© THINKSTOCKCOVER STORY
By Mark A. Goodburn and Steve Hill
loud is not the future — it’s now. It’s an enabling force for business evolution that goes beyond technology, allowing organizations to more efficiently and effectively reengineer the company’s corporate strategy. For transformative power, the new model is blue — as in “sky.”
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The cloud has reached an important inflection point that is impacting corporate strategy and changing business models. Organizations that recognize and are able to effec- tively manage risks around cloud will create a sustainable competi- tive advantage.Years of technological advances have allowed the Internet to become a viable backbone for “virtualized”
technology. The information tech- nology community is well aware of this shift and has largely driven the discussion about cloud and its impact on IT.
Less prevalent has been discus- sion about the much broader impact cloud is beginning to have on busi- ness. Make no mistake about it, with the virtualization of technolo- gy comes the virtualization of busi- ness applications, processes and services. In effect, it means the vir- tualization of an organization.
This shift is profound and is poised to have a transformational impact on business models and core drivers of competitive differentiation.
The cloud allows large organiza- tions to move away from managing their own data centers to focusing their attention and their resources —
financial and human — on their core competencies. Smaller players see the dynamic implications of a future unrestrained by the need to build extensive IT infrastructure.
Cloud is bringing about transfor- mational change in value chains, enabling companies to respond much more effectively to customer demand. Cloud networks are evolv- ing, linking companies through complex, multiparty processes into single, virtual organizations.
As with any transformational shift, technical and operational hur- dles need to be overcome. Data security, privacy and a host of other issues must be fully considered, and the right balance between these risks and performance must be achieved.
Still, at a time of economic recov- ery, when organizations are seeking new paths to growth, both business and government leaders must seize this ideal moment to think hard about the possibilities a cloud oper- ating environment presents.
What is ‘Cloud?’
Cloud is a business imperative. It is more than just virtualized technolo- gy. It’s an amalgamation of many
years of technology innovations and development that has evolved into a model for enabling conven- ient, on-demand access to a shared pool of virtual computing resources, including networks, servers, storage, applications and services.
Cloud includes business services (applications) deployed and main-
tained over the Internet on a pay-as- you-go basis. It provides agility like never before, taking people and latency out of systems, thus allow- ing companies to adopt new sys- tems in days or weeks, rather than several months or years.
Cloud service providers general- ly use one of three cloud service models:
Software as a Service (Saas) — business operations over a network;
Platform as a Service (PaaS) — deploy customer-created applica- tions to a cloud; or
Infrastructure as a Service (IaaS)
— rent processing, storage, network and other computing resources.
Cloud deployment models for organizations moving to cloud envi- ronments include:
Private — a “closed” environ-
ment for a single organization host- ed by a third party;
Public — a shared environment used by many organizations; or
Community — perhaps the most interesting and potentially transfor- mational of the three, which involves an environment shared by many organizations in particular industries, by geography, along
similar supply chains or otherwise connected.
In the community cloud model, agreed-upon rules establish coopera- tion between suppliers, providers, cus- tomers and the value chain that can become paradoxically business-en- abling. This is where the rubber really meets the road, and provides oppor- tunities for business models to change.
It’s when involvement becomes not just a competitive advantage for those who join but a competitive imperative for similar organizations that hope to compete over the long term.
What’s Driving Cloud Adoption?
Shifting business models and the numerous cloud alternatives avail- able to organizations are accelerat- ing the adoption curve. Today, through business process outsourc- ing, a company can leverage an
almost unlimited range of resources and business processes from any location. The cloud operates on a similar principle and has much the same advantages. Like other forms of business virtualization, it offers large-business capabilities and processes at relatively low cost.
Cloud allows a start-up organi- zation to access the same technolo- gy infrastructure and support as a Fortune 500 company. It permits a company to access all its information technology services as if it were plugging in to the electricity grid, pay- ing for exactly what is need- ed, when it is needed.
The comparison between the advent of the cloud and the development of the elec- tric utility grid is worth exploring. In the early years of industrialization, if power was needed to run a busi- ness — whether water or steam — the business had to locate near the power source.
Then, in the early 20th century, came the utility grid.
Businesses could now oper- ate from almost any location, tapping into that virtual power source only when it was needed.
