Innovation & technology viewissue 13 reprint. Cloud computing gets strategic Reducing technology costs is just the starting point

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1 Innovation & technology viewissue 13 reprint Cloud computing gets strategic Reducing technology costs is just the starting point

2 Innovation & technology Cloud computing gets strategic Reducing technology costs is just the starting point

3 By Phil Garland, Rob Gittings, and Mike Pearl Phil Garland is PwC s US CIO Advisory Leader. Rob Gittings is PwC s US Technology Sector Leader. Mike Pearl is PwC s US Cloud Computing Leader. What a difference a year makes. Last fall, View introduced readers to what we called the latest technology trend to capture the attention of businesses, consumers, and investors alike. That description of cloud computing was apt: Momentum along with considerable hype for the new approach and its supporting technologies has been considerable. But the real impact is only now beginning to be felt. A year ago, cloud was squarely in the IT domain; now, it s making its way to the boardroom. Phil Garland, Rob Gittings, and Mike Pearl leaders in PwC s Advisory, Technology, and Cloud Computing practices explain why the real story is less about technology and more about business strategy. Most organizations today are no longer deciding whether they ll use cloud computing. Rather, they re asking how? Will we use software-as-a-service to provide CRM for our sales team instead of managing the application in-house? Should we take advantage of inexpensive, virtualized storage to meet our mushrooming data needs? Will a private cloud enable us to better leverage our technology investments among our different business units? Good questions but all too often, the discussion ends there. And even more important, certain crucial stakeholders are missing from the dialogue. Yes, cloud is absolutely about facilitating better IT. But, as leading companies are discovering, it can also be much more than that. Those companies are taking a broader view: cloud as a new engine for business growth. The cloud you don t know Cloud computing can play a strategic role for all companies, not just those in the technology or services industries. The vision is simple: By doing away with typical IT constraints limited resources, consuming maintenance, and incompatible systems cloud computing frees the business to pursue growth and innovation. In essence, cloud lets you say yes more often. Imagine that you could green-light as many as a half dozen new research and development (R&D) projects instead of betting on just one or two. With cloud s ondemand approach, it s possible to quickly and at a fraction of the current cost equip teams with the resources they need. Rather than weeks or months, the supporting infrastructure for a project could be set up in just a few days. That kind of rapid start-up means companies could try many new ideas, quickly rejecting ones that weren t viable in favor of ones that are most promising. PwC View issue 13 3

4 Cloud computing finally brings businesses closer to a world in which technology can truly be an enabler, not an obstacle. Having more options is a compelling proposition. That was the case for Zagat Survey, the company behind the eponymous dining, travel, and leisure guides and website. When Zagat Survey began rebuilding the Web platform for its Zagat.com subscription service one of its most strategic and fastest-growing businesses it determined that using Amazon Elastic Compute Cloud (Amazon EC2) infrastructure was a better choice than managing the hardware in-house. With Amazon EC2, Zagat could easily test different hardware configurations to determine the best setup for the core service. Companies not held back by IT are free to capitalize on opportunities as they arise. For example, a company unexpectedly overwhelmed by a consumer response to a pop-culture phenomenon might want to quickly launch a Web promotion. Instead of scrambling to set up the required infrastructure, this short-term need could be met quickly with cloud-based resources. Or consider another way cloud can smooth out IT roadblocks to top-line growth. In, say, a merger or acquisition, system integration is often a complex and synergy-draining proposition. But think about how much more efficiently the two entities data and business processes could be merged if supporting systems resided in the cloud instead of being managed internally. Admittedly, it sounds too good to be true as if you could merely snap your fingers and the supporting infrastructure needed for any initiative would magically appear. Of course, that will never quite happen. Cloud computing is no magic bullet. In fact, as a disruptive force, it raises a number of issues that companies need to carefully consider: strategy, finance, risk and governance, data security and privacy, technology, and its impact on other business functions. Yet cloud computing finally brings businesses closer to a world in which technology can truly be an enabler, not an obstacle. To deliver on that promise, companies find they need to formulate a comprehensive business strategy for cloud computing. Created by the executive team not solely the CIO such a strategy takes into account how cloud can best support the business, and it considers the changes the strategy would cause to the ways people work and make decisions. 4 PwC View issue 13

