Research Study on the Economic Impact of Cloud Services on South African SMMEs

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1 Research Study on the Economic Impact of Cloud Services on South African SMMEs Prepared by: Adrian Schofield Manager: Applied Research Unit Joburg Centre for Software Engineering at Wits University December 2013 Rev 2.1

2 Contents 1. Executive Summary Objective of this Study Introduction to the JCSE and LINK Centre Background Literature Review Issues Arising Connectivity Mobility Security Policy Choice Survey Results Demographics Current usage Cloud computing status Cloud computing concerns Small businesses and the web Cloud Computing Hype or Reality? Cloud Computing Risks and Rewards Conclusions Bibliography Research Team Adrian Schofield Professor Barry Dwolatzky Charley Lewis... 29

3 1. Executive Summary The term cloud computing has achieved prominence in recent years as the way in which enterprise and their users will access technology, in preference to the traditional in house or outsourced approaches. The Joburg Centre for Software Engineering (JCSE) in conjunction with the LINK Centre (both at University of the Witwatersrand) undertook this research study to evaluate the economic impact of cloud services on South African SMMEs. Having explained what cloud computing is and how it supports the technology needs of an enterprise, we set out to establish its relevance in our local market. There has been a significant amount of research on this topic published in the last few years, both in South Africa and internationally, and an in-depth review of this material guided this study. We found that a high proportion of the published material was funded or compiled by businesses in the vendor community, promoting the benefits of adopting cloud computing. The published literature examines the impact of cloud computing at the macro level (suggesting increased SMME revenues and significant job creation) and at the micro level (addressing issues of compliance, security, access and cost). We found that SMME decision-makers could be faced with a confusing range of choices when considering if cloud was an appropriate tool for them. We tested how a selection of South African SMMEs were dealing with these issues through an online survey, which we compared with similar surveys carried out by other researchers. We found that many respondents were not aware of what actually constitutes cloud computing. They are happy to use the technology without necessarily understanding the terminology. We conclude that there are valid concerns that can be resolved (largely through better user education), that cloud computing does add value at the enterprise level and that compliance can add complexity to adoption. Increased adoption requires easy implementation, understandable pricing and access to affordable, reliable broadband. Economic Impact of Cloud Services on South African SMMEs Page 1

4 2. Objective of this Study The purpose of the study is to provide an in-depth understanding of the potential economic and other benefits which cloud computing can bring to South African small, medium and micro enterprises (SMMEs) as well as highlighting any regulatory/policy impediments or accelerators and how they may be addressed. There have been previous studies of this topic in South Africa (and elsewhere). In this research, we will endeavour to validate what has been concluded and to suggest new trends and influences that have surfaced in our study. The study will be followed by a round table discussion to publicise the study findings as well as to generate debate and discussion with relevant stakeholders in the public, SMME and other private sector spaces. The research questions that have guided this research include: o o o o o What are the views and perceptions of the economic value of cloud services by SMME owners and managers? What has been the economic impact of the use and provision of cloud services by South African SMMEs? Here considerations with reference to the role of cloud services in supporting innovation, improved productivity and job creation are pertinent; What are the experiences of SMMEs in South Africa with issues related to privacy and security? What are the policy implications of SMME experiences, views and concerns with cloud computing so far? What policy/regulatory impediments or accelerators exist to cloud adoption in South Africa and how may these by addressed? The University of Witwatersrand (Wits) has carried out this study, using the resources of the Applied Research Unit at the Joburg Centre for Software Engineering (JCSE) and the LINK Centre. A grant from Microsoft South Africa was used to support the costs of the research project. Economic Impact of Cloud Services on South African SMMEs Page 2

5 3. Introduction to the JCSE and LINK Centre The Joburg Centre for Software Engineering (JCSE) was established in 2005 a partnership between the University of Witwatersrand (Wits), the City of Joburg and other government and industry players. The Centre is becoming the focus of a software development cluster, drawing on the established academic and research programmes at Wits and the expertise of ICT enterprises. The cluster has drawn stakeholders together within the vehicle of the Tech-in-Braam concept around the creation of the Tshimologong Precinct. The JCSE is headed by Professor Barry Dwolatzky and is functionally supported by various Wits departments, including the School of Electrical & Information Engineering and the LINK Centre. The Applied Research Unit within the JCSE has been managed by Adrian Schofield, since its inception in The Unit produces the Annual ICT Skills Survey and other applied research outputs focused on the ICT sector. The LINK Centre is the leading research and training body in the field of information and communications technology (ICT) policy, regulation and management in Southern Africa. The LINK Centre focuses on capacity building in the public sector and development arenas through quality training, applied research and consultancy services necessary to maximise the benefits of the Information Society and the Knowledge Economy. Economic Impact of Cloud Services on South African SMMEs Page 3

