|Issue:||Europe II 2010|
|Topic:||Cloud computing: Future directions and management implications|
|Author:||Richard Davies and Doug Neal|
|Title:||Richard Davies, VP & Managing Director and Doug Neal, Research Fellow – Executive Programme|
|Organisation:||CSC’s Leading Edge Forum|
Richard Davies is VP and Managing Director of CSC’s Leading Edge Forum. Prior to joining the Leading Edge Forum, Mr Davies was with CSC Index, AT&T, Morse Group and Teradata where he held a variety of commercial roles. Mr Davies has a Bachelor of Arts with Honours in Business Administration from the University of Wales, and has attended the INSEAD Advanced Management Programme. Doug Neal is a Research Fellow – Executive Programme at CSC’s Leading Edge Forum. Prior to joining the Leading Edge Forum, he worked at two international management consulting firms and founded an organization specializing in systems for executive management. Doug Neal received a BA from Haverford College, conducted special studies at the Ruhr University, and has an ABD from the University of Michigan.
Cloud computing is a rapidly changing information technology – but it is not alone. It is part of an accelerating wave of change impacting business and society. The world is becoming virtual and businesses are increasingly being defined by information and how it flows. IT is steadily becoming more integral to business and the cloud will not only facilitate and accelerate this integration but will also both enable and support fundamental changes in the nature of the management model. The cloud is emerging as a rapid and powerful platform for innovation and experimentation that just about every company can afford.
The IT industry is often accused of over-promising and under-delivering. While there are many days when this may seem true, looking back over time the opposite is more the case. The extent of IT-enabled business change has been greater than most people could have imagined and we believe the pace of IT-enabled innovation will continue to accelerate. One reason for this belief is the rapid rise of cloud computing. The cloud is changing computing economics, often eliminating the need for fixed, capital investment, and enabling a more agile and variable customer environment. But each generation of computing tends to be defined by the new types of activity it enables. While the cloud is enabling many new uses, two broad but closely related classes of activity seem the most significant: social networking and unstructured information. For most of its history, computer applications have typically worked with structured information – database records, transaction processing, financial information and so on. As this structured work matures, the industry focus is shifting toward more unstructured information and relationships – such as cross-functional teams, personal networks, text messages, content management and customer co-creation. All of these areas will be facilitated by cloud computing’s emphasis on ubiquity, connectivity, standards and borderless information flows. Over time, the importance of applying technology to these unstructured domains and social interactions will rival, and perhaps even surpass, traditional data systems. Cloud computing is not the only information technology that is rapidly changing, and should not be evaluated in isolation. It is part of a ‘bow wave’ of change that includes consumerization, virtualization, mobility, social networking, end-user devices and even the environmental movement. The pace of technical, business and societal change is accelerating. As companies develop and refine their strategies, we encourage the adoption of a holistic view that cuts across the core technologies listed above and systematically thinks through their impact on the six key business areas shown: customers; products/services; competitors; partner/joint ventures; business operations; and employees. Dramatic changes in each area are likely. Consider the following: • customer sales, service, communications and brand strength are increasingly determined online; • IT can radically reshape many product and service offerings; • new competitors can emerge from any geography and expand at unprecedented speed; • partnering can now be managed globally and across your entire value chain; • technology is significantly lowering the costs of many business operations; and. • employees are becoming increasingly double-deep, integrating their particular job skills with the relevant IT know-how in an increasingly self-service manner. The last of these may have the greatest impact on the traditional enterprise IT function, which will need to shift from being a provider of IT to an enabler of IT within the firm. It is a huge cultural change that many IT groups and professionals will struggle with. There was a time not so long ago when you could reach out and touch your friends, your team, your information, and even your servers. Physical proximity was very comforting, but it is now the exception, not the rule. As we move to a world of virtual computers, virtual offices, virtual teams, virtual realities and even virtual companies, we will increasingly come to recognize that the virtual is becoming what’s ‘real’. It is the buildings, travel and physical operation centres that are becoming increasingly unnatural and unnecessary. Businesses are being increasingly defined by information and how it flows. Cloud computing will only further this trend. While cloud computing implies significant changes in the how and where of information processing, we disagree with those who say that company data centres hosted on company premises will cease to exist. Legal, regulatory and compliance issues alone are enough to ensure that this will be unlikely in the foreseeable future. Availability, concerns about becoming too dependent upon the Internet, and the sheer scale of transition are additional barriers. What we envision is a staged migration and ultimately a role inversion: Stage 1 – Use the cloud to augment IT strategy. Apply the cloud to research, development and testing environments – leave production alone. Use the cloud to improve agility, reduce opportunity costs, and speed up time to market and time to creation of value. Stage 2 – Integrate