Doing Business in the Cloud – Implications for Cost, Agility and Innovation

This report is designed to help business and IT leaders both understand and assess the implications of the cloud computing phenomenon. While there has been a lot of IT marketplace hype, and it is easy to dismiss cloud computing as just another computer industry buzzword, we believe this would be unwise. The phrase ‘cloud computing’ captures the essence of IT-based innovation today and points the way toward important future economic, business and technology trends. Just as previous IT eras (such as mainframes, personal computers and the Internet) have led to important business and economic changes, so will the cloud. This report will, in largely non-technical language, describe the nature of those changes, and what they mean to business and IT executives alike. We will show that the cloud is already a powerful platform that is helping world-class organisations operate faster, more flexibly and effectively, and at a substantially lower cost.

Doing Business in the Cloud – Implications for Cost, Agility and Innovation

This report is relevant to just about every large firm and government agency. It is structured in six sections. We start by helping business and IT leaders to understand the cloud computing paradigm, using simple terms and familiar analogies. Part two then provides case examples drawn from world-class customers, showing the important cloud computing applications that have already emerged.

In moving to the cloud, companies need to decide what suppliers to work with, and what types of cloud services will make the most sense for them. While we typically don’t focus our research on the IT vendor community, the changes occurring on the supply side of the IT business warrant close customer attention. As described in part three, a very different IT industry value chain is now emerging.

Part four discusses how many firms are now in the process of developing their cloud transition strategies, but many others have yet to seriously begin. For both groups, cloud computing will remain a rapidly changing topic that every business should monitor for at least the next five years. Implementation, security, supplier and contract issues are all in substantial flux, and thus the cloud is creating many new forms of business and IT risk that need to be managed.

In part five, we introduce our sense of the cloud’s long-term societal impact. The cloud will help unite business and IT change into a single stream of evolution, one that will have a profound effect on the ways that organisations are structured and managed; it will also be an important area of future LEF research. In part six, we conclude with a brief summary, a getting started checklist and an overall management model that should help clients gauge where they are now and where they might soon need to be.

Figure 1 – A definition of cloud computing

Figure 1 – A definition of cloud computing

There are many definitions of cloud computing, most of them using some combination of the words above, especially the highlighted ones. While some of these words might initially sound like technology jargon, they all have significant business implications. Cloud computing is enabling the assembly of a complete set of business/IT capabilities that can be accessed on demand, available round the clock, and scaled up or down as needed in real time. This is very different from the capital-intensive information technology industry that we know now.

Historically, IT systems and software were typically acquired, installed, configured and maintained, resulting in complex change management processes and significant business rigidities. It is difficult to overstate the importance of the cloud’s ability to link business and technology change in a unified transition model, where systems and even entire business infrastructures can be built, expanded, reduced, modified or shut down entirely without the lag times and fixed costs we have all become so used to. It is the single biggest step in improving business/IT agility we can recall.

In recent years, the LEF has talked increasingly about ‘business/IT co-evolution’ to describe an environment in which business and IT change are largely inseparable. Cloud computing will drive the next phase of this co-evolution by enabling business and technology management practices that have long been separate to be brought together. Throughout this report, we will show how this business and technology integration will reshape the overall economy as well as the strategy, structure and culture of the individual firm.

Figure 2 – The cloud computing paradigm

Figure 2 – The cloud computing paradigm

The emergence of cloud computing can be seen as a classic business/IT paradigm shift. The figure above highlights the major changes in speed, agility, cost, scale, innovation, strategy, organisation and culture that cloud computing can enable. We think the image of a dial captures the unprecedented ability to turn computing resources up or down easily as required. Just as we saw with the emergence of scalable electrical power during the first half of the 20th century, the ability to finely tune complex IT resources to current conditions will give an enormous boost to business agility and efficiency.

The figure also allows us to see more clearly the differences between cloud computing and the Internet and web models of recent years. Consider the major dot.coms. Market leaders such as Google, Amazon and eBay all started very small but then for more than a decade have ridden their own scalable, marginal cost curves to become the giants they are today. But as they grew, these firms typically had to accumulate their own hardware and software resources and their own, now large, fixed costs. In this sense, they are not all that different from their pre-Internet predecessors.

What is different about cloud computing is that it makes these scalable and variable cost features available much more broadly and flexibly. It is now possible for even a single sufficiently talented individual, anywhere in the globe, to assemble a powerful but virtual set of modern hardware, software and application capabilities for just a few pounds or dollars a month. Yet this very same system could potentially be smoothly scaled upwards to support millions of customers, if the initial idea takes off. Low-cost, self-service, start-up capability like this has never been so easily available, and should lead to extraordinary global entrepreneurship. It’s almost a form of hi-tech micro-financing.

Figure 3 – The iPhone as an analogy for the cloud

Figure 3 – The iPhone as an analogy for the cloud

The iPhone provides a good analogy for thinking about the cloud. Initially, the iPhone lacked many important capabilities (such as cut and paste) that computers have used for decades. Yet people stood in line to buy iPhones because of their attractive interface, large screen, ease of use and iTunes compatibility. Similarly, cloud computing today has well-known shortcomings in areas such as integration and security, but also has features with powerful market appeal.

Additionally, the iPhone was not based on breakthrough technology; in many ways it was just a network-enabled extension of the original iPod. But it organised and integrated a variety of existing technologies in appealing ways. Similarly, the cloud makes use of existing computing, storage and software technologies, but makes them available in new, inexpensive and easy-to-use ways. Like the iPhone, the revolution is in the package, not any one component.

Lastly, the cloud, like the iPhone, is a platform that is supported by a vast ‘eco-system’, is being continuously improved, and will be used for things never initially imagined or possible. Hardly a day goes by now when new capabilities are not announced. If you can’t get what you want now, just be patient. In such fast-changing environments, we urge our clients to think about and evaluate the likely path ahead rather than what’s available right now, and be prepared to change course as technology improves. Innovation will continue at both the (cloud) centre and the end-user device periphery.

There is one crucial difference. The iPhone is controlled by a single vendor, Apple, whereas the cloud generally relies on Internet standards. Each model creates different challenges in terms of both market competition, and customer usage, control and dependency.


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