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The Cloud in the Enterprise: Big Switch or Little Niche?

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Cloud computing — where mega-data centers serve up webmail, search results, unified communications, or computing and storage for a fee — is top of mind for enterprise CIOs these days. Ultimately, however, the future of cloud adoption will depend less on the technology involved and more on strategic and economic factors.

On the one hand, Nick Carr, author of “The Big Switch,” posits that all computing will move to the cloud, just as electricity — another essential utility — did a century ago. As Carr explains, enterprises in the early industrial age grew productivity by utilizing locally generated mechanical power from steam engines and waterwheels, delivered over the local area networks of the time: belts and gears. As the age of electricity dawned, these were upgraded to premises-based electrical generators — so-called dynamos — which then “moved to the cloud” as power generation shifted to hyper-scale, location-independent, metered, pay-per-use, on-demand services: electric utilities. Carr’s prediction appears to be unfolding, given that some of the largest cloud service providers have already surpassed the billion dollar-milestone.

On the other hand, at least one tech industry luminary has called the cloud “complete gibberish,” and one well-respected consulting group is claiming that the cloud has risen to a “peak of inflated expectations” while another has found real adoption of infrastructure-as-a-service to be lower than expected. And Carr himself does admit that “all historical models and analogies have their limits.”

So will enterprise cloud computing represent The Big Switch, a dimmer switch or a little niche? At the GigaOM Network’s annual Structure conference in June, I’ll be moderating a distinguished panel that will look at this issue in depth, consisting of Will Forrest, a partner at McKinsey & Company and author of the provocative report “Clearing the Air on Cloud Computing;” James Staten, principal analyst at Forrester Research and specialist in public and private cloud computing; and John Hagel, director and co-chairman of Deloitte Consulting’s Center for the Edge, author and World Economic Forum fellow. We may not all agree, but the discussion should be enlightening, since ultimately, enterprise decisions and architectures will be based on a few key factors:

Drivers and Barriers: These can include enhanced flexibility and agility from on-demand, scalable resources; reduced total cost via optimal hybrid solutions; accelerated time-to-market via ready-to-ware applications and innovation platforms; application architecture constraints and requirements; security and more.

Development and Deployment Options: Solutions can be built in-house from scratch; use pre-built software on owned, dedicated infrastructure; go all cloud; be outsourced or be the result of a combination of such approaches.

Metrics and Models: A true apples-to-apples comparison of financials, risk, compliance, customer experience and competitiveness is tricky, because among the factors that need to be taken into account are the roles of sunk costs and depreciated assets, migration costs, marginal capital investments or ancillary costs required to implement and transition to robust solutions, power, cooling, space, management, administration, certification and training. Stair-step effects — where provisioning of new capacity is done in large blocks which at first are underutilized, or the need for one additional quantum of compute capacity drives construction of an entire new data center — complicate things further.

Trends: Differences between enterprise and cloud cost structures will shift over time based on competitive intensity, scale economies and learning curve effects, as well as technology and best practices diffusion. There is a widespread belief that larger cloud providers have dramatic scale economies, but these may be illusory or unsustainable, since the same building blocks — servers, storage, automation tools, even containerized data centers — and potentially the same options (such as optimal site location) may be available to both enterprises and cloud providers.

Demand: Variable and unpredictable customer demand — due to macroeconomic factors, bullwhip effects in the supply chain, and fads and floods — impact the total cost/benefit equation, while the bottom-line benefits of pay-per-use services vary based on demand curve differences.

Consider all of these factors together. Nick Carr’s predictions will likely be realized in cases where a public cloud offers compelling cost advantages, enhanced flexibility, improved user experience and reduced risk. On the other hand, if there is a high degree of technology diffusion for cloud enablers such as service automation management, limited cost differentials between “make” and “buy,” and relatively flat demand, one might project a preference for internal solutions, comprising virtualized, automated, standardized enterprise data centers.

