Cloud-based business innovation, transformation, and the future of enterprise IT

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1 Cloud-based business innovation, transformation, and the future of enterprise IT Professor Marco Iansiti David Sarnoff Professor of Business Administration Harvard Business School May 3, 2011 Copyright President & Fellows of Harvard College

2 Information technology has reshaped the enterprise with waves of innovation 25% IT Expenditure as a percentage of Total US Capital Expenditure 20% Cloud Computing Early Internet 15% Client Server 10% 5% Mainframes 0% Source: US Bureau of Economic Analysis, Venture One 2

3 Information technology drives enterprise growth Relationship between IT Capability and Enterprise Growth Rate IT leaders +3.5% -3.3% IT laggards IT Capability Score based on IT Scorecard Scale; Sample of 161 manufacturing enterprises and 608 midsized product and service firms. Source: Brunner and Iansiti, 2008; Keystone Strategy 3

4 Product Customization Standard Custom Information technology drives enterprise differentiation, through innovation Correlation between IT Capability and Enterprise Performance, as a function of strategy in financial services 0.031* 0.151*** IT Capability Score based on IT Scorecard Scale; Sample of financial advisory firms 0.037** 0.041** Simple Complex Product Variety Source: Brunner and Iansiti, 2008; Keystone Strategy; * significant at the 10% level; ** significant at the 5% level; *** significant at the 1 % level 4

5 Four waves of IT have driven innovation and productivity Cloud Computing (2000 s -) Private Cloud Early Internet (1990s -) IaaS PaaS SaaS Client Server (1980s -) Mainframes (1970s -)

6 however, each wave has also meant more complexity for IT to manage Past technology shifts have not replaced prior systems Likewise, each wave adds to the heterogeneous systems IT must manage Beginning the Transition to Client/Server Technology 100% 75% No Response 50% Client/Server Only IaaS PaaS SaaS 25% Both Mainframe and Client/Server Mainframe Only Private Cloud Marketplace of 3 rd Party Services 0% Legacy System & Solutions Each generation of IT is additive to previous generations, adding complexity IT complexity limits CIOs ability to manage and maintain new and old systems Source: How convention shapes our market longitudinal survey, Shane Greenstein,

7 Cloud computing presents the latest wave of IT evolution Over 1 Billion downloads in just 9 months on the Apple App Store 20 millions apps installed per day by more than 500 million users of Facebook each day Gmail had 16 million unique visitors in June 2007, which has grown to 52 million today More than 200 millions active users on Zynga s social games 7

8 Gmail Monthly Unique Visitors (Millions) Cloud Computing has already been a massive success for consumer applications Agility 60 Reach Burst from 50 to 3500 instances in less than one week Day 1 Day 2 Day 3 Day 4 Day 5 Day 6 Day Gmail had 16 million unique visitors in June 2007, which has grown to 52 million today Jun-2007 Dec-2007 Jun-2008 Dec-2008 Jun-2009 Dec-2009 Jun-2010 Dec-2010 Efficiency Innovation Power Usage Effectiveness: Enterprise Average vs. Google Google s data centers are nearly 2.5 times more as energy efficient than average enterprise K developers 20M apps installed per day 2.5M websites integrated with FB 250M users on partner sites per month 0 Enterprise Google 500M users 250M mobile users 8

9 Cloud infrastructure also offers business opportunities, but certain requirements need to be satisfied Clusters of off-premise, centrally managed, commodity hardware, capable of delivering scale, performance, and reliability at very low entry costs Service Provider Service Provider Service Provider Goals Infrastructure on demand to maximize agility and minimize time to market Dramatic improvements in computing performance and efficiency Requirements Building a web of trusted service providers Rapid provisioning and deployment Managing multiple, heterogeneous providers Bridging from enterprise to service provider 9

10 Cloud-based software applications also provide opportunities and requirements for business innovation An integrated web of public and enterprise services that can deliver real business innovation Goals Rapid innovation in developing and delivering services Composite applications built and deployed using public, hybrid, and private clouds Private Cloud Private Cloud Requirements Managing a complex network of distributed service providers Security anywhere, anytime IaaS PaaS SaaS IaaS PaaS SaaS Marketplace to discover trusted services 10

11 but the new complexity of Cloud Computing harms the Cloud s ecosystem and reins in its business potential SLA? Piecemeal use of public cloud PaaS Multiple HW and SW technologies? Distrust in service providers Security concerns SaaS Security? Legacy IT Device proliferation Stalled virtualization? Performance? IaaS Siloed service providers 11

