Act II — Why the deal was good

You turn on a cloud server. Ten minutes, and it’s running. The old way was four months of procurement paperwork to get you one. Real money is now riding on somebody else doing that job. Is it worth it?

Let’s look at a realistic and uncommon story of cloud and outsourcing. It illustrates what value a customer got and how they got there. Aegon Levensverzekering N.V. is a life insurance company that needed to comply with what’s called the Solvency II regulation, which required reporting the net-present-value (NPV) estimate of its entire life-policy portfolio, millions of policies across thousands of scenarios. The Dutch regulator is worried that the insurer might not be capable of honoring the life insurance policies. There are many scenario’s: changing retirement ages, changing life expectancies, changing interest rates and investment returns. Off the shelf scenario-based actuarial risk-modeling software exists to do this, but the compute requirement is pretty big. This requires a high performance compute environment with hundreds of CPUs, for several weeks, every quarter. But outside of that batch, all the machines are idle. ...

Consumers of digital infrastructures benefit from not running them themselves, but having a provider who serves more consumers do it for them. Imagine stringing a wire to connect your PC to your neighbor’s PC in order to play a game together. People have been doing these things. How long does it take to string the wires and connect them? What is the cost? Where do you buy the cable? How are you going to run that cable? It is a lot faster to just use the internet for that. ...

What is information really? If we know that, we can try to understand how we can judge its value, or even start to understand how we can create value with information. In Claude Shannon’s theory of communication, information is about reducing uncertainty. Another way is to say that more information means less noise because if you add noise to information, that information will have more uncertainty and less value. To visualize this, think of a picture that is obscured by a bit of fog or haze. You can still see some of the picture, but not very clearly. You will make more errors when trying to understand what the picture means. ...

Most digital infrastructures are meant to communicate or coordinate, or are in support of other digital infrastructures that communicate or coordinate. That is where their prime value is. The internet is a great example. It is designed to enable computers to communicate by moving data packets between them. Social media is another example, used by people to communicate with each other. Its success is a testament to the fact that communication is a fundamental human need. ...

While value is often expressed in monetary terms, there are many other sources of value for individuals as well as for organizations. This implies that there are many other forms of power too, which is one of the reasons to look at this. Individuals do not just have economic needs, they also have emotional needs. They don’t just want to support themselves and their families financially, they also want to belong to a group, act ethically, and be recognized as independent individuals. ...

A great way to look at how value is created in interactions between autonomous actors is game theory. How do autonomous actors respond to other actors? This is the core question here. How do you respond to an offer from a service provider? But also, how do they respond to you? I have found game theory to be an effective model to think about the outcomes of sequences of interactions. This is because it clearly identifies the actors (or players) and their interests. ...

The game of trust How do people establish trust under the most adverse circumstances? How can sworn enemies get into a position that it makes sense for them to help each other. In game theory, this is the surprising phenomenon that the prisoner’s dilemma aims to explain. Imagine two suspects held by the police who don’t have enough evidence against them. Their choices (game moves) are to confess or stay silent. If they help each other by staying silent, they will both get a positive pay-off: they will be free. If one confesses, and therefore betrays the other, the second one will go to prison for a longer time than the first one. If they both confess, they will both go to prison. ...

A service agreement is a contract. And a contract, as we saw earlier, is essentially a set of complementary promises. So a service agreement is really a set of promises between a provider and a consumer. Not a technical specification, not a piece of legal boilerplate: a set of promises. Take a typical IT service. The provider might promise things like this: We promise to prevent unauthorized access. We promise to keep your information safe. We promise to maintain the service according to vendor best practices. We promise to keep a spare copy of your data off site. We promise to add resources as needed. We promise to apply updates and improvements. We promise to have trained staff that reacts timely and professionally. None of these promises are self-evident. Each one could fail, or be broken. Each one is, in other words, also a risk. ...

Getting to value quickly has value in itself. The faster you get to value, the better it is, generally. We’ll discuss some of the reasons for that elsewhere. Agile development is all the fashion nowadays for getting to digital value quickly. Why is that and what kind of digital infrastructures does that require? Back in the old days, business software was primarily written to automate existing business processes. Those processes might change somewhat as a result, but in the core processes were no different. Think accounting systems, scheduling, “customer relationship management” and so on. ...