Peering into the cloud
Over the past 18 months, I have spent a great deal of time talking with CIOs about their Cloud Computing plans. Despite the potential value, many firms have taken a cautious approach to deploying applications in the cloud. And, it’s not for lack of interest or intent. The current economic and regulatory climate has squeezed IT budgets and heightened sensitivity around business and brand risks. Furthermore, CC continues to evolve, driven as much by hype and technology as it is by user needs and perceptions. Companies will successfully leverage CC if they can align their IT strategies to their corporate priorities, understand and adopt relevant CC best practices and overcome organizational barriers.
CC is a relatively new computing model whereby application software and its business data resides in remote data centers that organizations access via the Web. There are 3 different types of Clouds: 1) Public clouds – the data centers are run by third parties who co-locate applications of multiple companies; 2) Private clouds – the data centers are run and operated for the sole use of an enterprise and; 3) Hybrid cloud – firms utilize the combination of public and private clouds that best satisfies their computing, user and spending requirements.
To fully leverage CC’s potential, IT managers will benefit from a better understanding of how companies are leveraging the cloud, what kind of financial returns are they seeing and what the organizational implications of these changes would be.
The following insights were gleaned from my consulting work around developing CC strategy and business cases. Where applicable, I will reference a recent global study published by Tata Consulting Services, a major IT services firm.
1. CC penetration has been modest.
According to Tata, cloud applications make up only 19% of all applications of the average $1B U.S.enterprise. Financial services, IT and manufacturing firms are leading the adoption curve while health care, chemical and metals & mining companies are the bottom 3 sectors. A typical CC project begins as a line of business pilot, often implemented through a specialized CC vendor – as opposed to their strategic IT partner. This approach can be implemented relatively quick, helps demonstrate technical performance, determines ROI and garners learnings for larger enterprise-wide roll outs.
2. Adoption rates are being driven by customer-focused applications.
Based on our research, marketing, sales and service applications are capturing at least 50% of CC investments. This partially reflects the corporate importance recently placed on revenue-focused strategies as well as the availability of customer-centered and proven cloud offerings such as salesforce.com and Amazon.
Many firms continue to have security and privacy concerns about moving applications that handle sensitive data to the cloud. According to Tata, the applications least frequently shifted from on-premises computers to the cloud were those that maintained employee data (e.g., payroll), handled legal issues (e.g., legal management systems), focused on product performance (e.g., pricing and testing), and processed key customer information (e.g., customer loyalty and e-commerce transactions).
3. Leveraging the cloud can deliver measurable and real value.
In our client work, we have seen modest cloud deployments – properly designed, planned and funded – deliver significant short term business results. For example, new product and services time to market has been accelerated an average of 4.5 months versus the baseline, leading to quicker investment payouts. From a cost savings perspective, some firms have seen IT utilization rates soar over 500% when they moved some applications to the cloud. In other cases, 2 companies saved a total of $2.8M over 12 months by deferring or avoiding expensive software licenses and hardware purchases.
Many CIOs remain skeptical around attainable ROI, tracing to a number of factors. For example, it is difficult to accurately forecast savings and revenue gains without other CC comparables. In addition, some CIOs still recall the longer than expected payouts from earlier major CRM and ERP investments.
4. Other factors, in addition to cost reduction, are driving early adoption.
Although most cloud vendors emphasize cost savings as the primary benefit, other aspects of the value proposition are attracting early adopters. These include: more closely tying standardized IT resources and applications to business needs; enabling quicker IT scalability; accelerating the launch of IT-dependent products and services and; enhancing business continuity.
5. Many companies are cautious about deploying many applications to a public cloud. On the other hand, private clouds still have much appeal.
Lingering concerns remain about a public cloud’s security, privacy and total long term cost. The Tata survey found that less than 20% of U.S.firms would consider putting their most critical applications in public clouds. However, 66% of U.S.companies would consider putting core applications into more secure (and possibly more expensive) private clouds. In both scenarios, we have found that many IT managers are challenged to separate the reality (e.g., strengths, gaps) of CC from industry hype. Until the industry matures, this disconnect will continue to hinder adoption rates.
6. Organizational dynamics are a major barrier to higher cloud penetration.
A transformational IT paradigm such as CC is bound to trigger internal debates around governance (e.g., what are the new rules, policies?), control (e.g., who internally is in charge?) and IT resourcing (e.g., which functions or business units get priority?) These challenges – and not technical requirements – pose the greatest barrier to higher CC adoption in the short term.
For more information on our services and work, please visit the Quanta Consulting web site.