6 4. Background What is cloud computing? The use of the term cloud in relation to information technology is not new to the 21 st Century. The principles of sharing expensive computer resources among a variety of users were clearly established in the 1950s and 1960s. The X.25 family of protocols, defined in the 1970s, were popular in the 1980s for packet-switched wide area network communication over leased lines and ISDN connections. When illustrating such a network, the IT managers of the time would typically show the terminals and servers linking to a cloud, wherein the packet-switching took place. The X.25 protocols have largely been replaced by the Internet Protocol. The National Institute of Standards and Technology (NIST) at the US Department of Commerce is generally recognised as the source of the commonly-used definition of cloud computing. Their Special Publication (Mell & Grance, 2011) of September 2011 contains the following: Cloud computing is a model for enabling ubiquitous, convenient, on-demand network access to a shared pool of configurable computing resources (e.g., networks, servers, storage, applications, and services) that can be rapidly provisioned and released with minimal management effort or service provider interaction. This cloud model is composed of five essential characteristics, three service models, and four deployment models. Essential Characteristics: On-demand self-service. A consumer can unilaterally provision computing capabilities, such as server time and network storage, as needed automatically without requiring human interaction with each service provider. Broad network access. Capabilities are available over the network and accessed through standard mechanisms that promote use by heterogeneous thin or thick client platforms (e.g., mobile phones, tablets, laptops, and workstations). Resource pooling. The provider s computing resources are pooled to serve multiple consumers using a multi-tenant model, with different physical and virtual resources dynamically assigned and reassigned according to consumer demand. There is a sense of location independence in that the customer generally has no control or knowledge over the exact location of the provided resources but may be able to specify location at a higher level of abstraction (e.g., country, state, or datacentre). Examples of resources include storage, processing, memory, and network bandwidth. Rapid elasticity. Capabilities can be elastically provisioned and released, in some cases automatically, to scale rapidly outward and inward commensurate with demand. To the consumer, the capabilities available for provisioning often appear to be unlimited and can be appropriated in any quantity at any time. Measured service. Cloud systems automatically control and optimize resource use by leveraging a metering capability at some level of abstraction appropriate to the type of service (e.g., storage, processing, bandwidth, and active user accounts). Resource usage can be monitored, controlled, and reported, providing transparency for both the provider and consumer of the utilized service. Economic Impact of Cloud Services on South African SMMEs Page 4

7 Service Models: Software as a Service (SaaS). The capability provided to the consumer is to use the provider s applications running on a cloud infrastructure. The applications are accessible from various client devices through either a thin client interface, such as a web browser (e.g., web-based ), or a program interface. The consumer does not manage or control the underlying cloud infrastructure including network, servers, operating systems, storage, or even individual application capabilities, with the possible exception of limited user-specific application configuration settings. Platform as a Service (PaaS). The capability provided to the consumer is to deploy onto the cloud infrastructure consumer-created or acquired applications created using programming languages, libraries, services, and tools supported by the provider. The consumer does not manage or control the underlying cloud infrastructure including network, servers, operating systems, or storage, but has control over the deployed applications and possibly configuration settings for the application-hosting environment. Infrastructure as a Service (IaaS). The capability provided to the consumer is to provision processing, storage, networks, and other fundamental computing resources where the consumer is able to deploy and run arbitrary software, which can include operating systems and applications. The consumer does not manage or control the underlying cloud infrastructure but has control over operating systems, storage, and deployed applications; and possibly limited control of select networking components (e.g., host firewalls). Deployment Models: Private cloud. The cloud infrastructure is provisioned for exclusive use by a single organization comprising multiple consumers (e.g., business units). It may be owned, managed, and operated by the organization, a third party, or some combination of them, and it may exist on or off premises. Community cloud. The cloud infrastructure is provisioned for exclusive use by a specific community of consumers from organizations that have shared concerns (e.g., mission, security requirements, policy, and compliance considerations). It may be owned, managed, and operated by one or more of the organizations in the community, a third party, or some combination of them, and it may exist on or off premises. Public cloud. The cloud infrastructure is provisioned for open use by the general public. It may be owned, managed, and operated by a business, academic, or government organization, or some combination of them. It exists on the premises of the cloud provider. Hybrid cloud. The cloud infrastructure is a composition of two or more distinct cloud infrastructures (private, community, or public) that remain unique entities, but are bound together by standardized or proprietary technology that enables data and application portability (e.g., cloud bursting for load balancing between clouds). 30 years ago, connections through the cloud were very expensive and typically only available through the incumbent (monopoly) telecommunications provider. Users would be large enterprises with the need for accessing common data in different locations, such as between Head and Regional or Branch Offices. The development of the Internet as a services environment supporting relatively Economic Impact of Cloud Services on South African SMMEs Page 5

