Cloud computing – where users access services via the internet – is changing not just the world of personal computing with popular services such as Dropbox, Gmail and iCloud, but also the world of business.
US-based technology advice firm Forrester Research estimates the total global cloud computing market was US$61 billion in 2012, and will grow to US$241 billion in 2020.
While businesses outsourcing their IT services is nothing new, for Daniel Schlagwein, a lecturer in information systems at the Australian School of Business (ASB), the move to cloud computing represents a generational shift in how companies access IT.
“Outsourcing is mainly a one-to-one service relationship,” says Schlagwein. “Cloud providers such as Amazon or Microsoft, however, are running services for thousands of clients.”
Typically, cloud computing has three advantages over traditional outsourcing. It can provide larger capacity, the standardisation of services and interfaces, and the ability to access different locations around the world as an organisation’s computing requirements change.
And according to analysis of recent research by Schlagwein and Alan Thorogood at the ASB, together with Leslie P. Willcocks from the London School of Economics and Social Sciences, cloud computing gives businesses the potential to move away from a fixed-cost model for their IT services, to a flexible pay-as-you-go model.
Shifting standards
In a study of the Commonwealth Bank of Australia, Schlagwein and his colleagues have found the bank has reduced its IT running costs by almost 40% by effectively turning the client-provider relationship on its head.
In the traditional model of cloud computing, clients adopt the standards of the provider. Commonwealth Bank, however, has insisted that its providers abide by client-side or industry standards.
This allows the bank to avoid being locked into a relationship with a single provider, and permits it to dynamically allocate its requirements across many cloud infrastructure providers, on the basis of minimising cost.
“The collective interest of cloud providers would be to resist this move towards particular client-driven common standards,” says Schlagwein, “but they are in competition with each other and were willing to work with a large client such as Commonwealth Bank.” The bank has chosen not to engage providers, unless they agree to this model.
By way of an analogy, if we think of IT services as cooking a meal, then in-house services are like cooking for yourself, outsourcing is like paying a neighbour to cook for you, and cloud computing is like going to a fast-food restaurant with a limited standardised menu. But what Commonwealth Bank has done is to tell the restaurant what should be on the menu.
The bank's new model affords the company savings, not just in processing costs, but also reduces the time-to-market for applications and services.
“With this cloud computing model, the time required for technical set-up is substantially reduced or even removed,” says Schlagwein. “What might take two weeks can be done at the press of a button.”
Schlagwein considers Commonwealth Bank to be “one the most progressive firms worldwide in terms of cloud model implementation, especially in the banking sector”.
“By removing the pre-commitment to infrastructure, you allocate costs at the time revenue is generated.”
Pay-as-you-go
Thorogood is a senior visiting fellow at ASB's school of information systems, technology and management, and runs his own consultancy business.
For him, the key to pay-as-you-go cloud computing is that it not only helps reduce costs but also simplifies decision-making within an organisation.
“When you put in a new piece of infrastructure – like a major upgrade to a network – you have to justify this in terms of net present value (NPV). But the problem is, you can’t,” Thorogood says.
“Management ends up struggling with the business case to fit the context. They either bundle it in with other projects which are NPV positive, or put a ‘tax’ on other projects.”
Thorogood illustrates these contrasting approaches with the example of a supermarket chain opening a new store.
In the first case, the board would be presented with a plan for a giant project, such as 10 store openings – and one network upgrade.
In the second case, the CIO would add in some of the costs of the network upgrade to the cost of one store opening, thus raising the hurdle for that business case.
Pay-as-you-go cloud computing solves the problem of how to govern this process, by avoiding buying big chunks of network in advance – rather, only buying it when you need it.
“By removing the pre-commitment to infrastructure, you allocate costs at the time revenue is generated,” says Thorogood. “Decision-making governance becomes natural, with ownership of the business case residing with the correct management team.”
According to Thorogood, the move towards pay-as-you go cloud computing for large banks and other financial service providers is easily justified on the basis of cost. However, smaller businesses, such as those employing 10 or less people working in IT, can make a business case for this on the grounds of flexibility.
“These smaller kinds of firms can now access world-class IT – the same calibre as accessed by Commonwealth Bank – by accessing through the cloud. And it’s so much more reliable than having a server under your desk, gathering dust,” Thorogood says.
“From a management perspective, [pay-as-you-go cloud computing] is the most exciting thing to come out of technology in a long time. Management is largely about decision-making, and this makes decisions so much simpler.”
Scale-Up flexibility
Kim Loane is the managing director, Asia-Pacific technology consulting and infrastructure services, for management consultants Accenture. The move towards cloud computing is something that Accenture is advocating to its clients.
“Cloud computing is not a fad or a trend,” says Loane. “It’s a reality, and technology suppliers are redefining what they are offering to support this new reality.”
Application software of all types is increasingly available in a cloud form. From enterprise resource planning, through customer relationship management, to office productivity applications, there are cloud options available.
“As a consulting organisation, it’s very unusual for us to meet a CIO that is not already aware of the advantages of cloud computing, in terms of scalability, cost and flexibility.”
For a company whose core business is, say, taking bets on horse races, there are obvious attractions to being able to flexibly scale up their computing in the lead up to a big race.
Risks, issues and pitfalls
Loane points out that, as with any change, the move towards cloud computing for businesses involves risks, issues, and pitfalls.
For government departments or highly regulated industries, there are sovereign data issues around what kind of data can legally be held offshore. These kinds of organisations can still benefit from the advantages of cloud computing, albeit with restrictions on where their data is held.
Beyond issues surrounding data, organisations need to ask themselves the question – which type of applications supporting your core business are you happy to have in the cloud? Much of Loane’s work in the area – and what companies struggle with – revolves around discussions about exactly what they are comfortable with putting in the cloud.
The reliability of cloud computing remains an issue, and the negotiation of service level agreements are an important consideration. But Loane believes that over time, this will diminish as a concern.
“At one time, companies generated their own power supply. But now they are generally comfortable with others supplying it for them,” he says.
A larger concern is preventing unwanted parties gaining access to data – no doubt related to wider worries in society about fraud and identity theft.
“Ultimately, though,” says Loane, “the benefits of cloud always boils down to cost savings. Another driver – one layer up – is the time it takes to do something.”
When Loane gives presentations on the subject, the slide that frequently attracts the most attention from clients considering cloud infrastructure is the one showing the time savings that can be achieved by adopting cloud computing – typically, provisioning times move from weeks and months to hours and days.
“The greatest challenge for businesses is how you cost-effectively migrate from your as-is world to your wonderful cloud world,” Loane says.