It may be overly simplistic to conclude that IT will recapitulate the path of the last century of electricity; its evolution is likely to be more far more nuanced. Which is why it’s important to understand the types of models that have already been proven in the competitive marketplace of evolving cloud offers — and the underlying factors that have caused these successes — in order to see more clearly what the future may hold. Hope to see you at Structure 2010.

14 Responses to “The Cloud in the Enterprise: Big Switch or Little Niche?”

  1. Hi Joe,

    I’m looking forward to the debate on your panel and the clash of perspectives. I for one agree that the evolution of cloud computing will be nuanced, but tend to favor the opinion that cloud computing will become the standard model for computing in the years to come. It’s success and widespread adoption will largely rest on the very customers looking to take advantage of this new paradigm of computing. These customers will need to work together to ensure that as cloud computing evolves that it does so in a manner that is open and accessible by all. Standards and portability will be a key component of this bright future. Without it, cloud computing may very well be relegated to the niche.

    Dave Geada
    VP of Marketing

  2. vijaygill

    @ray not sure what you are going on about

    1) compliance audit on what level?
    2) multiple user accounts are easily available at the app level, for example see SFDC accounts
    3) fine grained charge back and billing – sort of missing the point, you won’t need that sort of fine grained chargeback and billing and that associated overhead and infrastructure at this level. But if you want to pay for it, it can be provided.

  3. In my opinion, cloud computing has so much more to offer than only “unlimited resources on a PAYG billing model”, or as we call it, the public cloud.

    I believe its real power lies in a hybrid cloud model, which combines (on-premise or hosted) private infrastructure(s) and public infrastructure(s).

    And thus could offer massive optimization of private infrastructures (from consolidation to dynamic power & cooling management, their is lots of room for optimization at this end of the line..) and more simplified management & operations (internal service catalog, faster provisioning of required resources, centralized monitoring,…) while still allowing to use public cloud resources when required.

    However, in order for a hybrid cloud model to succeed there is a strong need for standardization within cloud computing.

    • Ray Nugent

      Frederick, I agree Cloud has a great deal more potential. We’re just scratching the surface on a new IT model, a new application model, a new technology model. However, I don’t believe standardization is the barrier to success at this point. It will be down the road but right now innovation trumps standards.


      • Ray, absolutely right.. I’m working on a startup company (from Belgium, EU) trying to innovate and dig up some of the buried potentials that cloud computing has to offer and embed them in a software platform.

        But even though we have some wonderful ideas, a lot of them are blocked or can’t reach their full potential because of a lack of standardization. And regardless of the fact that we are trying really hard to innovate and really have some great ideas (imho) finding funding to realize these ideas is a real pain because investors often don’t see the potential.

        (so basically we’re blocked or slowed down from 2 directions)

        Probably, the vision I have of an open cloud space, where workloads could be pushed around from one cloud to another (not only the image, but entire settings and configurations, and on a transparent level), is just a utopia.. And maybe even not required or requested by organizations.

        Another reason why I count so much on standardization is probably because as a small young startup we are afraid that customers might not be interested in our technology (regardless of how innovative it is) because it might create a lock-in. Which is something that could be avoided through standardization (instead of bridging several API’s for example, and you can’t cover them all..)

        Just some thoughts of a young fellow trying hard to contribute to the future of cloud computing.. I’ve seen a lot of cloud computing technologies, even from major companies (been at IBM 2 weeks ago for example) and I really know for sure that their is still a lot of work to do and a lot of aspects to innovate on. However the companies that have the money to do so are often too stubborn to do so, while the ones who really want to innovate (the small ones, like me) often don’t find the money to realize their ideas. That’s where in my opinion the main problem lies with innovation.

  4. Ray Nugent

    How much does the lack of enterprise features like compliance audit, multiple user accounts and fine grained charge back/billing inhibit the migration of an IT org to public cloud vs concerns like data security?