8 low cost devices and storage capacity has led to the current growth in cloud computing. The commoditisation of services and applications through mobile devices has created a generation of consumers/end-users who accept the cloud environment as the normal way to access information, services and communications. This, in turn, has put pressure on enterprises to adapt their information processing to utilise this environment. In this study, we have focused our attention on the computing needs of small, medium and micro enterprises (SMMEs).There is a considerable disparity in the approach to acquiring and using technology between micro and medium enterprises. While the latter will often have resources dedicated to managing these tasks (such as an IT or network manager, or even their own systems developers), the former will merely seek an affordable solution to a business problem. Our research endeavours to identify the real contribution of cloud technology to these different enterprises. No use of technology exists without being subject to government policy and regulation. The Organisation for Economic Cooperation & Development (OECD) says in the introduction to its publication on Measuring the Internet Economy (OECD Publishing, 2013): Even though policy makers have been keenly aware of the Internet s increasing economic importance, there is no widely accepted methodology for assigning an economic value to the Internet. Policy makers look to broadband and mobile data networks as platforms for innovation and development. Governments increasingly fund broadband rollouts, either through direct public investment or via the modification of universal service programmes, to extend access and achieve these goals. Given the growing importance of the Internet as a policy tool, the question about the value of the Internet economy becomes particularly relevant. There is a high level of interest, therefore, in being able to measure the size of the Internet economy as a way to understand the effects of various investment strategies, regulatory rulings and policy decisions. There have been various studies that attempt to address this issue, but the methodologies are not always consistent with statistical standards and economic concepts. Based on our review of this and other relevant studies and publications, our study highlights where South African and international policy issues influence the value of cloud computing to SMMEs and, through their activities, to the country as a whole. In Gartner s predictions (Jacobs, 2013) of the top 10 technological trends for 2014, cloud computing is mentioned in four of them, so we can be confident that its use will grow in importance at all levels of enterprise. Gartner also suggest that the bulk of new IT spend in 2016 will be in cloud computing. On the other hand, some commentators and analysts suggest that the vendor community is overdoing the promotion of cloud as the solution to every IT manager s problems. Economic Impact of Cloud Services on South African SMMEs Page 6

9 5. Literature Review There is a wealth of literature on the topic of cloud computing relevant to SMMEs in the South African context, with additional material being published daily. During the course of the review for this study, we selected about 100 items that contained facts or debate that would contribute to the outcomes of our research. Not all of them are cited, as there is much duplication and we wanted to avoid repeating any specific vendor-aligned messages. The items we have reviewed cover academic and commissioned research, commercial white papers, official reports, industry association reviews and trade press commentary. Any SMME decision-maker seeking information on the topic would be advised to differentiate sponsored trade publications from objective commentary and to identify peers who have experienced utilisation of cloud computing for reference purposes. Although there is material available from several years ago, we have also chosen to concentrate on the more recent publications. The items discussed below are a representative selection, highlighting the predominant factors, most of which are common to current research output. Two significant studies were published in South Africa in June 2013 by the Free Market Foundation (FMF). One, by Mike Schüssler and Jasson Urbach is The Economic Impact of Cloud Computing in South Africa (Schüssler & Urbach, 2013) in which it is suggested that cloud computing has the potential to create jobs per existing jobs in the South African economy for the same amount invested. The study makes reference to SMEs (small and medium enterprises) but this is not the focus of the study. The second FMF publication is The Regulatory Environment Affecting Cloud Computing in South Africa (Moore, 2013) by Gary Moore, subtitled Legislative and Policy Measures Influencing the Implementation of Cloud Computing. This detailed study was summarised into a small booklet compiled by Terence Davie and also published by the FMF, A Guide to Laws and Regulations Affecting Cloud Computing in South Africa (Davie, 2013). The message we take from the regulatory information, as it relates to SMMEs, is the ease with which a business owner can transgress any of the myriad laws and regulations that apply to operations in South Africa. However, the reality is that it is not difficult to categorise the areas that need attention. These include privacy and data protection, companies and tax laws and intellectual property rights. Whilst we expect owners and managers of SMMEs to take heed of the need to comply with the statutes detailed in these publications, we believe the risks are manageable and that compliance need not incur significant costs. We explore these issues further in the next section. The Schüssler/Urbach study relies on the link between reduced initial capital costs flowing from the use of cloud computing and the rate of creation of new enterprises to conclude that there is the potential for job creation as mentioned above. We will examine whether this link applies in the SMME environment and the influence of South African factors on enterprise and job creation. We will also examine whether assumptions based on economic data available in 2009/10 remain valid in the light of more recent local and global economic experience. This examination is relevant in view of the reference by Schüssler and Urbach to the papers published by Frederico Etro (Etro, 2009) in May 2009, updated in February 2011 (Etro, 2011), on the economics of cloud computing in Europe. Etro s research was carried out in the early days of the current wave of cloud computing and he calls his study an experiment and a simulation in identifying the impact that the diffusion of cloud computing will have in Europe. Etro cautions that Economic Impact of Cloud Services on South African SMMEs Page 7

