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Wednesday, December 29, 2010

The Cloud & Enterprises

This is in continuation of the previous note:

Thomas Friedman makes the case that Value creation is becoming so complex that no single firm can master it without closely collaborating with a wide set of partners. John Hagel brings this up :” We are shifting from a world where the key source of strategic advantage was in protecting and extracting value from a given set of knowledge stocks — the sum total of what we know at any point in time, which is now depreciating at an accelerating pace — into a world in which the focus of value creation is effective participation in knowledge flows, which are constantly being renewed”. All these thoughts presuppose or recognize the role that information technology plays in making this shift happen. Extending the thought, once can see that from an infrastructural perspective, externalization of data and processes, for example through cloud computing, can create a secure foundation for collaboration that will eventually be indispensable. This flow and collaboration – critical components in the shift becomes so important that it is worth dwelling a little more into this theme.

With the global competitive forces getting more and more powerful one case that business around the world are keen to get more agile and more lean. With dependence in IT increasing with time, solutions centered on IT get more significant. With cloud as an enabler to such a change, one can see many things are coming together to make benefits get realized. As business tends to focus on getting the easy to do business with tag, the ease of provisioning extranets makes the organization more agile as it establishes lightweight, short term partnerships and outsources granular services to external providers. When information and goods flow across borders and enterprises, the concern of rising transactional cost is bound to arise. With well designed cloud solutions , transaction costs can be actually managed better. And by reducing the transaction costs of contractual collaboration the company can effectively leverage external resources without engaging in full scale mergers and acquisitions or setting up joint ventures.

How to engineer a seamless and reliable experience that can not only absorb changes in the external environment but also function as a critical enabler of such change? Look carefully and we can see that at the operational level , an increasing number of data sources are becoming available in the form of web services, truly interoperable and are easy to integrate. Enterprises move really aggressively to make gains on this count – some of them are able to leverage these effectively have an advantage over their competition. The real advantage comes by being able to extract context sensitive, pattern based business intelligence by combining the data sources with their internal information and that of their partners.

This in essence sets the stage of preparing to not only take advantage of emerging technology to stay competitive but also potentially help a set of enterprises to create new standards of competing and thereby create competitive advantage through differentiation. Talking of differentiation, form the perspective of business enabled through the cloud it can be seen that the increased service orientation of cloud squarely uplifts the importance of identifying and analyzing competitive differentiation. Once core functions are established inside enterprises likely centered around core competencies the next question to seek is : determining whether they lead to a business benefit and the larger question therein is whether they are indeed unique and whether the uniqueness is sustainable in the fast changing world?

In such critical turns and decisions, enterprises need to take a far more involvement in activities that may look too mundane and operational. For example, it is a perfectly valid question to ask and keep asking at regular intervals as to how much of IT should be delivered by internal sources. As the technology and technology enabled markets and business services mature, many viable and economical solutions become available for enterprises to consider. And if standardized services (preferably configurable) are available on the market on a more economical footing, then it is obligatory on the part of enterprises to investigate whether it would be possible to leverage them. There may also be alternate forms of delivering the services. Let’s see from an IT perspective - in such a scenario, very effective solutions delivered over the cloud are becoming more and more commonplace. For example, self service portals can reduce human involvement overhead and can thereby lower the costs of basic services. Add ability to configure and integrate – the potential multiplies. Such decisions help enterprises move resources to focus on efforts inside the enterprise that could yield far better returns and may help enterprises become more lean and efficient and in some cases can make them more innovative as well.

Then where does it leave genuinely core processes that are supposed to provide differentiation by design? Where these processes begin to get intertwined with undifferentiated tasks, the effectiveness definitely goes down. Many of the generic IT solutions with customized overlays clearly fall into this category. Such a scenarios also provides enterprises to examine objectively if it would be possible to isolate the generic functions and have them sourced from the most effective and efficient source. Obviously there may not be standard answers for every conceivable scenario but enterprises can think through and decide on embracing appropriate choices.

Now comes the question of horizontal scalability – can the core competencies be looked as a platform to provide a base for a broad range of solutions? Can most of the solutions be plausibly monetized? Too often we see that the competitive advantage can begin to help in gaining business in related areas as well – there cloud solutions can provide can help in providing quick entry and act as a simulation media before eventually becoming a core infrastructure for leverage in steady state on scale up. Similarly IP that can be enabled through cloud can facilitate embracing new business models for cross domain/ cross enterprise usage. Obviously these things don’t happen just by chance – every such possibility needs to be thought through and details worked out in a rigorous manner. When competencies get stretched to serve a more broad base of services, it would invariably call for a realignment of resources and focus inside enterprises. Enterprises then get sucked into taking decisions on designing organization structures ranging from divisions to horizontals.

With market shifts happening more frequently – the dynamism with which enterprises monitor and prepare for them increase more rapidly. Too often, today we see that corporate strategies are reflecting upon changes across all stakeholders – competition, suppliers, customers besides geographies and market segments. This is a more complex game but technology and cloud by extension can provide more strategic enabling support. Such changes can foist huge demands on enterprises –some of them could be very direct and some of them could bring in an indirect but overbearing expectations on the business. The utility model is not just limited to computing CPU cycles and counts the saving. Its actually about making a range of services available on demand – information consulting, data streams, business processes, real time collaboration etc. The reality is that almost all the industries would have a need to consume such services as they begin to navigate the effects of changes that are happening in their industries and in some case extend such services when they act the role as providers. The lesser recognized part of the equation viz. the indirect impact : this can be more powerful and with a larger reach. How? In this complex web of business, enterprises which don’t provide such services may have to engage in transactions with others that do provide such services. Now one will have run as fast as the ecosystem to at least hold on to the current competitive position ( in some cases –in fast changing industries, one will have to run faster to hold on to the position). So the moral here is : no enterprise is likely to be immune from this sort of change and this is going to create a series of cascading changes across the business landscape.