12 As a result, the Cloud s business opportunities are still largely untapped The cloud has enabled utilization rates over 80% but the current enterprise average is less than 10% A new Cloud service can be deployed in minutes but the enterprise average for server deployment is 45 days Massive reach of engaged consumers but enterprise security challenges limit how broadly corporate IT is used, reducing user productivity Thousands of new apps produced and installed each day from dynamic consumer ecosystems but enterprise innovation is limited by need to maintain complex of existing IT systems 12

13 How do we get there? Let s step back for a moment and look at what drove the client-server wave 25% IT Expenditure as a percentage of Total US Capital Expenditure 20% Cloud Computing Early Internet 15% Client Server 10% 5% Mainframes 0% Source: US Bureau of Economic Analysis, Venture One 13

14 Organizations provided platforms that managed the complexity of the ecosystem and drove adoption Microsoft and Intel enabled a large ecosystem of OEMs, ISVs and SIs to manage the complexity of technology and realize the innovative potential of the PC SIs Component Providers Enterprises OEMs Consumers ISVs 14

15 Microsoft and Intel played a Keystone role in the evolution of information technology A Keystone Strategy proactively shapes an ecosystem, controls its health and, in doing so, benefits the performance of the firm keystones compete as a network, investing in tools, technologies and platforms that make partners more productive while managing complexity and tying the network together The Keystone is the weight bearing point of an arch or vault. The gray wolf in Yellowstone National Park is a keystone species, crucial to the longterm sustainability of the ecosystem. 15

16 A small number of Keystones were key to the adoption of each technology wave Client/Server & Personal Computer Era Keystones Microsoft, IBM, and Intel teamed up to organize robust, secure, trusted platforms for consumers, developers, and enterprise IT departments Enabling Technologies Tools and APIs, as well as technologies like Active Directory Provided a way to manage and hide the ecosystem s unnecessary complexity Drove the rapid development and deployment of innovative applications 16

17 Now the battle is more complex: Two Keystones in intense competition for the consumer Who is going to be the (main) keystone in the consumer ecosystem? Each organization invests $Billions in establishing the infrastructure for consumers and partners Each organization is building communities, tools, and technologies to better manage the complexity of the ecosystem Who is going to be the better Keystone and drive ecosystem innovation???? 17

18 The enterprise cloud needs Keystones too Realizing the Cloud s potential will require a trusted ecosystem of providers to deliver services, tools and applications to manage the increased complexity of IT SaaS SW, Tools & IT Management Enterprises Infrastructure? PaaS IaaS SIs 18

19 Keystones should provide platforms for Cloud business innovation A platform is a set of solutions shared by a community through a common set of interfaces As with previous technology generations, the Cloud platform needs to hide the unnecessary complexity of information technology, and ensure for both new and old technology Robust and Secure Infrastructure Integration with Legacy Systems Trusted Ecosystem of Providers Agile Development Rapid Deployment Efficient Utilization 19

20 Vertically Integrated Heterogeneous Support Being an effective Cloud Keystone The most effective Keystones focus on a narrow, horizontal, management layer, providing the services, tools and platforms that drive ecosystem adoption Effective keystones offer platforms that enable heterogeneous solutions Products Platform 20

21 Making the vision real Composite app built using Amazon, multiple cloud services, corporate IT, and monitored using cloud management platform Infrastructure outage takes down end-user application Cloud Management Platform Management platform detects outage and shifts resources to private cloud Application is restored Private Cloud Cloud Automation IaaS IaaS PaaS SaaS Cloud Management Platform Cloud Security Cloud IT Management 21

22 The fundamental promise of the Cloud: a low cost of entry AND better cost efficiency at all levels of scale 1 Mainframes High cost of entry High efficiency at scale Mainframes 2 Client/Server Lower cost of entry Less efficient at scale Cost Client Server 3 Cloud Computing Low cost of entry Higher efficiency at all levels of scale Computing Power Cloud Computing Source: Rolf Harms and Michael Yamartino, The Economics of the Cloud for the EU Public Sector, November 2010; Keystone Strategy analysis 22

23 In summary Waves of information technology have driven enterprise productivity and innovation, and the Cloud generation presents a real opportunity Each new technology generation has also added to the complexity of enterprise IT Harvesting the real business potential of the Cloud will require managing the added complexity faced by the CIO and service provider As with previous generations of IT, the ecosystem will provide the solution to this problem But in order for the ecosystem to thrive, new Keystones must provide powerful, reliable platforms to organize the ecosystem, manage the complexity of new and old systems, and release a new generation of innovation 23

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