10 we should take the estimates on the impact on employment with care. He suggests that a fast adoption of cloud computing in Europe will result in the creation of new SMEs and more than a million new jobs. However, he also says that the estimated reduction in unemployment rate that this represents will be between 0,05% and 0,3%. Translated into the South African scenario, this would not have a major impact on the jobless numbers. We can compare the European view with the Australian view, looking at the study commissioned by the Australian Information Industry Association (AIIA) and the Australian government, carried out by KPMG (KPMG, 2012). Therein, the focus is on the effect of cloud computing on Gross Domestic Product (GDP) growth and not on job creation, as illustrated in this statement in the Executive Summary: Based on the current level of Australian GDP, KPMG estimates that adoption of cloud computing services across 75% of relevant ICT spending, achieving opex and capex savings of 25% and 50% respectively, after 10 years would result in an increase in long-run GDP of A$3,32 billion per annum. At 50% adoption levels, the GDP gain is A$2,16 billion per annum. The Summary goes on to group the benefits of cloud computing as follows: Direct cost savings reduced cost per unit of output Productivity improvements increased output per unit of cost Innovation ability to deliver new and evolving products The KPMG study was cross-sectoral and included companies employing from 20 personnel up to many thousands. Papers published in South Africa include two from the University of Cape Town. Madisha and Van Belle reported on research into software-as-a-service (SaaS) readiness and adoption in South Africa (Madisha & Van Belle, 2009), with the intention of informing prospective SaaS adopters about the challenges of adoption and the mitigation thereof. Madisha and Van Belle carried out an extensive literature review and arrived at the following as the characteristic benefits and challenges associated with SaaS (which we find generally apply to the broader field of cloud computing): Benefits Quick implementation Pay per use Superior IT infrastructure and support Transparent upgrades Mobility Challenges Limited customisation Limited integration Vendor lock-in Data security and privacy Broadband infrastructure Managers were targeted by Madisha and van Belle in a survey of SMEs and non-profit organisations (NPOs), to which 104 valid responses were received. Factors influencing SaaS adoption were closely related to the benefits and challenges listed above and recommendations focused on education of potential users, promotion of ICTs by government and access to affordable, reliable Internet connections. In the second UCT paper (Hinde & Van Belle, 2012) Charles Hinde and Jean-Paul Van Belle set out to explore the adoption of cloud computing within South African SMMEs and develop an insight into the advantages and disadvantages thereof. Economic Impact of Cloud Services on South African SMMEs Page 8

11 Again, extensive literature review was carried out, much of it common to the earlier paper. The study highlighted the difference between the issues of cloud adoption for SMMEs and those affecting larger organisations and came to similar conclusions about the drivers and inhibitors of cloud computing adoption by SMMEs. 72 responses to a survey were incorporated into the study and compared with a 2011 survey carried out by ITWeb and some European data. We will examine that comparison further in Section 6 of this paper. The conclusions were that small IT companies with tech savvy owners were quite aggressive in adopting cloud computing and that the benefits assuage any concerns fairly quickly in the post-implementation period. In April 2012, the International Telecommunication Union (ITU) published a study by Slaheddine Maaref on Cloud Computing in Africa (Maaref, 2012), examining the issues from a legislative and regulatory perspective. The study concludes that, against the background of the need for broadband infrastructure, there are clear advantages of cloud computing but that concerns over security, confidentiality, data protection and network reliability must be addressed. Recommendations include effective regulation, comprehensive cloud computing contracts, establishment of data centres, introduction of training programmes and cross-border standardisation. In March/May 2013, Mpho Mohlameane and Nkqubela Ruxwana submitted a paper to the Journal of Economics, Business & Management entitled The potential of cloud computing as an alternative technology for SMEs in South Africa (Mohlameane & Ruxwana, 2013), in which they investigated the challenges faced by SMEs in the adoption of traditional ICT solutions and the potential for cloud computing as an alternative technology. Interestingly, they excluded very small and micro enterprises with fewer than 10 employees, which they allege do not have any potential of adopting ICT services. This statement is highly debatable and we will test the assertion in our survey results. Mohlameane and Ruxwana go on to find that there is widespread adoption of ICT solutions among SMEs such as services, office suite, servers and network infrastructure. They note challenges hindering adoption of ICTs include insufficient capital, a lack of ICT skills, performance issues, downtime and disaster recovery, and the cost of ICT solutions. In support of cloud computing as an alternative to the traditional use of ICTs, Mohlameane and Ruxwana quote from research by Osterman Research (Osterman Research, 2012) and Ted Schadler (Schadler, 2012) illustrating the savings to be made by moving services such as and office suite products into the cloud. Their recommendations include SMEs increasing their knowledge of cloud computing, vendors developing proof of concepts and presentations to SMEs and trial periods, such as those offered by Google, Salesforce and Microsoft. Osterman Research published a further white paper in November 2012 (Osterman Research, 2012) which, in our opinion, is an example of how SMME decision-makers can be confused by the proliferation of data available on the topic of cloud computing and also demonstrates the tendentiousness of vendor-driven research. The paper claims that the three primary benefits of the cloud for small businesses are: The cloud can significantly reduce the costs of providing , voice, fax, realtime and other forms of communication compared to managing these services using internally deployed and managed infrastructure. The cloud can improve communications by eliminating the impact of electricity or Internet outages, and it can minimize the impact of slow Internet connections. Economic Impact of Cloud Services on South African SMMEs Page 9