5 How cloud changes the business Capitalizing on cloud computing means being prepared for significant changes across the organization. The following describes just a few of the ways that cloud affects each functional area. Strategy. At the highest level, cloud computing becomes a new lens through which to view other business considerations. For example, how might competitors, particularly nimble start-ups or smaller organizations that are not wedded to legacy systems, use a cloud computing foundation to change industry dynamics? As the executive team identifies projected business benefits from using cloud computing and begins to articulate a strategy, it will also determine who is responsible for overseeing and implementing the strategy. Finance. Cloud will eventually bring changes to every aspect of the finance function, including financial planning and analysis, accounting, and tax. One of the most obvious changes will be in evaluating the total cost of IT ownership. How does a cloud-based solution compare with the traditional approach? Additionally, companies will want to look at the budgeting and depreciation impact of moving from fixed IT costs to variable ones. If a company is considering a private cloud, other considerations arise. For example, how will the investment be financed? And once it s up and running, will the organization operate the cloud as a payas-you-go service by billing usage back to business units or departments just like an external provider would? On the tax side, when companies buy (or sell) cloud computing services, they find it is crucial to determine exactly what is being exchanged. In a cloud computing scenario, a company might be leasing equipment, making service payments, or paying for a license to use software. Those distinctions are important and can have an impact on tax filings. Cloud computing transactions aren t quite leases and aren t quite services, but tax law requires that they be classified in one of those two categories. Eventually, tax regulations will be updated and clarified, but for now, they reside in a gray area. At the highest level, cloud computing becomes a new lens through which to view other business considerations. PwC View issue 13 5

6 Companies reassess their strategy, looking at where cloud can accelerate projects or enable them to take advantage of new opportunities. Risk and governance. As did the disruptive technologies that preceded it like the Web or e-commerce cloud computing brings with it new risks to identify and address. Chief among them are security risks, particularly in the moving of company data to a third party for storage, processing, or support. These data integration and ownership concerns need to be addressed for the protection of intellectual property as well as to safeguard employee, customer, and partner information. Again, questions arise: What controls are in place to ensure appropriate access to customer data and other sensitive information? How is one company s data segregated from the data of other customers that use the same provider? What securitybreach guards has the provider put in place? Even for companies establishing private clouds, security considerations exist, such as what type of security model is appropriate for the new environment. As they raise these questions, companies establish the criteria by which they will identify and evaluate potential cloud computing providers. They will develop company standards and determine the appropriate service levels for their organizations. They will also think about oversight, such as who s authorized to make the final decision about using cloud for a specific project or who s authorized to engage a cloud vendor. With cloud services so readily available, companies that don t establish adequate controls risk creating an environment that s rife with so-called shadow IT technology that is neither centrally managed nor approved and that does not typically meet the organization s standards. Companies considering those factors are also looking at whether providers can give thirdparty assurance about their operations. More and more cloud providers are undergoing a thirdparty assurance process similar to the way more-traditional outsourcers undergo a SAS 70 audit of their controls and then furnish the report to customers and other stakeholders. 1 While assurance standards are still evolving for cloud computing, providers realize that a report from an independent entity can ease customers concerns about security and privacy, among other issues. Technical. Obviously, moving to cloud computing means thinking through many technical issues. For example, the management team will consider the organization s migration strategy as well as how data that resides 1 A Statement on Auditing Standards (SAS) No. 70, Service Organizations, is a report on the system of internal control related to the processing of financial reporting transactions by service organizations. A SAS 70 report is commonly used for satisfying the user organization s requirement to assess the internal controls over financial reporting of the functions they outsourced to service organizations. 6 PwC View issue 13

7 How cloud computing reshapes the business When companies strategically adopt cloud computing, the impact ripples throughout the organization. Below is an overview of how things change and what the executive team considers in the transformation. Strategy. Companies reassess their strategy, looking at where cloud can accelerate projects or enable them to take advantage of new opportunities. They also look at how they are currently using cloud computing in the organization. People. Cloud computing moves organizations toward a service focus, rather than a functional one. As such, they begin reassessing their talent needs. For example, they look at IT staff and consider whether they have or can develop the IT architects they will need to design and manage cloud services. Processes. Changes to processes may be significant. For example, research and development will need to align more tightly with IT, as project planning and deployments are accelerated with cloud. Likewise, in a company s finance organization there may be changes to how profitability, budgeting, and depreciation are handled. Technology. Regarding technology, new issues include how to address data security and governance in the cloud model, as well as how to support the business as it assumes more of a service focus. Structure. Changes in the organization s processes may also affect how the organization is structured. For example, consider the impact that rapid and inexpensive deployment of technology could have on product development. How do governance models remain relevant and intact? in the cloud will be integrated with existing systems or other outsourced functions. The team will also think about how a cloud strategy affects its ability to fully control and monitor applications even though the systems or infrastructure may reside outside the organization. Beyond these more technical aspects, management will also assess the talent in its technology organization by ascertaining whether employees have the right skills to manage cloud-based infrastructures. Going forward, cloud computing will encourage organizations to adopt a service focus rather than a functional one. They ll look at realigning operational resources to support business growth needs. And as their people develop expertise in cloud and enterprise architecture, they ll contemplate how to retain valuable staff. Other functions. As enterprise IT continues to evolve toward cloud-based solutions, other, less obvious corporate functions will feel the impact. For example, marketing and sales strategies may change as companies incorporate cloud models into their own R&D and product and service deliveries. Even a company s legal department will need to rethink operations in light of cloud computing: Is the department prepared to review cloudrelated risks and liabilities? How will electronic discovery, or ediscovery, requirements for litigation be met? PwC View issue 13 7

