A prediction: The business case for the Cloud will mirror the case for outsourcing.
That outsourcing is the right answer has been a constant. What it’s the answer to? That continues to evolve.
We’re already starting to see this with the Cloud. Makes sense, I guess, as the Cloud is the next generation of data-center outsourcing.
Now the Cloud does offer a couple of very major advantages over the previous versions. First, there’s the absence of opaque financial games. Cloud services come at standard prices. The popular practice of using lease/buy-back arrangements and other, even more financial-derivative-like complexities to front-end-load the benefits of a data-center outsource while back-end-loading the costs aren’t part of the Cloudiverse. Nor are expensive early termination penalties.
So Cloud computing does deliver the flexibility companies were supposed to get from data center outsources, but rarely did because these were, typically, ten-year contracts that were (and are) expensive to restructure once signed.
Nonetheless, Cloud Business Case v1.0 — that the Cloud will save money and lots of it — is nearing the end of its useful life. It won’t, and, as was the case with previous forms of outsourcing, the bigger the company the worse the financial case gets.
But that’s okay, because Cloud Business Case v2.0 is already shipping. Two different CIOs explained it to me. Even if they don’t save a dime … even if they have to pay more, in fact … putting their email into the Cloud (both used this example) is worth it because that means they don’t have to worry about it anymore.
Fair’s fair. Two isn’t exactly a statistically significant sample, and just because a couple of guys said something doesn’t make it a trend.
What makes it a trend is that these are the exact same words I’ve heard for decades when the subject was outsourcing: Put the responsibility in another company’s hands, sign a contract, and you don’t have to worry about it anymore.
With traditional outsourcing, this expectation was simply absurd. You have fewer tools at your disposal when managing an account manager backed by a ten-year contract that spells out every in-scope responsibility than when you’re managing a data center manager who’s an employee reporting to you on the organizational chart.
With a Cloud service, you don’t even have an account manager, at least, not in the same up-close-and-personal sense you did with an outsource.
Instead you have a service level agreement with a penalty clause. Maybe you have tools to let you monitor service level conformance, too. Blunt instruments, even when compared to working with an account manager; much blunter than an employee who is on-site and taking responsibility.
Cloud Business Case 2.0, then, is that what the Cloud really gives you is professional management so you don’t have to worry about it. It’s a convincing-sounding case.
Until you scratch beneath the surface, because if something goes wrong and you staff the function internally, you have an employee responsible for troubleshooting your multi-vendor environment. If you take it to the Cloud, the opportunities for mutual finger-pointing and blame-avoidance are abundant. As in, “Our servers were up. The problem must be with either your ISP, your firewall, or your internal networks.”
CIOs don’t get paid big bucks for charming naiveté. Whether you go to the Cloud, sign an outsourcing contract, or hire an employee, you’re still accountable. It’s still your worry.
Maybe when Cloud Business Case 2.0 starts to lose popularity we’ll finally hear the business case that should have been v0.9: What you can do with the Cloud that’s new, interesting, and seriously cool.
Compare:
When PCs first started leaking into the enterprise, an enormous wave of innovation leaked in with them, in the form of new, cheap software that did things nobody thought of doing before, and in the form of new, cheap tools that let employees figure out things they could do for themselves that nobody had been able to do before.
The World Wide Web brought the same thing — an enormous wave of innovation, this time in the form of tools, means and styles of communicating with customers, and whole new ways of doing business that had never existed before.
We’ve added smartphones and tablets. Browse the App Stores. Look at everything you can buy for ten bucks or less. Sure, there’s a lot that’s well worth ignoring. But there are also plenty of cheap, innovative apps that let people do nifty stuff.
The Cloud? It’s all about doing pretty much the same things, in pretty much the same way, only this way you pay by the drink.
It’s like the Dos Equis guy, but in reverse — the least interesting sales pitch in the world.
Bob:
It’s even worse — the cloud, for we children of the 1960’s is just timesharing 2.0, with no sense of losing control to “the Man.” It’s one thing to backup your stuff to “the cloud.” It’s a completely different (and to some of us stupid) thing to place all your stuff/data/programs Only in the cloud.
And cloud vendors who act as if this concern does not even exist are even worse than clueless.
Rollie Cole PhD,JD
Founder, Fertile Ground for Startups and Small Firms
Helping Build Environments for Multiple Startups and Small Firms to Thrive
I think you’re being generous! In my opinion, any business giving up any control of its own assets is heading for a downward spiral. Just think of the millions of users last week who lost access to their cloud-stored data, because their company was accused (accused, mind you, not found guilty in a court of law) of copyright violation.
Cloud operations also introduce several new possible points of failure. I’ve never understood how this can be considered an improvement! I didn’t lose power in the recent winter storm in Seattle, but I did lose Internet access for 2 days. If I worked in the cloud, I’d have been out of business.