12 The cloud enables the deployment of unified communications systems and the improved business efficiencies that accompany the use of this technology. The first benefit may well be true (in part, at least) but we would argue that the second does not make sense, since cloud computing is (by definition) dependent on a reliable, high speed Internet connection. We confess to being mystified by the second benefit as it would appear that the opposite is true. The mention of unified communication systems in the third point is unique to this document as a primary benefit. We note that the paper was sponsored by MynextMail, a business solutions provider. Another publication in early 2012 was The Open Group s Maximising the value of cloud for smallmedium enterprises (Isom, et al., 2012) a guide aimed at executives in SMEs. The guide was produced to make small enterprise owners more aware of the value of cloud computing. The authors highlighted the light nature of information technology in small and medium enterprises, noting characteristics such as smaller IT budgets, use of commercial off the shelf (COTS) software, less sophisticated systems and use of third-party facilities. The Open Group Guide explains the principles and elements of cloud computing and suggests that SMEs can benefit from adopting cloud computing in the following ways: Quick provisioning of IT services supports rapid time-to-market, thus improving competitiveness; The shift from Capex to Opex and scaling of cloud services according to need reduces costs and improves cash flow; Cloud computing enables mobility of the workforce These benefits are common to the majority of analysts, unlike those identified by Osterman, above. The Guide stresses that business owners must manage the risks associated with cloud computing, as with any other use of ICTs, including security and privacy, integrity of the providers, regulatory compliance and service management. The Guide assists SMEs by outlining the typical workloads that are candidates for transfer to cloud operation, from basic infrastructure and standard office suites to more sophisticated management systems and vertical applications. The types of cloud environment and levels of cloud services are explained and the issues of cloud integration are considered. For a better view of the risks associated with cloud computing, especially for SMMEs, we selected a May 2013 publication by the Australian Government s Institute of Criminology, Cloud computing for small business: Criminal and security threats and prevention measures (Hutchings, et al., 2013). This paper confirms the attractiveness of cloud computing for small businesses but cautions that the service providers and their clients are exposed to significant risks of criminal behaviour and security breaches. It concludes by identifying the actions that can be taken by small businesses and the cloud service providers to mitigate the risks and prevent losses. Admittedly, the threats are daunting but adopting the right policies and procedures will enable most of the concerns to be resolved, putting the small enterprise on a more equal footing with its larger competitors. A recent addition to the commissioned reports on cloud computing s impact is the Boston Consulting Group s Ahead of the Curve: Lessons on Technology and Growth from Small Business Leaders (Michael, et al., 2013). This study classifies enterprises as leaders, followers and laggards, based on their adoption of technology and suggests that, If more SMEs could achieve the growth rates of technology leaders, we estimate that SME revenue could potentially grow by $770 Economic Impact of Cloud Services on South African SMMEs Page 10