8 A new kind of cloudpowered growth Cloud s potential for transforming business could be far-reaching. Over the next decade, cloud computing could become the foundation for business growth for virtually all types of businesses. 2 As more and more companies move internal functions or business services to the cloud, a new type of ecosystem will evolve. The ecosystem will make it easier for businesses to (1) partner with one another by seamlessly integrating via the cloud and 2 For an in-depth look at how companies are moving toward that future, including interviews with executives at ADP and Amazon, see PwC s Center for Technology and Innovation s Driving growth with cloud computing, Technology Forecast, (2) create and market new business services. Their internal functions can be made into versatile building blocks available to others, thereby creating new sources of revenue. Or businesses can create their own unique offerings by combining third-party services and functions that reside in the cloud. To get a glimpse of how this potential might be realized, look no further than two of today s business services and cloud computing leaders: Automatic Data Processing (ADP) and Amazon. These pioneers, which are already using cloud computing technology to grow their businesses, are examples of what we refer to as extensible enterprises. In an extensible enterprise, the business s internal capabilities are viewed as potential business opportunities. These capabilities can function as a business platform, driving ecosystem interactions that are deeper and that happen at much lower costs than previously possible. (See Figure 1.) Consider how ADP has fared during the recent recession. Double-digit unemployment would seem to spell trouble for a payroll services provider, but ADP managed through the recession with flat revenues in part due to its cloud computing strategy. One of the company s Figure 1: Network of business platforms When a company pursues an extensible enterprise strategy, it creates a platform of cloud-based services that are connected to cloud-based platforms from other enterprises, ultimately creating a network of business platforms that makes it easier to integrate or create new service offerings. Extensible enterprise A Extensible enterprise E Extensible enterprise B Source: PwC Center for Technology and Innovation, Technology Forecast Extensible enterprise D Extensible enterprise C 8 PwC View issue 13

9 As more and more companies move internal functions or business services to the cloud, a new type of ecosystem will evolve. strategic goals is to provide a complete hire-to-retire HR suite. As such, ADP has entered into new partnerships to round out its services portfolio. Two such partnerships are with Cornerstone OnDemand, a talent management provider, and PreVisor, a pre-employment talent verification service. The success of partnerships such as these relies on quickly bringing to market differentiated services that go beyond mere data exchange an ability cloud computing makes possible. Because each business was cloud based, the partners could quickly integrate the business processes of their platforms and reap new revenue thereby offsetting a decline in ADP s payroll services revenue. In another example, Amazon used the cloud in a different way to extend its business prospects. In an effort to drive traffic to its retail site, the company opened up its proprietary product catalog so that the catalog could be used by other companies in different ways. In making its catalog, images, pricing, and other details available to potential partners via the cloud, Amazon found new value in extending its business to third-party sellers. Other companies like Target and Marks & Spencer have created their own online retail stores through the service, while others have developed new offerings, like a shopping comparison engine. This approach unlocked latent value that Amazon had not anticipated. The result: higher traffic to the Amazon site and more revenue created by its ecosystem. PwC View issue 13 9