Cloud similarly allows technolo- gy to be accessed as a utility, creating a lean and mean virtual enterprise positioned wherever customers need to be served in the marketplace. This means industries highly dependent on maintaining huge IT resources to accommodate seasonal spikes in activity — the retail industry, for example — no longer have to have their IT servers sitting idle year- round waiting for the run-up to the December holiday season.
That is the cloud’s promise to business. This ability to “plug in” to IT services via the cloud opens up many, often transformational oppor- tunities, well beyond technology efficiencies and cost savings. Among the opportunities:
n Cloud makes it easier to deploy solutions or to combine enabling
technologies in response to changing market needs. Cloud environments often have thousands of applica- tions built to quickly meet specific needs, and many of these applica- tions are built to be integrated.
There are also many applications that companies can “try before they buy,” letting them be more experi- mental in their approach to solving complex problems.
n Cloud increases speed to market, reducing or eliminating information latency, a devilish issue common to conventional value chains. With no latency, companies can reduce prod- uct development cycle times and rethink key processes, especially in planning, fulfillment and promotions.
n Cloud platforms make it possible for organizations to leverage the collective mind-share and develop- ment efforts of the extended cloud community. In this way, everybody benefits from advances made by others in the cloud.
n Cloud cuts IT costs and funda- mentally changes how IT services are funded, shifting IT spending from a capital expense to an opera- tional expense. This move from cap- ital expenditures (CAPEX) to opera- tional expenditures (OPEX), from a fixed cost to a subscription-based model, can have significant implica- tions on procurement.
n Cloud has proven itself an effec- tive tactic for achieving greater effi- ciency in applications ranging from email to photo storage to Web host- ing. Consider that those who use an email service, such as Gmail, are uti- lizing a cloud service.
In just the last year, many public and private organizations have inte- grated with cloud operating environ- ments, changing dramatically the way their technology is deployed, accessed and managed. For example:
n A large American city, in one of the most extensive migrations of its kind, is shifting 34,000 employees from an onsite email system to Google’s cloud-based email system, making a much-needed cut in the city’s operating expenses and pro-
viding strategic flexibility for its planning.
n The U.S. federal government launched a cloud computing store- front (www.apps.gov) that provides agencies with one-stop shopping for cloud services. In addition, it has recently launched a program to pro- mote cloud standards in areas like security and data portability.
n Two major retailers have success- fully piloted cloud-based, point-of- sale replenishment solutions to con- nect the store shelf to their upstream supply chains. These private supply networks allow suppliers, trans- portation carriers and retailers to simultaneously operate on a single platform to balance supply and demand from shelf to manufactur- ing. Results have been significant, with chain-wide inventory reduc- tions of near 50 percent, as well as a 30-percent improvement in out-of- stock performance.
nA large technology company wanted to move to a demand-driv- en supply chain and needed a way to quickly connect all of its cus- tomers, suppliers and manufactur- ing facilities in one “lean rope.” The company opted for a cloud supply chain platform and was up and run- ning its core processes across all partners in less than six months.
The platform has helped reduce overhead by 50 percent, doubled inventory turns and improved replenishment cycle times by more than 50 percent.
Social Connectivity
‘Virtualization of a Nation’
In addition to business process improvement and cost savings, cloud also enables people to be con- nected to governments, businesses and each other in new ways. This connectivity, linking customers and with them their data, provides opportunities for driving new levels of intelligence around consumption.
This is especially true in Asia, where companies and governments are making huge investments in the cloud. One major analyst projects total spending of about $55 billion
loud allows technology to be
accessed as a utility, creating a lean and mean virtual enterprise positioned wherever customers need to be served in the marketplace.
This ability to “plug in”
to IT services opens
up transformational
opportunities.
between now and 2014 — a 27-per- cent growth rate. By comparison, according to another analyst, spending growth in the West is now about 2.5 percent.
In China, cloud is seen as a solu- tion to providing cost-effective Internet services to the masses, both businesses and consumers. The vir- tualized nature of cloud is particu- larly appealing as an opportunity to leapfrog some of the IT infrastruc- ture hurdles China faces in its
efforts to bring computing to its bil- lion-plus population.