13 billion also have the potential to create an additional 6,2 million jobs. (p5) While we agree with the statement s principle, we contend that the culture of winning that makes leaders adopt technology cannot be used to argue that technology adoption makes winners. We see their success as the result of factors such as leadership, entrepreneurship, access to funding, innovation and the like, where one of the characteristics is that they use the most effective tools they can acquire. We would argue that good management leads to good IT adoption, which leads to better productivity and profits, which leads to higher employment levels. Having said that, we do agree that the Boston Consulting Group study presents some valuable information to guide SMEs and policy makers in assessing the value of technology adoption and using appropriate solutions to support economic growth. The volume of literature on the subject of cloud computing is evidence of the level of interest in the topic. In addition to the formal research outputs, there is a daily stream of advice from on-line media houses such as TechTarget (www.techtarget.com) and ComputerWeekly (www.computerweekly.com), most of which is sponsored by the big vendors. What the small business owner or manager can gain from this material depends on their willingness to devote the time required for sifting the wheat from the chaff. It is not surprising that a high percentage of the information on offer is either directly from or sponsored by the providers of services related to cloud computing, extolling its virtues. In the next section, we will identify the issues as seen from the SMME perspective, before checking them against the results of our survey and other surveys. We end the literature review with two quotations from Brainstorm magazine s Round Table on Cloud computing (Bakker, 2013) in September 2013, which support what we found: If one believes the technology-focussed press around the world, every single ICT vendor on the planet has magically become a provider of cloud-friendly products and services. (p.69) Anton Heÿdenrÿch, an analyst at Africa Analysis, believes vendors are doing too much to promote cloud, referring to the fact that just about every vendor press release these days attempts to capitalise on the hype around cloud. (p.67) The last word comes from the same magazine s feature on SMEs in September 2013 (Barnard, 2013): Paying as little as R79 per month for access to Microsoft s Office 365 suite is palatable to even the smallest business. Our research suggests that business owners of any size want to know what the service will cost, what it will do and how easy it is to implement in their environment. Over-hyping the attractions of cloud computing will lead to failure understanding of the real potential benefits, supported by carefully managed adoption and implementation are the ingredients of success in this market. Economic Impact of Cloud Services on South African SMMEs Page 11

14 6. Issues Arising In this section, we identify the common issues relevant to SMMEs and the adoption of Cloud Computing, based on our analysis of existing literature. From the literature available in print and on-line, there is general acceptance among the authors that cloud computing for SMMEs is a good thing, offering the potential for a cost-effective access to the ICT tools that enable businesses to be more efficient, more productive and more competitive. What is also clear, though, is that small and medium businesses need to be aware of and to avoid the pitfalls that might be involved in adopting this solution to their IT requirements. Some concerns are particularly relevant in the South African/African context; many are common across the globe. We question whether many of the decision-makers in the SMME arena are actually aware of cloud computing and what it might mean for them as an enhancer of their business. Our research indicates that many such users see no reason to keep up to date with technology trends they seek a feasible solution to their problems based on their experience to date and, possibly, on word of mouth. Many are using cloud services without realising this, as we will explore in the survey results, below. Connectivity It (almost) goes without saying that connectivity is at the heart of the cloud computing issues for SMMEs, particularly in Africa and, to a large extent, in South Africa. Whereas larger enterprises can afford to have duplicate or triplicate means of connection to the networks, even in apparently wellconnected geographical areas, smaller organisations need the right answers when it comes to questions of reliability, speed and cost from a single service provider. There have been significant improvements in recent years in the cost and availability of broadband connections in South Africa, largely thanks to increased international bandwidth and growing competition from wireless access providers. Many small businesses (and private users) back up their ADSL connection with a 3G option. However, there is still considerable further improvement required before small enterprises can be confident that their connection will be always on and not out of bundle. The pervasiveness of ICTs and the Internet in the management, administration and control functions of 21 st Century enterprises leads to the recognition that connectivity is a basic utility, along with electricity and water. The prolonged failure of the connection would have a measurable negative economic impact related to the scale of the failure. At the SMME level, the lack of business recovery or mitigation processes could lead to business failure in the event of a prolonged separation from the cloud. It is therefore important that the country s broadband policy (currently under development) recognises the critical need for affordable and reliable access to the broadband network, with spectrum managed to take maximum benefit from advances such as LTE. Mobility Wherever the data and applications are stored or hosted, the user interface is the second most important element, after the connection. The move from desktop hardware to portable and then to hand-held devices has enabled users to choose to be connected from almost anywhere at any time. The proliferation of smart phones, tablet and ultrabook computers has created a significant workforce taking advantage of no longer being anchored to a work station but now carrying it with them. Economic Impact of Cloud Services on South African SMMEs Page 12