The fact remains cloud provides a very huge canvas. By its huge capabilities and reach , the cloud can effectively change the business dynamics along with the progressions that it creates and this can simply dominate careful setups laid inside enterprises. By attacking the cost structure of IT operations and being seen as business friendly, it can find more support in its absorption. And, the truly disruptive phenomenon that cloud is - shall influence this business ecosystem more rapidly and with greater reach : net result – cloud could become the harbinger of change that will accelerate the changes in the partner landscape in this interconnected world.

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Wednesday, December 08, 2010

The Cloud & Its Impact!

Was on a long flight to Asia, when conversation with the co-passenger began to get centered around cloud computing and what could be its impact that an educated executive ought to know. I have seen the various definitions of cloud computing that include elements of the varied description of the term, yet they typically do not address every single aspect that is associated with cloud computing. The definitions vary from being seen as IT as a service independent of location by IT resources to massive scalable IT capabilities provided as service across the internet to multiple customers to infrastructure hosting of customer applications and billed by consumption.

My intent here is not to add confusion with yet another attempt at fine tuning the various definitions that are currently available. Each and every thought strand provides a good job at giving an idea of what is involved. Nothing of importance suggests to me that there is any particular value in having an authentic/authoritative/cardinal definition. The attributes provide a more meaningful way to provide a near close authentic touch : off premise, elasticity, pay-as-you go billing, virtualization, service delivery, universal access, centralized and distributed management, multi- tenancy etc.

For me, the way I see it, the innovation of the internet from a technical perspective lies in identifying the confluence of several technical trends , look forward and visualizing how these can combine with improving cost factors, a changing environment and evolving societal needs can combine to create a virtuous cycle that generate an ever increasing economies of scale and benefits from network effects. Look carefully. One can see that cloud computing is similar in nature while admittedly its difficult to isolate a single grain of technology strand triggering the cloud’s advent and progress. A number of incremental improvements in various areas ( notable among those fine grained metering, flexible billing, virtualization, broadband, SOA, service management) have all come together recently. Combined together they enable new business models that can dramatically affect cost and cash flow patterns and are therefore of direct great interest to the business . In the backdrop of economic changes affecting the business environment and a investment overhang of IT , cloud and the opportunities it presents look very significant to business.

If we examine further, the combined effect has reached a critical threshold by achieving sufficient scale to dramatically reduce prices, thus leading to a virtuous cycle of benefits (cost reduction for customers, profits for providers), exponential growth and ramifications that may reverberate across many of our lives, including technology, business, economic, social & political dimensions. As cloud computing establishes itself as primarily a service delivery channel, its likely to have a significant impact on the IT industry ( by maximizing service interconnectivity), by stimulating requirements that support it.

The Capex Vs Opex discussion is well known and I won’t repeat it here but would like to point out that the reduction in fixed costs also allows the company to become much more agile and aggressive in pursuing new revenue streams. Since resources can be elastically scaled up and down they can take advantage of unanticipated high demand but without being burdened with the excess costs when the market softens. The outsourcing of IT infrastructure reduces the responsibilities and help organizations focus in the area of delivering true value of IT. The shift can help IT to focus from Plan-Build-Run onto Source-Integrate- Manage mode of functioning.

Another form of business impact may be that the high level of service standardization that cloud computing brings may blur the traditional market segmentation. The conventional distinction that separates small and medium businesses from enterprises, based on their levels of customization & requirement for sales and service support may fade in favour of richer set of options & combinations of service offerings. Let’s zoom out and come back. In some ways, cloud computing is only a small part of a much larger trend that is taking over the business world. The transition to services centered economy is gaining momentum over the decades - the critical constraint had been on collaboration - if we do a root cause analysis we can find that the constraint is rooted on trans- enterprise barriers and a cohesive well geared technical infrastructure.

The difficulty rests on the fact that unlike in a tangible product, it is very difficult for one to break services into its elemental components that come together to provide a seamless efficient service. The transaction costs that are associated with identification, contracting, monitoring and collection were far too high to justify bringing different entities together. A s we progress towards an ecosystem where everything –as-a-service becomes a defined norm, the gamut expands to include a lot of business as well. From Human resources management to finance to logistics to manufacturing all can be potentially handled by a strategic partner. And cloud here can play a critical enabling role of providing an infrastructure that acts as a critical component of this transformation.

Regardless of whether a company seeks to adopt cloud computing, the technology may have a significant impact on the competitive landscape of many industries. Some enterprises may be forced to look at cloud computing simple keep pace with external efficiencies in their ecosystem. And for some, it could be the case that their core business is being eroded by the arrival of newer agile competitors. As a result, I think that it very likely that there will be a market shift as some companies leverage the benefits of cloud computing better than others. These may trigger a reshuffling of the competitive landscape, an event that may harbor high risks and huge opportunities. More on this theme later

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