across multiple entities.

For example, if users stop calling to dispute transactions, it might mean that there are fewer fraudulent transactions. However, it could also mean that the users move on and simply abandon the credit card if they are not able to seamlessly dispute a transaction on the card. The card issuer needs this insight quickly. They must have the ability to respond in a timely manner to a dispute — for a particular age group, on a mobile device, in a particular geography — and offer a different method of resolving the dispute.

Competing products from “born in the cloud companies” are able to respond quickly because their data and applications reside together on cloud.

For companies to respond quickly in today’s cloud world, their services components must change from horizontal to vertical: process, application, data, API, and cloud together for a related function. As an example, the credit card issuer should consider outsourcing the entire service component together.

Some companies have already employed this vertical model of outsourcing in the older world and have reaped tremendous benefits as it ensured sustenance and change worked hand in hand. With the advent of the cloud and its ability to handle large volumes of data and generate insights, it is extremely important that outsourcing is handled as a vertical function.

* Due to change of technology and processes, it’s uncommon to see programs over a year.

This article was originally posted “Vertical vs. Horizontal Sourcing In The Cloud Era” from Cloud Strategy Magazine.