Cloud Computing or the IT Industrial Revolution (ITIR): Economic impacts on supply and demand in IT.

Transcription

1 Cloud Computing or the IT Industrial Revolution (ITIR): Economic impacts on supply and demand in IT. Louis Naugès Co-Founder & Chief Evangelist Cloud Revevol Abstract In the early 20 th century, the economist Joseph Schumpeter became famous by popularizing the concept of "creative destruction". Schumpeter's central idea was that "capitalism can be understood as an evolutionary process of continuous development and of creative destruction. In the IT world, the decade will be the one of the Cloud ; it will be a perfect example of this "creative destruction». New actors, new business models will arise and undermine the incumbents vendors who will have a very hard time adapting to strong and profound changes induced by Cloud Computing. - Cloud computing is a great new for organizations which will see their IT budgets decline sharply, the quality of their IT solutions improve and the time needed to implement them decrease by a ratio of 10 or more. - Cloud computing is a very bad new for the vast majority of IT legacy vendors which will see their traditional sources of revenue and activities shrink very fast. 1 - Background: keys for understanding the "real" Cloud Computing Today, Cloud is everywhere! All vendors have added to their offerings the word Cloud because it has become "fashionable". Too often, this is no more than a repackaging of a traditional solution, to which the Cloud label has been added. In the remainder of this text, I will focus on Public Cloud Infrastructures and SaaS (Software as a Service) usages; these are the two main areas where the real economical disruptions generated by the Cloud Computing movement will be the strongest, and where innovation plays a key role. Public Cloud infrastructures On a Public Cloud, Organizations are using servers and infrastructures they don't manage, which are owned and operated by large industrial players such as Amazon or Google. Over the past 10 years, these vendors have been busy building huge Data Centers which allow them to share the economies of scale they have achieved with 1

2 their customers. It is estimated that Google has about 3 million servers in its 40+ Data Centers and Amazon has more the 500,000 servers in operations. AWS, Amazon Web Services, started in 2006; since that time, they have reduced their prices 19 times! This graph shows the high level of Capex investments by Google; in 2011, they have invested $ 3.5 Billion and most of this money has been spent on Data Centers. Google was absent from the IaaS market (Infrastructure as a Service) until June 2012, when they announced at their annual I / O conference that they were entering the IaaS market under the name Google Compute Engine. Among the legacy providers of IT infrastructures, HP, IBM and Microsoft have entered the IaaS market and they all have sufficient financial resources to be able to play an important role. To summarize: to have a reasonable possibility to be a significant player in the IaaS market today, the ticket for entry is $1 Billion. SaaS usages All SaaS solutions have three mandatory features: 2

3 - Hosted on public clouds. - Billed as a service. - A «multi-tenant» architecture: All customers share the same instance of the software. Customers don't have access to the source code. They are not allowed to make any changes to the SaaS application. Any change in the solution which is implemented by the SaaS vendor is immediately available to all customers. All customers use only one version of the software, the most current one. This double industrialization, in infrastructures and applications, is the key for understanding the profound economic impacts of cloud computing on the demand and supply side of solutions and services. 2 - ITIR: IT Industrial Revolution: impacts for client organizations CEOs, CFOs, line of business managers, CIOs, end users... rejoice! I have great news for you: the Cloud Computing Revolution has arrived. Let's summarize its main advantages, both in terms of infrastructures and usages. Benefits of ITIR in infrastructures The industrialisation of infrastructure brings to business clients: A sharp reduction in investments (Capex), increasingly replaced by operating costs (Apex): The computing power of public clouds is charged by the hour, with very competitive rates, which start at 5 or 8 cents / hour for basic Linux servers. They pays only the power needed. A prime example of this is that of a pharmaceutical research laboratory which used the solution from CycleComputing built on AWS, Amazon Web Services. They needed 50,000 servers in parallel for a few hours to analyze a database of proteins and were able to do it at the very low hourly cost of $ How many companies can mobilize 50,000 servers when they need them for a few hours? Access to a variety of solutions, tailored to every need, for networks, servers or workstations. Le's take one example: CCD, Cloud Connected Devices, the successors of legacy PCs! CIOs who understand the benefits of Cloud Computing can extricate themselves from the unique "Master" view for PC and say to all users: «To access SaaS applications, you can use the PC, Macintosh, 3