With the majority of the China population not having access to per- sonal computer environments, the use of applications targeted for mobile use would allow greater access to basic services such as mes- saging and information. With more than 800 million mobile phones already in use in China, analysts predict that by 2015 the smart phone market in China will include 50 per- cent of all mobile phone users in the nation supporting this strategy.
China’s ambitious attempt at the
“virtualization of a nation” has been bolstered by significant investments from western technology leaders
such as Hewlett-Packard Co., IBM Corp., Microsoft Corp. and Oracle Corp. But the bulk of investment is coming from China’s domestic mar- ket, where China Mobile is invest- ing $58 billion over three years — a level of investment and related infrastructure development outpac- ing those in the West.
Fueled partly by the need to improve legacy communications infrastructure and due to the sheer vastness of the China nation, this
level of investment addresses the full stack of technology and man- agement associated with delivering a large-scale cloud infrastructure.
In addition, China’s domestic software development industry sees the cloud as a route to markets it has not yet been able to reach. By hav- ing access to enterprise-ready envi- ronments without the set-up costs usually associated with such efforts, small- and medium-sized software providers will be able to offer their applications and services to the increasing number of multinational corporations looking to invest in the region.
Though it’s unlikely that China will reach the market values of the
s with any
transformational shift, technical and operational hurdles need to be overcome:
Data security, privacy and a host of other issues must be fully considered, and the right balance between these risks and
performance must
be achieved.
U.S. in the short term, some suggest it is possible that China will pro- duce software service providers equal in scale to Salesforce.com within five years.
Cloud Requires Strategic Business Approach
When managed properly, cloud should improve the risk profile of a project. Cloud technologies generally take less time to deploy than tradi- tional technologies, and process
design is generally more iterative and more efficient as well. Lower costs, combined with quicker time to value, generally equals lower risk — espe- cially if vendor incentives are careful- ly aligned and managed and service- level agreements tightly enforced.
However, change on this scale — often involving core assets — naturally requires a hard look at the technology and operational risks organizations will continue to face as they adapt to a cloud operating environment.
First, it’s important to recognize that even a relatively small shift to the cloud is the beginning of a large strategic change for an organiza- tion. Companies making the shift need a governance model and strat-
egy for evaluating, selecting and deploying cloud technologies, no matter how “insignificant” those technologies appear to be. It also means, from the outset, the organi- zation’s board of directors and sen- ior leadership must be involved in the decision-making process.
A company that shifts IT servic- es and other processes to a cloud environment is, in essence, redesigning its infrastructure. At what point does this process reach
an inflection point, making it “good business” to transition from exist- ing infrastructure to a cloud-based infrastructure? What does that mean to the larger business model and strategy?
There is also a large change-man- agement dimension, as a move to cloud will invariably bring about shifts in corporate culture.
Cloud also has significant tax implications. The physical location of a company’s information can come into play, as can the location of a company’s servers. The exact flow of a transaction will need to be monitored to determine which gov- ernment entities have taxing authority over the transaction.
At the state and local level, cloud service providers must understand fully their sales and use tax collec- tion responsibilities. If not addressed, these issues could expose the businesses to significant sales/use tax liabilities.
Maintaining data security and privacy is of course a huge consid- eration as organizations move to the cloud. Cloud owners and service providers will have unprecedented responsibilities and control of vast amounts of data, resulting in the need for robust new data security and privacy proto- cols, policies and service delivery models.
Companies utilizing cloud internationally will also need to focus on regulatory compliance issues. Data pri- vacy is a serious issue in Europe, for example, and in the United States, the Patriot Act makes privacy an impor- tant concern as well.
Each of these issues present varying levels of risk for organizations moving to the cloud, and the real challenge will be in making a well man- aged transition so an organization realizes the full benefits, while retaining opti- mal transparency, compliance and assurance controls.
These and other matters around cloud require deep consid- eration among an organization’s technology and business leaders.
Ultimately, cloud is about corporate strategy and business leadership.
Organizations that understand how to manage the risks and take advantage of business virtualization will create sustainable competitive advantage, excel at creating new types of value chains and better leverage the value of globalization.
MARK A. GOODBURN (mgoodburn@
kpmg.com) is vice chairman and head of Advisory for KPMG LLP, based in New York, and Steve Hill ([email protected]) is KPMG LLP’s National Innovation leader, based in Dallas.