Cloud Computing: Achieving Business Agility and Flexibility through Technology

Cloud computing has certainly become a hot topic over the last year, as businesses seek more flexible and cost effective processes for transaction processing, data storage and content distribution. As the growth in computing power and bandwidth rockets forward, we have seen an acceleration of the commoditization of hardware and software such as grid computing, service-oriented architecture and virtualization, opening up new options to meet companies' IT needs. In addition, the expansion of data centers and cloud computing services has rapidly transformed the internet from a passive content delivery to a vibrant software delivery platform.

What Is Cloud Computing?

Putting the buzzwords aside, cloud computing is about using shared resources, often over the Internet, such as collective computing power, storage and software, in an on-demand basis. Like connecting an appliance to the electric grid, connecting to cloud computing resources is done as needed and usually paid for based only on resources actually used. Paying "by the drink" and avoiding the up-front capital investment of building data centers and procuring hardware effectively transforms fixed costs into variable costs based on actual usage. Cloud computing is a paradigm shift in the IT industry, just as the shift from mainframe to client-server computing preceded it over the past twenty years.

An emerging popular variation on the basic cloud computing idea is the private cloud concept, in which the shared resources are specific to a single organization. For example, a large organization like General Electric might create a set of computing resources that can easily shared amongst its various divisions.

How Are Organizations Affected by this Shift to Cloud Computing?

This transformation has quickly brought significant changes to companies' technology value chains, and has significantly impacted operations in several ways:

Internal IT departments: The definition, creation, procurement and consumption of companies' internal IT assets are changing. As companies focus on reducing their costs and simplifying their IT infrastructure, cloud computing is increasingly being evaluated as a potential alternative to in-house built IT systems. Cloud computing vendors now offer shared infrastructure resources, such as computing power and storage, as well as higher value-add-services, such as shared database management and web infrastructure platforms. These Infrastructure-As-A-Service and Platform-As-A-Service offerings, as they are known, can often be used by enterprise users with minimum involvement from the internal IT teams. Companies assessing new applications or investment in hardware or storage should alternatively evaluate various cloud computing options in addition to their traditional approaches.

Independent Software Vendors: Providing software via cloud computing, or Software-as-a-Service as it is known, is the emerging software delivery model. Research firms predict that within five years, 95% of ISVs will be delivering software as a service. This has the practical effect of shifting a good portion of IT hardware capital expenditure - and risks - over to the ISV. Transitioning to this new business model - from selling a product to selling a service -- is more than just a technology challenge. ISVs that made the shift leveraged a combination of mergers and acquisitions, new technologies and consulting services. Most independent software vendors need to have a concrete plan to of how they will create, launch, and support cloud computing offerings over the next couple of years.

System Integrators, Value-Added Resellers and IT Consultants: Business process, industry and market knowledge are increasingly more important than IT skills, especially as implementation cycles for SaaS are much shorter than traditional on- premises applications. Even though new opportunities are arising from challenges with interoperability and integration of SaaS solutions, as well as development of well-defined cloud strategies for enterprises and ISVs, the value chain will continue to adjust in the next few years. SIs, VARs and consultants need to consider these changes and have a plan about how to adapt their business model to this new environment.

Cloud Enablers and Providers: Estimates indicate that there are over 1,000 companies providing cloud services today. Many are finding it harder to differentiate their offerings - probably victims of their own hype. Cloud enablers and providers need to be responsive to market, which is rapidly evolving with the introduction of new standards, requirements and products, and focus on profitable growth. In addition, such a fragmented market offers a consolidation opportunity to well-established technology companies to enter into the cloud computing market and offer additional services to their current customer base.

What Are the Benefits of Cloud Computing?

Cloud computing promises to support top-line growth in a company by increasing its agility in order to quickly respond to market movements and reduce expenses by more efficient use of assets. For example, the New York Times recently used Amazon Web Services to digitize back editions of their newspaper in only a few days, a process they claim would otherwise have taken over a year. This was possible because they were able to temporarily use a large number of servers in the cloud to process the information. Another example is a government services company that reduced its time to respond to RFPs by a large order of magnitude. They did this by using cloud computing techniques to reduce the time it takes to provision internal technology platform from weeks to hours. Cloud computing is therefore more than just a technology-related initiative; it is a company-wide efficiency strategy championed by CIOs.

What Are the Current Shortcomings of Cloud Computing?

Similar to other immature technologies, many questions around standards, security and compliance, especially for public clouds, do not yet have a clear answer. Medium and large enterprises have been slow to fully adopt cloud computing, largely due to the number of critical legacy applications still in use and not easily enabled in a cloud environment. However, many enterprises have already invested in virtualization to build their own internal private cloud and optimize IT costs. Additionally, most companies are evaluating software-as-a-service options for less critical functional areas, such as CRM and HR. Finally, because of the attractive pricing and delivery model, companies can affordably and quickly try several cloud solutions available in the market and rapidly identify those solutions that can make their business more agile and effective.

Bottom Line on Cloud Computing for Growth Companies

Cloud computing does in fact represent an inevitable paradigm shift in the information technology landscape. It is already having widespread impact across the value-chain of IT suppliers, including infrastructure providers, software companies and service providers. While several open questions remain about standards, security, and business models, the early business benefits of increased agility and reduced costs are too compelling for these questions to remain unanswered. Companies today, whether they are producers of technology or strictly consumers, should begin now to understand cloud computing and how it fits into their environment.

If you have any questions about cloud computing and how it may affect your business, please contact your GA team or Cory Eaves, Senior Vice President, General Atlantic. Cory is the IT expert in GA's Resources Group.