1 C O V E R S T O R Y THINKSTOCK december 2010 financial executive 1
2 By Mark A. Goodburn and Steve Hill The cloud has reached an important inflection point that is impacting corporate strategy and changing business models. Organizations that recognize and are able to effectively manage risks around cloud will create a sustainable competitive advantage. Years of technological advances have allowed the Internet to become a viable backbone for virtualized technology. The information technology community is well aware of this shift and has largely driven the discussion about cloud and its impact on IT. Less prevalent has been discussion about the much broader impact cloud is beginning to have on business. Make no mistake about it, with the virtualization of technology comes the virtualization of business applications, processes and services. In effect, it means the virtualization of an organization. This shift is profound and is poised to have a transformational impact on business models and core drivers of competitive differentiation. The cloud allows large organizations to move away from managing their own data centers to focusing their attention and their resources financial and human on their core competencies. Smaller players see the dynamic implications of a future unrestrained by the need to build extensive IT infrastructure. Cloud is bringing about transformational change in value chains, enabling companies to respond much more effectively to customer demand. Cloud networks are evolving, linking companies through complex, multiparty processes into single, virtual organizations. As with any transformational shift, technical and operational hurdles need to be overcome. Data security, privacy and a host of other issues must be fully considered, and the right balance between these risks and performance must be achieved. Still, at a time of economic recovery, when organizations are seeking new paths to growth, both business and government leaders must seize this ideal moment to think hard about the possibilities a cloud operating environment presents. What is Cloud? Cloud is a business imperative. It is more than just virtualized technology. It s an amalgamation of many loud is not the future it s now. It s an enabling force for business evolution that goes beyond technology, allowing organizations to more efficiently and effectively reengineer the company s corporate strategy. For transformative power, the new model is blue as in sky. 2 financial executive december 2010
3 years of technology innovations and development that has evolved into a model for enabling convenient, on-demand access to a shared pool of virtual computing resources, including networks, servers, storage, applications and services. Cloud includes business services (applications) deployed and maintained over the Internet on a pay-asyou-go basis. It provides agility like never before, taking people and latency out of systems, thus allowing companies to adopt new systems in days or weeks, rather than several months or years. Cloud service providers generally use one of three cloud service models: Software as a Service (Saas) business operations over a network; Platform as a Service (PaaS) deploy customer-created applications to a cloud; or Infrastructure as a Service (IaaS) rent processing, storage, network and other computing resources. Cloud deployment models for organizations moving to cloud environments include: Private a closed environment for a single organization hosted by a third party; Public a shared environment used by many organizations; or Community perhaps the most interesting and potentially transformational of the three, which involves an environment shared by many organizations in particular industries, by geography, along similar supply chains or otherwise connected. In the community cloud model, agreed-upon rules establish cooperation between suppliers, providers, customers and the value chain that can become paradoxically business-enabling. This is where the rubber really meets the road, and provides opportunities for business models to change. It s when involvement becomes not just a competitive advantage for those who join but a competitive imperative for similar organizations that hope to compete over the long term. What s Driving Cloud Adoption? Shifting business models and the numerous cloud alternatives available to organizations are accelerating the adoption curve. Today, through business process outsourcing, a company can leverage an almost unlimited range of resources and business processes from any location. The cloud operates on a similar principle and has much the same advantages. Like other forms of business virtualization, it offers large-business capabilities and processes at relatively low cost. Cloud allows a start-up organization to access the same technology infrastructure and support as a Fortune 500 company. It permits a company to access all its information technology services as if it were plugging in to the electricity grid, paying for exactly what is needed, when it is needed. The comparison between the advent of the cloud and the development of the electric utility grid is worth exploring. In the early years of industrialization, if power was needed to run a business whether water or steam the business had to locate near the power source. Then, in the early 20th century, came the utility grid. Businesses could now operate from almost any location, tapping into that virtual power source only when it was needed. Cloud similarly allows technology to be accessed as a utility, creating a lean and mean virtual enterprise positioned wherever customers need to be served in the marketplace. This means industries highly dependent on maintaining huge IT resources to accommodate seasonal spikes in activity the retail industry, for example no longer have to have their IT servers sitting idle yearround waiting for the run-up to the December holiday season. That is the cloud s promise to business. This ability to plug in to IT services via the cloud opens up many, often transformational opportunities, well beyond technology efficiencies and cost savings. Among the opportunities: n Cloud makes it easier to deploy solutions or to combine enabling december 2010 financial executive 3