4 tablet or smartphone of your choice. It only has to be equipped with a modern browser, and make sure all applications are written using the HTML5 standard. Universal Mobility: "Anywhere, Anytime, AnyDevice". Any wireless network, Wi- Fi, 3G or LTE and a mobile CCD will allow any employee to use all SaaS applications. Excellent security: all important data of the company remains in the hyper-secure Data Centers of leading suppliers of Public Cloud. Even better, no applications or data reside on employee's workstations, eliminating one of the greatest risks of IT, today. All network communications are done using HTTPS. There are even now, for cases where confidentiality is absolutely critical, excellent solutions, such as CipherCloud (Disclaimer: Revevol is a partner of CipherCloud), which allow you to encrypt your data in the Data centers of public cloud providers such as Google or Salesforce. Benefits of ITIR in usages SaaS solutions do not meet all the needs of businesses, especially in large organizations. For many years to come, "Core Business Applications" will still need custom developments to adapt to the specific business processes and provide important sources of competitiveness and differentiation. But, for all universal, horizontal applications, the only answer today is... SaaS or SaaS! The most iconic examples are well known: Communication and Collaboration: Google Apps or IBM SmartCloud for Social Business are two good examples of these solutions. CRM, Marketing... Salesforce which started in 1999, will have this year sales of about $ 3 Billion. Human Resources Management: the two leaders in this field, SuccessFactors and Taleo, were bought in 2012 by the two largest legacy vendors of enterprise software, SAP and Oracle, respectively. Is this good news for customers of these SaaS solutions? I'm not convinced. Adaptive Planning, who is the leader in budgeting and reporting processes. Project management, monitoring of travel expenses, cash management... The list is long of all areas for which tyou can find today excellent SaaS solutions. For businesses, the benefits of SaaS are even greater than those induced by the public cloud infrastructures: applications... that work. The hypothesis "my application does not work" no longer exists! When a company decides to acquire a SaaS solution, it will access the same application which is already used by hundreds or thousands of other organizations. Short Deployment times: they are measured in weeks or months, never in years. 4

5 Simultaneous deployments in all subsidiaries, all countries. No more endless planning, country by country, spread over several years. All employees have access, at the same time, at the same applications, everywhere. Applications always up to date. All business customers of a SaaS solution always run the latest version... because it's the only one available! No more migrations nightmares. In the ancient world of legacy applications, it happened, sometimes, that an application deployed in-house would eventually work, after much effort. It was the moment chosen by the software editor to announce that you need to change versions, because the old one you were running is no longer maintained! Lower, variable and predictable costs. All SaaS solutions are billed by time, months or years and by the number of users. The organization therefore knows precisely its applications budgets, year by year, and can continuously adjust its costs based on the evolution of the actual number of users for each application. The following financial table, prepared by the research firm Forrester, come from a comprehensive analysis, comparing the costs of a SaaS application, Google Apps, to the ones from Exchange, the legacy messaging solution from Microsoft, still used in 2012 by a few companies... 5

6 Three important remarks on this data: The smaller the size of the organization, the better the saving from the SaaS solution. Even for very large companies, cost reduction exceeds 50%. This study compares Google Apps to Microsoft Exchange ; Google Apps also provides, for the same price of $50 (or 40 ) / year / person, functions equivalent to the ones of Sharepoint, Lync and Office (for most users). Contrary to what was written at that time at the end of the table, in 2012 Google Apps allows users to work in off-line mode for messaging, calendar and writing text documents. These financial benefits, shown here for Google Apps, are found in all SaaS applications, without exception. Applications which are reliable, continuously updated, and whose costs are 5 to 10 times lower than those of legacy applications: Who can be against SaaS? In summary,this ITIR, IT Industrial Revolution is great news for all organizations, regardless of their industry, their size or their country. This is... the end of a DIY IT. 3 - ITIR: IT Industrial Revolution: Impacts for providers As much of cloud computing profits are strong and immediate for client organizations, it represents a big challenge to most legacy IT vendors. For the majority of legacy suppliers, which lived very well in the prehistoric age, or "precloud" one, the widespread use of Public Clouds infrastructures and SaaS applications is a very, very bad news because their business models will be undermined. The Schumpeterian "creative destruction" will find in Cloud Computing a perfect illustration. I propose to focus this analysis on four core activities of IT, which are among the one which are the most deeply impacted by the ITIR: - Workstations vendors. - Manufacturers of servers. - Editors of business applications. - The IT Services Companies. Workstations. The majority of IT professionals still view workstations as a Windows PC (XP or 7), preloaded with Office. But as the general public has shown, this is changing rapidly with three key changes: 6

7 Mobility has won as it's clearly shown in this graph. Since 2011, 80% of objects access tools to IT applications are mobile : laptops, tablets or smartphones. The variety of forms, power and OS: 4" Smartphones, 5" Phablet (Phone -TAblet such as the Samsung Note), Tablets from 7" to 10", Notebooks, 12" to 17", running Windows, MacOS, ios, Android or ChromeOS. The variety of choices is already staggering and will continue to grow. The browser, as the universal window to access all SaaS applications, on all CCD, Cloud Connected Devices. Today, all "former kings" of the PC era are suffering: Intel is attacked by ARM, the leader in mobile devices, Microsoft, HP, Dell Lenovo and others who dominated the PC market see sales flat or going down every quarter. 7