the cloud with IT operations. Use the cloud for disaster recovery. Develop applications that can be deployed as services in the public cloud. Move applications that are processing-intensive for short bursts (such as large statistical analysis tasks) to the cloud. Consider ways to decompose data for optimal internal and external storage. Stage 3 – Reverse the roles of the data centre and the cloud. Move most computation and end-user computing to the public cloud. Optimally store data, decomposed along legal, regulatory, compliance and performance lines. Make your data centre the disaster recovery site. The impact of cloud computing on IT energy consumption and green IT is also interesting. If more computing is done in the cloud, internal IT capacity and power consumption will be lower than if it has to be kept ready for the occasional peak load. Additionally, most of the mega data centres that have been built by Google, Microsoft, Amazon and others are relatively new and were designed with power availability, peak load management and energy efficiency in mind. This could emerge as an important factor if corporate energy consumption becomes a prominent political or regulatory issue. Of course, the real importance of any new information technology is measured not by how it changes data centres or IT management, but by what effect it has on the overall management of the business. The role of IT is shifting from doing things to, or for, employees to one of creating platforms and enabling employees to do it themselves. These ‘double deep’ employees will increasingly become the source of value creation within a business. IT is steadily becoming more integral to the business, and the cloud will facilitate and accelerate this integration in several important ways. From a financial point of view, cloud computing doesn’t just move IT from a capital to a variable cost model – it helps shift the entire business that way. In many firms, IT accounts for as much as half of capital spending, a figure that has always bothered business leaders and can now begin to shrink significantly. Buildings and facilities are typically the next biggest component of capital cost, and, by making businesses more virtual, cloud computing can help reduce these investments as well. The net effect is that business costs will become substantially more variable, and this will have a significant impact on both agility and resiliency. Organizationally, the traditional separation of business and IT that was characteristic of the mainframe and even the early Internet eras is now giving way to an environment led by tightly integrated business/IT teams where discussions about who is in the business and who is in IT become increasingly meaningless. Additionally, when combined with social networking technologies, the cloud will help make what we today think of as informal, undocumented social networks much more visible, influential and manageable. Over time, personal, business and customer networks may challenge and even surpass the formal organizational hierarchy as the principal structures of the modern firm. One of the big philosophical questions that topics such as cloud computing inevitably raise is: How much does this really matter? Isn’t this just another management challenge that business leaders need to address? After all, while technology has changed many aspects of doing business and requires many new skills, how much has it really changed the basic ways that organizations actually behave and make decisions? Fundamental changes in the nature of the management model are indeed happening. As business theorists have noted for many years, much of the structure of the modern firm is based on traditional communications and transaction costs, but since technology is radically reshaping both areas, it is only natural that significant organizational changes will follow. Expect to see many more social and democratic systems and experiments – for example, techniques such as prediction markets, which place more value in the aggregated knowledge of employees than in a central forecasting group. Cloud computing will both enable and support such initiatives and will be inseparable from whatever new management paradigms emerge. Early cloud vendors initially focused on consumers, small and medium sized businesses, and start-ups rather than enterprises, since enterprises are a niche market compared to consumers. However, recent strong interest by governments in the UK, USA, Canada, Holland and Japan has created a niche large enough to get the attention of the large cloud vendors. These vendors will make improvements in their cloud offerings in their pursuit of the government market that will also be attractive to enterprises. In looking at some of the key lessons we have drawn from the early cloud adopters, we are struck by the balance between direct cost savings, and improved speed and agility. These benefits provide a strong foundation for future cloud expansion, especially given the many blue-chip companies increasingly pursuing this path. Moreover, we believe it is impossible to separate these developments from the current global economic downturn and today’s heightened business uncertainties. We know from the past that recessions and their resulting cost pressures tend to make business and IT leaders more willing to pursue new computing alternatives, and that is clearly the case today. As IT budgets are slashed, perceptions of what is possible and acceptable naturally change, especially when order-of-magnitude gains are involved. Despite the recession, the need for companies to innovate and compete globally is not going away, and firms will continue to pursue advanced business/IT capabilities to maintain or improve their current market position. The cloud may be the latest hot button term in the tech sector, but its proven advantages of being a rapid and powerful platform for innovation and experimentation that just about every company can afford are just being realized. The IT industry will undoubtedly make its mark by introducing this technology to clients and making the transition as seamless as possible; however, the companies that choose to innovate with the cloud will ultimately become the determining factor in its success. l