Authored by Mike Walker, Enterprise Strategy and Architecture Chief IP Architect

In my last post in this series, “CIO Priorities for the Next 3 Years”,  we examined the future of Corporate IT, and made some predictions on what CIO priorities for the next three years might be. According to research from IDC, IBM, and Gartner, the three areas that CIOs are expected to invest most heavily in will be data, mobility, and the cloud. 

Today, we will take a closer look at the most recent and most aggressively growing of these three niches: The cloud. Our friends at Gartner estimate that, over the next five years, enterprises will likely spend about $112 billion cumulatively (no pun intended) on cloud services. Another example comes from a new survey of 600 large companies by Tata Consultancy Services. The Tata survey points out that companies in all regions expect their cloud usage to grow dramatically by 2014. For example, U.S. companies expect that 34 percent of their total applications will be cloud-based in two years. European respondents said they expect cloud applications to hit 25 percent in that period.

Clearly, the cloud is here to stay, so let’s talk about the power of the cloud. Specifically, what game changing elements does the cloud bring to businesses in the future?  

Below is how I think about it from a Strategy and an Enterprise Architecture oriented way. This should resonate with most CIOs:

• Convergence - The cloud is the ultimate power networker, bringing together the essential elements that enable both legacy and emerging technologies. The analyst community bears this out, positioning the cloud as the nerve center of the IT of the future. Gartner calls it the “CSMI Nexus,” and describes it as a junction of cloud, social, mobility and information. I agree with Gartner’s position that the future will be more integrated and connected when it comes to these four technologies, but the cloud will always be at the center, enabling all of this to occur.
• A New Financial Model – Because the cloud requires no upfront investment for hardware and software, it enables a shift from capital expenditures to operational expenditures, wherein the bulk of the costs are absorbed into a utility model, with low monthly fees for applications and services. The challenge with this is that often, the implementation time and costs significantly reduce the value of the capital expenditure, and the investment is nearly depreciated before the value can be extracted. This can cause a bit of CFO angst.
• Agility and Scalability - An agile, scalable enterprise is needed to support the rhythm of modern business—not all business cycles, after all, are static. Take for example the banking industry, which has a peak transaction volume between Thanksgiving and January 1; or healthcare and insurance, which are driven respectively by staggered enrollment periods and policy renewals. On-premises systems present a high barrier for agility, as they require sophisticated virtualization software, and significant investment in hardware and data communication equipment. Conversely, the cloud offers much greater flexibility via an on-demand environment that makes it easy to add more capacity as businesses evolve.
• Streamlined IT – From deployment and management through administration and support, the cloud may deliver the biggest gifts to IT departments. Getting up and running is almost a no-brainer, often requiring nothing more than a standard internet connection. Standardizing PC environments and managing system and desktop updates are all made easier using the cloud. Cloud-based management also help drive down the cost of support. With a cloud-based system, it’s easier to proactively detect and manage issues to reduce help-desk calls, and to ensure that all managed PCs have the latest security updates using online distribution and management.
• Productivity – The gains in productivity that can be garnered with the cloud are invaluable, given that more and more organizations have global workforces these days. Using the cloud to give users all the latest productivity tools is only the beginning. When employees have access to office desktops, files, and applications any time, from any location, they can get more done, faster—and even physically dispersed teams can collaborate more easily. 

So what does this all mean for traditional, on-premises systems? The IBM Tech Trends Survey reports that 91% of IT professionals are anticipating that cloud will completely overtake on-premises computing in the next 5 years. Essentially, the challenge for on-premises systems with the advent of the cloud is their essential lack of innovation in the market. When faced with the explosive growth in the cloud paradigm that offers businesses more choice, extended capabilities, and exciting new emerging technologies, on-premises simply can’t compete. 

The Financial Transition to the Cloud

From a financial aspect, it seems like a straightforward move: Operating primarily with a “pay-to-play” model, the cloud appears to be both cutting edge and cost-effective. But is it really that simple? 