4 technologies in response to changing market needs. Cloud environments often have thousands of applications built to quickly meet specific needs, and many of these applications are built to be integrated. There are also many applications that companies can try before they buy, letting them be more experimental in their approach to solving complex problems. n Cloud increases speed to market, reducing or eliminating information latency, a devilish issue common to conventional value chains. With no latency, companies can reduce product development cycle times and rethink key processes, especially in planning, fulfillment and promotions. n Cloud platforms make it possible for organizations to leverage the collective mind-share and development efforts of the extended cloud community. In this way, everybody benefits from advances made by others in the cloud. n Cloud cuts IT costs and fundamentally changes how IT services are funded, shifting IT spending from a capital expense to an operational expense. This move from capital expenditures (CAPEX) to operational expenditures (OPEX), from a fixed cost to a subscription-based model, can have significant implications on procurement. n Cloud has proven itself an effective tactic for achieving greater efficiency in applications ranging from to photo storage to Web hosting. Consider that those who use an service, such as Gmail, are utilizing a cloud service. In just the last year, many public and private organizations have integrated with cloud operating environments, changing dramatically the way their technology is deployed, accessed and managed. For example: n A large American city, in one of the most extensive migrations of its kind, is shifting 34,000 employees from an onsite system to Google s cloud-based system, making a much-needed cut in the city s operating expenses and providing strategic flexibility for its planning. n The U.S. federal government launched a cloud computing storefront (www.apps.gov) that provides agencies with one-stop shopping for cloud services. In addition, it has recently launched a program to promote cloud standards in areas like security and data portability. n Two major retailers have successfully piloted cloud-based, point-ofsale replenishment solutions to connect the store shelf to their upstream supply chains. These private supply networks allow suppliers, transportation carriers and retailers to simultaneously operate on a single platform to balance supply and demand from shelf to manufacturing. Results have been significant, with chain-wide inventory reductions of near 50 percent, as well as a 30-percent improvement in out-ofstock performance. n A large technology company wanted to move to a demand-driven supply chain and needed a way to quickly connect all of its customers, suppliers and manufacturing facilities in one lean rope. The company opted for a cloud supply chain platform and was up and running its core processes across all partners in less than six months. The platform has helped reduce overhead by 50 percent, doubled inventory turns and improved replenishment cycle times by more than 50 percent. Social Connectivity Virtualization of a Nation In addition to business process improvement and cost savings, cloud also enables people to be connected to governments, businesses and each other in new ways. This connectivity, linking customers and with them their data, provides opportunities for driving new levels of intelligence around consumption. This is especially true in Asia, where companies and governments are making huge investments in the cloud. One major analyst projects total spending of about $55 billion loud allows technology to be accessed as a utility, creating a lean and mean virtual enterprise positioned wherever customers need to be served in the marketplace. This ability to plug in to IT services opens up transformational opportunities. 4 financial executive december 2010
