November 19, 2011

The Case for Cloud (part 2)

This is the second in a series on the Case for Cloud, and starts in the wayback machine, circa 1995. At the time, the dominant network operating system and email service for large corporations was from Banyan Systems. At a conference for the Association for Banyan Users International, a customer stood up in a session and in utter frustration called to the Banyan staff: "Sell to my CEO!!" We shook our heads, "OK, whatever, got it." He pressed on "No you don't get it, Microsoft is selling to my CEO, and you folks are selling to me, an IT manager, who do you think is going to win this business?" Still taken aback, we muttered something like, "Yeah, we'll try to do better." He then argued: "With Banyan VINES, I can be anywhere on the network and monitor everything and manage everything. Once we rip out Banyan and get forced to implement Windows NT and Exchange, I will need five times more staff to manage that stuff!!" (Maybe "stuff" wasn't the exact word he used).

Of course, he was mostly right, except that IT bloat was far more than five times the staff, and didn't stop with networking and email. Client/server software was taking off across all sectors, and we needed large technology staff and highly skilled IT workers to manage Oracle, SAP, Siebel, Peoplesoft, and the rest, not to mention the growing hardware cost and complexity from HP, IBM, EMC, Cisco, and so on.

The chart on the left, from Gartner, clearly shows this IT spending spree as a percentage of revenue for North American companies during this time. No question that all this IT spending was a broad economic driver, but certainly was an exploding cost to corporations.

Did all of this IT spending have a benefit? The following chart shows the productivity trend for the banking sector since 1987 (from the US Bureau of Labor Statistics). The banking sector is the one of the most intensive users of information technology, spending more than 7% of revenues, and clearly from this trend we can see there has been a continuing productivity benefit.

What is the exact function that all of this information technology is performing? Simply put, automation. Fewer people creating more product and services because processes are being automated. But here's the rub: looking at IT spending and productivity trends for various industries hides a critical factor. Information technology - across all industries - has been automating everything else but not IT itself. If we need to manage more Windows desktops, deploy and backup more servers, expand our email and other services, what do we do? Well, hire more IT staff, of course!

We started to get a peek at industrialization of IT with the introduction of technologies like virtualization and online backup. But those approaches just make the old technologies a little more efficient, they really don't make fundamental changes in IT management. Now think about the scale of cloud computing, and it becomes easy to realize that this vast scale can't possibly be achieved with the manual processes of traditional enterprise IT. Not at all. Cloud is a completely different perspective, a highly automated, industrialized approach, where scale can actually be achieved without explosive IT spending.

Coming back to the example of Microsoft Exchange, which is very illustrative of the economic forces that will move traditional IT towards the cloud. There are many analyses posted on the Internet showing how several cost factors are involved: storage, computing, data center space, bandwidth, skilled IT workers, etc. Google's key insight (with Google apps) is that Microsoft could give away Exchange licenses for free, but a company deploying Exchange would still have an expensive technology stack and staff to pay for. A cloud-based email vendor, with their highly automated, industrialized, and efficient service, could offer a low price with no way for a vendor of on-premise software to compete. Email is just one example, but as all of the core IT functions that a business depends on get moved to stable cloud services, the economics of scale and efficiency will force those businesses to follow the cloud.

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