The truth is, most companies significantly underestimate the scope of change required to establish cloud services until it’s too late. In the traditional model, companies buy technology from a vendor as a capital investment, and continue to invest in maintaining and servicing it over time. With the cloud being a service, however, the financial model should be treated more like a utility, requiring the reallocation of budget from capital expenses into operating expenses.  

We also have to consider that this monetization model could change over time. A recent in the Harvard Business Review Blog Network entitled, “The Truth About Cloud Economics” it talks about a potential and very valid shift in the way cloud providers will monetize their services. Below is the conclusion that Drue Reeves and Daryl Plummer make about this shift:

So, to combat this kind of risk, cloud providers will enter into what are called "enterprise agreements," where the two parties can define the parameters of the relationship based on mutual risk sharing. Essentially, this ensures that each party has a vested interest in the financial success of the other party. There's risk, but there's also reward for better service.

In the end, providers that deliver better service and better guarantees will ask for — and get — more money. Consumers, on the other hand, will get the flexibility of "pay-as-you-go." As long as they can figure out a way to pay for it.

http://blogs.hbr.org/cs/2012/04/the_truth_about_cloud_economic.html 

What I think this means is that we should consider the value and risk for cloud providers as well as ourselves when making these decisions. The future financial viability for our cloud providers are important in this equation as well. Simply put, if they are not making money in the cloud business, there is no reason to have a cloud business.

From a CFO perspective, they will have a bone to pick, pointing out that this shift can present challenges when a company must still also pay to maintain legacy infrastructure. And if the new cloud services aren’t replacing existing services, new lines of expenditure must be created, which is rarely a smooth process.

Governance is also an issue to consider. With the ease of cloud deployment, it’s important to consider the ramifications of being able to add services quickly as a company grows and needs change. Having a predictable cloud requisition/governance strategy in place can go a long way toward making future service acquisitions easy. 

Making the right choice

So now that we have identified some of the significant financial issues around the cloud, how do you determine what’s right for your organization?

1. Rationalize your strategy. Understand where your business wants to go, what is important, and why. In this process, you need to distill the business and IT strategies to identify cloud-ready capabilities that align to strategy, and provide the maximum amount of value with minimal risk to the business.
2. Get clear on capabilities. Understand what business capabilities will be a good fit for the cloud through a valuation process. This way, you’ll understand what investments should go to the cloud through a rigorous evaluation of the prioritized set of opportunities identified through strategy rationalization. Through this valuation an assessment of the business and technology capabilities will uncover the value and risk that each capability would bring the company if ported to the cloud.
3. Make a plan. Create a business transformation plan that will prioritize investment opportunities, balanced across the enterprise and integrated into a transformation roadmap. 

Below is a simple three phased approach to making a top down, business value driven decision on which investments to port to the cloud. It’s important that we take this value driven approach to ensure that we don’t make the mistakes we made with other very large technology initiatives such as SOA, CRM or ERP. We should focus on the value add capabilities first to realize value sooner, more reliably and predictably. 

We want to take a top-down business value driven approach to process, analyze and refine. This in turn will allow us to describe the business capabilities and to match those with cloud technologies enabling maps to the business-driven strategy that cloud services support. Entering into cloud assessments at a lower level can diminish the level of business impact—and the amount of value—that an organization will realize with the cloud, as seen below.

This picture tells is that the lower in the “stack” we go the lower the overall business value we will realize. This is critical for decision makers to understand as we make decision to go to the cloud.

By respecting both the business and IT dimensions of an organization, and balancing value and risk to identify cloud opportunities while mitigating threats, companies can be assured that the cloud solutions chosen will be flexible, adaptable, and reusable—and just the right fit for their needs.

So that’s it for today. Next time, I’m going to dig a little bit deeper, and talk about how we can balance value and risk through effective cloud strategy.