5 between now and 2014 a 27-percent growth rate. By comparison, according to another analyst, spending growth in the West is now about 2.5 percent. In China, cloud is seen as a solution to providing cost-effective Internet services to the masses, both businesses and consumers. The virtualized nature of cloud is particularly appealing as an opportunity to leapfrog some of the IT infrastructure hurdles China faces in its such as Hewlett-Packard Co., IBM Corp., Microsoft Corp. and Oracle Corp. But the bulk of investment is coming from China s domestic market, where China Mobile is investing $58 billion over three years a level of investment and related infrastructure development outpacing those in the West. Fueled partly by the need to improve legacy communications infrastructure and due to the sheer vastness of the China nation, this s with any transformational shift, technical and operational hurdles need to be overcome: Data security, privacy and a host of other issues must be fully considered, and the right balance between these risks and performance must be achieved. efforts to bring computing to its billion-plus population. With the majority of the China population not having access to personal computer environments, the use of applications targeted for mobile use would allow greater access to basic services such as messaging and information. With more than 800 million mobile phones already in use in China, analysts predict that by 2015 the smart phone market in China will include 50 percent of all mobile phone users in the nation supporting this strategy. China s ambitious attempt at the virtualization of a nation has been bolstered by significant investments from western technology leaders level of investment addresses the full stack of technology and management associated with delivering a large-scale cloud infrastructure. In addition, China s domestic software development industry sees the cloud as a route to markets it has not yet been able to reach. By having access to enterprise-ready environments without the set-up costs usually associated with such efforts, small- and medium-sized software providers will be able to offer their applications and services to the increasing number of multinational corporations looking to invest in the region. Though it s unlikely that China will reach the market values of the december 2010 financial executive 5
6 U.S. in the short term, some suggest it is possible that China will produce software service providers equal in scale to Salesforce.com within five years. Cloud Requires Strategic Business Approach When managed properly, cloud should improve the risk profile of a project. Cloud technologies generally take less time to deploy than traditional technologies, and process design is generally more iterative and more efficient as well. Lower costs, combined with quicker time to value, generally equals lower risk especially if vendor incentives are carefully aligned and managed and servicelevel agreements tightly enforced. However, change on this scale often involving core assets naturally requires a hard look at the technology and operational risks organizations will continue to face as they adapt to a cloud operating environment. First, it s important to recognize that even a relatively small shift to the cloud is the beginning of a large strategic change for an organization. Companies making the shift need a governance model and strategy for evaluating, selecting and deploying cloud technologies, no matter how insignificant those technologies appear to be. It also means, from the outset, the organization s board of directors and senior leadership must be involved in the decision-making process. A company that shifts IT services and other processes to a cloud environment is, in essence, redesigning its infrastructure. At what point does this process reach an inflection point, making it good business to transition from existing infrastructure to a cloud-based infrastructure? What does that mean to the larger business model and strategy? There is also a large change-management dimension, as a move to cloud will invariably bring about shifts in corporate culture. Cloud also has significant tax implications. The physical location of a company s information can come into play, as can the location of a company s servers. The exact flow of a transaction will need to be monitored to determine which government entities have taxing authority over the transaction. At the state and local level, cloud service providers must understand fully their sales and use tax collection responsibilities. If not addressed, these issues could expose the businesses to significant sales/use tax liabilities. Maintaining data security and privacy is of course a huge consideration as organizations move to the cloud. Cloud owners and service providers will have unprecedented responsibilities and control of vast amounts of data, resulting in the need for robust new data security and privacy protocols, policies and service delivery models. Companies utilizing cloud internationally will also need to focus on regulatory compliance issues. Data privacy is a serious issue in Europe, for example, and in the United States, the Patriot Act makes privacy an important concern as well. Each of these issues present varying levels of risk for organizations moving to the cloud, and the real challenge will be in making a well managed transition so an organization realizes the full benefits, while retaining optimal transparency, compliance and assurance controls. These and other matters around cloud require deep consideration among an organization s technology and business leaders. Ultimately, cloud is about corporate strategy and business leadership. Organizations that understand how to manage the risks and take advantage of business virtualization will create sustainable competitive advantage, excel at creating new types of value chains and better leverage the value of globalization. MARK A. GOODBURN kpmg.com) is vice chairman and head of Advisory for KPMG LLP, based in New York, and Steve Hill is KPMG LLP s National Innovation leader, based in Dallas. Reprinted with permission, Financial Executive, December Financial Executives International. By IPA Publishing Services ( ) For web posting only. Bulk printing prohibited.