There is one real advantage, which is irrelevant to very large companies, but very important to most: you don’t have to worry about load spikes. If your viral marketing really goes viral, you need a lot of capacity in a very short time. If you build for it internally and you don’t get it, you may be out of business. And since you probably won’t get it, you shouldn’t build for it. But if Oprah mentions you on the air, even if it is someone else’s show, your web site will probably crash, and maybe your other self managed systems with it. If you use a major cloud provider, you have a good chance of staying up.
I agree about the advantage. Not sure it applies to most companies, though. I’m not even sure how to collect the data to figure it out.
Hi Bob,
I am puzzled by the value that CIOs see in the cloud. There might be some element of reducing personnel and/or capital employed. Let someone else do all the dirty work of upgrading operating systems and hardware spread across a larger base. Those seem like marginal, but perhaps very real benefits to the CIOs.
On the other hand, as an end user, I do see the appeal. End users link tools like dropBax, evernote, wikipedia, google docs and gmail with the cloud. Many companies do not have similar tools available to employees (at least not easily accessible).
Of course, the dragging their feet companies will probably block access anyway…
You are SO …. SO… wrong… because the 2 page 3 bullet powerpoints say all is well…. therefore all is well.
Agree with tony k – for small business the collaboration that occurs in the cloud is priceless. No CIO needed for google docs or Dropbox.
Even when you know exactly what you want and can nail down the service provider, cloud (or any other form of outsourcing) potentially means that you’re still handing over your crown jewels to a third party. A true story:
A large multinational was looking to outsource its IT infrastructure. We got the usual suspects in, but one quote was far lower than the others. As head of IT for EMEA, I doubted that the figures they were providing could be achieved. We sat down with their CEO and he assured us they could meet the price and make a profit. We had some very good procurement guys who drew up a watertight contract defining our service requirements. I was still unconvinced and told our CIO: “you do realise that once we’ve handed over all our infrastructure and staff, they’ll have our balls in a vice”. I was told in no uncertain terms to shut up and that if I voiced my concerns to anyone else it would be ‘career limiting’.
After a couple of years they announced that they couldn’t make any money on the existing contract terms and they were unilaterally withdrawing support for any further changes. We indicated the watertight contract and told them we’d pointed this out at the beginning. They said (in effect): “sue us”. Of course, suing them would have taken years (and cost untold millions) and meanwhile we couldn’t make any IT changes. Replacing them would also have taken time and a substantially increased cost. Long story short – there’s a new contract on ‘enhanced’ terms. The senior management responsible have been promoted and/or moved on to pastures new (aka ‘the next sucker’). None of this has been made public or could be ascertained from published information. I’m sure it has happened innumerable times before and will happen again.
Superb column Bob and builds nicely on last week.
Email is a great example. Has anyone ever had an email failure? What is the tolerance level for it? When Microsoft had cloud-based exchange failures for 3 days, how happy were CEOs? Our job as CIOs is redundancy and providing solid services to our organizations. Making it someone else’s problem hardly qualifies.
I’m also tired of what is now considered the cloud. Wikipedia is not the cloud, it’s a website. Gmail existed long before anyone claimed there was a cloud, it’s a website that does (mostly consumer) email.
The cloud folks continue to change what the cloud is. I look at it as the core infrastructure and maybe software as a service if I am in a good mood.
How bad has the term “cloud” become. I have learned by home has a DECA cloud in it. Yes, that is connected DirecTV receivers…
Good piece, Bob.
The way I see it, a lot of CIOs are putting extraordinary focus on cutting costs (probably due to their executive incentive plans).
These incentives can cause CIOs to not fully consider the risks to the business and the lack of quality/reliability/value that cheap resources whether it is cloud computing, offshoring, outsourcing or investing in any new paradigm or technology.
CIOs need to seek value, not cheap and their compensation plans should reflect that.
Quentin’s post is a good example. I have a excellent guess what company that was and I wouldn’t at all be surprised if it were the company for which I work.
We had an outsourcing account which initially had US and Canadian people to do the takeover, which was then transitioned to offshore cheap resources. Quality sucked, reliability and availability awful.
Our company got fired, but the really great thing was that the CIO also got his sorry backside fired too. Which is as it should be – no FUMU allowed.
To bring up a parallel – it is now known that compensation schemes for executives of several major banks were set to maximize revenue, which pushed the execs to drastically lower mortgage lending standards. The execs got their huge bonuses, but a small recession kicked off defaults which snowballed into the recent economic crash.
So, if CIOs are heavily influenced to primarily cut costs at the expense of everything else, failure of IT is not only predictable, it’s inevitable.
Follow the money.
In some companies, at least, it was a bit more subtle than just “cut costs.” A point that should have been obvious to all concerned but wasn’t is that “scalable” and “flexible” are opposites … trade-offs.
Businesses that had invested in infrastructure (high CapEx) to achieve scalability (low incremental cost = lower OpEx) discovered they couldn’t easily shed costs when the downturn meant they didn’t need the scale anymore.
And flexibility is one legitimate benefit of the Cloud.
Bob,
Another great article and your insight is of great influence for my strategic position. In addition, the comments are spot-on too!