15 There are measurable productivity and efficiency gains from the use of mobile connections. However, SMME decision-makers need to be aware of the risks arising from any loss of the devices or interception of sensitive data. Security The user interface and the cloud infrastructure must offer a degree of security that satisfies the enterprise s requirements. By security, we mean that the user s data is protected from theft or loss and that its integrity can be preserved from end-to-end. Many small business owners, preoccupied with the pressures of managing their operations, will trust that the cloud is a secure environment. This trust follows the assumption that nobody eavesdrops on their voice calls and that s are delivered to the intended addressee. Many are aware of the risks of viruses, malware and phishing but the scale of interception by government agencies revealed in the PRISM saga in 2013 will have undermined many people s faith in the Internet. For a period through August and September 2013, following the Snowden revelations about PRISM, there was a spirited ( ) debate among members of the Internet Society under the thread The end of the Internet lamenting the loss of trust in the Internet s ability to protect privacy and the diminution of its value as a forum for open debate. However, many correspondents suggested that the Internet user community would live with the risk to their data privacy, with the convenience of the services available outweighing the possibility of invasion of privacy. Our research supports this in respect of the average individual and small enterprise. Policy We mentioned in the literature review Gary Moore s FMF publication (Moore, 2013) on the regulatory environment in South Africa. Without absolving any enterprise owner or manager from compliance with all the relevant laws and regulations, we highlight the following as being of particular interest to SMMEs. Electronic Communications Act, 2005 reflecting the convergence of broadcasting and telecommunications and promoting the interests of consumers and SMMEs Electronic Communications and Transactions Act, 2002 facilitates and regulates electronic communications and governs the handling of electronic transactions Protection of Personal Information Bill, 2009 Signed into law, becoming effective late 2014, regulates collection, storage and processing of data containing personal information Promotion of Access to Information Act, 2000 requires certain information to be available on request, details of how to obtain must be on the enterprise web site Regulation of Interception of Communications and provision of communication-related information Act, 2002 requires that all SIM cards are registered to an identifiable owner, to inhibit fraud and other criminal activity Consumer Protection Act, 2011 protects consumers from false claims in marketing and advertising material and from defective products and services, including those supplied inline Companies Act, 2008 and various Tax Acts and SARS regulations requiring the retention of records in readable formats for minimum periods of time, including s and other correspondence Economic Impact of Cloud Services on South African SMMEs Page 13

16 Intellectual Property rights, as covered by copyright and patent legislation SMMEs need to ensure they have the right to use the software offered within the cloud and that they have taken steps to protect their rights in any software they have developed for such use by others Compliance for SMMEs can be challenging, particularly if their operations are associated with larger enterprises. Not only do they have to be knowledgeable about the laws and regulations that directly affect them but they may also have to meet the requirements of their large customers or suppliers. The FMF publication is a useful tool in this regard. Choice The final issue is the selection of service providers in the cloud environment. SMME decision-makers will be faced with a confusing range of choices, both locally and globally. In our literature review, we have already mentioned the plethora of information sources on the topic of cloud computing. The challenge for SMME owners and managers is to establish what they need to know in the most effective manner. One can look to a company like Tolly (www.tolly.com) for their analyst and test reports, but they may not cover the suppliers being considered. The trade media (such as IT News Africa and ITWeb) will periodically review the available offerings but in an uncritical way. There are cloud services brokers and value-add resellers, who may have a stronger allegiance to their supplier, rather than to their customer. In respect of this trend, Gartner suggests that, by 2015, at least 20% of all cloud services will be consumed via cloud service brokerages, rather than directly (Gartner, 2013) but there is no indication of how much of this will relate to SMMEs. There are issues of integration which need to be resolved. The user needs to know if it is possible to source (for example) , ERP, CRM and accounting from different suppliers, or whether it is better to depend on a single service provider. However the decision-maker arrives at the choice of vendor(s), they must start with a very clear understanding of their requirements and costs. Cloud does offer greater efficiency and cost-saving opportunities but, like all applications of technology, must be implemented and managed effectively. Economic Impact of Cloud Services on South African SMMEs Page 14