10 Cloud considerations As businesses begin formulating a cloud strategy, some of the questions that company leaders may consider asking are: CEO How can I communicate the transformational potential of cloud computing to senior management and the board? What business value does cloud bring beyond the IT benefits, and how do I identify and gain those benefits? How can we exploit strategic opportunities while managing risk to the business (finance, tax, operational, and IT)? CFO How do I manage the unpredictability of costs in a pay-as-yougo model? What are the implications of moving to a service model from an accounting and tax perspective? How can IT costs reflect the needs of individual business units? CIO Which of the strategic imperatives can cloud solutions help right away? What is the roadmap that creates incremental benefits on the way to adopting cloud computing? How can IT better align with product development to support our changing business model? How does our talent strategy need to change to support a cloud-based infrastructure? Of course, business ecosystems are not new; companies have long prospered through working with partners or via indirect sales channels. But what s different here is the sheer number of possibilities in the so-called network of business platforms and the fact that the ecosystem can function in a self-service manner, with potential partners integrating with other cloud businesses as needed. ADP, through deep integration, and Amazon, through versatile processes, exemplify how cloud computing can create strategic advantage and drive revenue growth. While many companies are only beginning to think about how they can more fully take advantage of cloud computing but are not yet ready to pursue an extensible enterprise strategy, it s important to understand the strategy s potential. Companies can begin adapting their thinking and processes so they ll be well positioned to pursue such a strategy when ready. For example, they begin reevaluating business processes. Most companies never consider the incremental value of exposing certain processes to third parties. Instead, they optimize processes to be highly integrated even entangled with other internal processes that are highly manual. However, organizations that are pursuing an extensible enterprise strategy start by overhauling processes: automating, digitizing, and modularizing them. 3 Moving forward Cloud computing is here to stay. It s an important business trend that is expected to significantly affect how business is conducted over the next decade and beyond. While companies today are just beginning to grasp its potential beyond the IT realm, its impact is expected to be profound. Company leaders who continue to think of cloud computing as strictly a better IT solution will miss a considerable opportunity. Those who do see the possibilities, however, understand that a broader cloud computing strategy is about enabling business agility. They are raising the right questions with their management teams and beginning to incorporate a cloud approach into their companies growth strategies starting today. 3 PricewaterhouseCoopers, Digital transformation in the ecosystem, Technology Forecast, September PwC View issue 13

11 Service model Which IT components to access via cloud: Software-as-a-service Platform-as-a-service Infrastructure-as-a-service Understanding the cloud Essential characteristics Cloud computing s defining attributes are: On-demand self-service Broad network access Resource pooling Rapid elasticity Measured service Deployment model Whether services will be fully controlled and used by only the company or be shared with other external customers: Private cloud Public cloud Hybrid cloud As executives other than the CIO begin embracing cloud, the focus becomes more about business strategy and less about technology. However, it s essential that everyone understand the IT context and the choices available to the business. The figure illustrates cloud s essential characteristics and outlines key considerations. Essential characteristics On-demand self-service A customer can automatically access computing resources, as needed, without requiring human interaction with the provider. Broad network access Services are available over the network and accessed by a variety of computing platforms. Resource pooling The provider pools computing resources to serve multiple customers. The resources are dynamically assigned according to demand. Rapid elasticity Customers access just what they need, with capabilities quickly scaling up or down. Measured service Cloud resource use is automatically managed through metering, enabling customers and providers to monitor, control, and report on usage. Service model Software-as-a-service (SaaS) An application and its supporting environment (hardware, network, operating system, database, etc.) are managed centrally by a service provider. Users typically access the application through a Web browser. Platform-as-a-service (PaaS) This model enables companies to build custom cloud-based applications. Everything but the specific application code is hosted remotely by a service provider hardware, network, operating system, and database. Infrastructure-as-a-service (IaaS) Hardware and network resources are available ondemand from the service provider, while the customer manages any applications and their operating systems in-house. Deployment model A business will consider whether its internal IT organization or a technology vendor will host and manage the cloud deployment and which model is appropriate. Private The hardware and software that compose the service are maintained for the use of a single organization, which might have distinct business units or internal customers. Public The service and its underlying hardware and software are shared by multiple organizations or customers. Hybrid In this model, a company augments its private cloud with public-based cloud services when needed. PwC View issue 13 11

12 Contacts Phil Garland 1301 K Street NW, Suite 800W Washington, DC (703) philip.a.garland@us.pwc.com Rob Gittings Ten Almaden Boulevard, Suite 1600 San Jose, CA (408) robert.gittings@us.pwc.com Mike Pearl Ten Almaden Boulevard, Suite 1600 San Jose, CA (408) michael.pearl@us.pwc.com For more PwC perspectives on cloud computing, visit: To read the full issue of View magazine or to comment: PricewaterhouseCoopers provides industry-focused assurance, tax and advisory services to build public trust and enhance value for our clients and their stakeholders. More than 163,000 people in 151 countries across our network share their thinking, experience and solutions to develop fresh perspectives and practical advice PricewaterhouseCoopers LLP. All rights reserved. PricewaterhouseCoopers refers to PricewaterhouseCoopers LLP, a Delaware limited liability partnership, or, as the context requires, the PricewaterhouseCoopers global network or other member firms of the network, each of which is a separate and independent legal entity. This document is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. The information contained in this document is for general guidance on matters of interest only. The application and impact of laws can vary widely based on the specific facts involved. Given the changing nature of laws, rules, and regu lations, there may be omissions or inaccuracies in information contained in this document. Before making any decision or taking any action, you should consult a competent professional adviser. Although we believe that the infor mation contained in this document has been obtained from reliable sources, PricewaterhouseCoopers is not responsible for any errors or omissions contained herein or for the results obtained from the use of this information.