8 The above graph, using numbers published by the Gartner Group, show clearly that the classical PC market has been flat over the past 4 years. On the smartphone market, the downward spiral of Nokia, RIM Blackberry and Microsoft is impressive, and it is not over yet At the same time, Apple and Samsung rates of growth and profits are impressive, as shown in these statistics just published by Nielsen in June 2012, showing that over the last 3 months, 91% of new smartphones buyers had chosen Android or ios. Manufacturers of Servers Public Clouds mean that organizations are not buying, or buying fewer servers, so it's logical that all the major servers manufacturers, HP, Dell, IBM, Oracle-Sun... have invented a counter-measure called... Private Cloud! Increasingly, Public Clouds leaders, such as Google or Facebook, are building their own specialized servers, based on their specific technical characteristics. In 2011, Google 8

9 was part of the club of the five major manufacturers of servers, and 100% of them were for internal usages! Virtualizing the remaining servers which are still needed for «core business» applications will further reduce the number of servers purchased. Editors of business applications The SaaS market is, by far, the largest of all sectors of cloud computing, so it is logical that the legacy leading publishers, SAP, Oracle and Microsoft are worried about the future of their "on premise" solutions. Saugatuck Technology, the market research company created by Bill McNee and 100% focused on Business Cloud and Cloud IT, published in March 2102 the results of a study done with CIOs of large companies, the U.S., Europe and Asia. I have extracted the following graph from this report: Trends are obvious: the market share of «on premise» solutions will decrease from 50% to 13% between 2012 and 2016! By 2016, CIOs plan to spend three times more on SaaS solutions than on «on-premise» ones. Will the legacy publishers of applications be able to adapt to new modes of operations in a market dominated by SaaS applications? Cultural, financial and human shocks are so important that the most likely answer is...no. 9

10 SAP is a good example: after the lack of success of his in-house SaaS solutions, such as BYD, Business by Design, SAP has decided to purchase native SaaS products and... leaders, such as SuccessFactors and its founder, Lars Dalgaard, to whom they have entrusted the worldwide responsibility of their Cloud / SaaS activities. Service Companies Every morning, hundreds of thousands of Indian engineers, intelligent, well-trained employees of legacy IT services companies such as Accenture or WiPro push the doors of huge «software factories». There, all day long, they will tinker to modify codes for the specific version of a SAP or Oracle Applications for a large company in Europe or in the United States. These " blue-collar software" are the XXI century equivalent, of car factories of the early XX century. By 2020, they will have to find another job because clients organizationd will have migrated between 50 and 80% of their applications to SaaS solutions. After the legacy software publishers, the world of IT services will be the second market most profoundly impacted by the cloud ITIR, why? SaaS projects induce profound changes in the demand for services: The end of mammoth projects: weeks or months against years, few people instead of hundreds of developers; compared to a conventional ERP or CRM project, the costs and average size a project to deploy a SaaS solution are divided by 10 or more. The end of "endless projects": SaaS project, once launched successfully, requires virtually no more intervention from services companies, it just...works! Fewer IT people, more skills: Organizations will need much less "small hands" to modify an «on-premise» ERP, work two years to upgrade a CRM or spend three years to deploy the same application on internal servers in 30 subsidiaries of a large international company. On the other side, the demand for specialized 10

11 skills, able to aggregate SaaS components, ensure links between public clouds solutions and applications still running private clouds will remain very strong. This will be done by a smaller number of IT specialists, highly skilled and better paid. Synthesis: an industrial IT world, which works, by 2020 The decade, the Cloud Computing one, will be exciting to live and follow. In 2020, organizations will wonder how they could work, in 2010, when Cloud Computing was still in its infancy! All organizations using IT will reap huge benefits when they embraze Cloud Computing. On the suppliers side, those born with the Cloud, Amazon, Google, or Salesforce have a major competitive advantage. For legacy vendors, the disruputive nature of Cloud Computing will be very difficult to manage. The key to their survival will be to accept major breaks with their past, their old business and organizational models. I recently visited the remarkable "Computer History Museum" in San Diego, California. The majority of suppliers who were part of the young history of computing, and whose products are on display, Control Data, Wang, Data General or Digital, are now dead! By 2020, how many IT vendors, still dominant in 2010, will have been able to adapt? How many will have joined these former leaders in the cemetery of providers that where not able to understand and ajust to the next wave of revolution in IT? Let's meet in 2021 and talk about it. Louis Naugès Electrical Engineering at Supélec Paris, MBA IAE Paris and MBA Northwestern University (Chicago). Started his professional life in IT and never looked back. Today, he is the "Cloud Chief Evangelist" of Revevol ( a company he co-founded in

12 Operating on five continents in 15 countries, Revevol helps companies, large and small, in their migrations toward Cloud computing solutions. 12