17 7. Survey Results An important component of this research study was to carry out a survey that would update the picture presented by previous surveys reported over the last two years. Those include: ITWeb 2 nd Online Cloud Computing Survey 2011 (ITWeb Surveys, 2011) (279 respondents); SME Survey 2012 (Goldstuck, 2012) (2 000 respondents); Deloitte Cloud Computing 2012 (Deloitte, 2012) (Unstated respondents); Microsoft SMB Cloud Adoption Study 2011 (Microsoft, 2011) (3 258 respondents); IDG Cloud Computing Survey 2013 (IDG Enterprise, 2013) (1 358 respondents). With the exception of Arthur Goldstuck s SME Survey, the South African surveys are drawn from small numbers of respondents and ours is no different in this respect. Although Goldstuck estimates there are SMEs in South Africa, making contact with them and persuading them to respond to an ad hoc technology survey is not easy. Using on-line sources, we identified and contacted over 600 SMMEs, spread across most sectors of the economy and all Provinces. The selection was random, requiring that the contact details were valid and that there was no bias towards any economic sector or size of enterprise. Our success rate of 132 responses reflects that of Madisha/Van Belle and Hinde/Van Belle (op.cit.), who recorded 104 and 72 responses, respectively. This is less than our target of 200 responses but we were constrained by time from pursuing the contacts further. We feel that a very high proportion of SMME owners would discard survey requests that had no direct bearing on their revenue generation. Many of those contacted for follow up to the first request advised that they would respond but did not do so. We also found that there was even less willingness to be interviewed on the topic, with only a handful of respondents discussing the issues with us. The survey questions were deliberately framed to follow on the types of questions asked in the earlier surveys, so that we can more easily identify commonalities and trends. Comparisons will be noted where appropriate in the analysis of responses, below. Demographics 57% of our responses came from companies employing 10 or fewer people; 30% from the employees band; 11% from and 2% from There were no responses from enterprises employing more than 250 staff. These results are thus more weighted towards the micro and small enterprises than the 2011 surveys in the Hinde and Van Belle paper (Hinde & Van Belle, 2012). 66% of our respondents were located in Gauteng Province, 18% in Western Cape and 7% in KwaZulu Natal. This is slightly more weighted towards Gauteng than the demographics of South Africa but not by a sufficient margin to influence the conclusions. Respondents were drawn from the following sectors of the economy: Chemical Products; Construction; Cultural, Tourism & Hospitality; Education & Training; Financial Services; Food & Beverage Manufacture; ICTs; Metal & Engineering; Mining; Other Services. The latter category represented 34% of the responses, followed by ICTs with 32%. Each of the others was less than 10% of the total. Current usage We asked a series of questions to establish the current level of usage of technology by our respondents: Economic Impact of Cloud Services on South African SMMEs Page 15

18 Does your enterprise use the following? We would expect desktops, laptops and mobile phones to be in common use, and all are found in over 80% of our respondents enterprises. Given the acknowledged high level of penetration of mobile phones in South Africa, we might have expected to see higher than 89% in that category but the high proportion of small and micro enterprises in our sample is the likely explanation. Of greater significance is the ready adoption of tablet computers in this sector, in use by almost 64% of respondents. Does your enterprise use cloud computing? We asked this question without qualifying what we meant by cloud computing to establish a baseline of understanding among the respondents about the technology. Equal numbers of respondents said Yes and No, with almost 5% responding Don t know. This correlates with the Hinde and Van Belle (Hinde & Van Belle, 2012) result of 52% saying their company had adopted a cloud service. We will compare these answers against the responses to the next question. Does your enterprise use any of the following? The responses to this question illustrate the difference in understanding of cloud computing between the SMME respondents and the vendor community. Less than 5% of respondents say that they use none of the listed applications all of which fall into the category of applications that run in the cloud. This supports our view that smaller enterprises do not concern themselves with how a service becomes available, only with its value to them in the course of business and how easy it is to use. For example, LinkedIn and Facebook are recognised more as social media, not cloud services. Further reflecting the high number of small and micro respondents, the simpler tools, such as Gmail and Dropbox, have achieved good penetration levels, whereas Salesforce.com is seen as too complex at this level of the market. Economic Impact of Cloud Services on South African SMMEs Page 16

19 Does your enterprise have its own website/ ? Almost 90% of respondents have their own website and addresses, i.e. they indicate the company name in the address. Cloud computing status Our next series of questions examines the respondents perceptions of the value and risks of cloud computing and their plans and progress towards implementing cloud computing within their enterprise operations. We first asked for their rating of where cloud computing adds or could add value to their business. With respect to cost reduction, 61% said it would add at least some value ranging up to high value. 71% felt that it would simplify IT (51% feeling very positive that this would be the case). 60% thought that there would be a reasonable to high value arising from cloud computing providing the ability to move IT out of their business. 58% were positive about the opportunity to effect a reduction in energy demand. These results reflect those shown in the IDG Cloud Computing Survey (IDG Enterprise, 2013), where the drivers towards cloud computing were listed as business continuity, greater flexibility, speed of deployment and improved customer support, followed by reducing waste and lower Capex. Don't know Already implemented Busy implementing Considering implementing Have not yet started Will not start Progress with Cloud implementing cloud computing Only 82% of the respondents chose to answer the question, How far have you got with using cloud computing? Correlating the answer to the earlier question about the use of cloud computing within the enterprise, 50% of respondents who answered this question say they have implemented or are Economic Impact of Cloud Services on South African SMMEs Page 17

20 The Deloitte Survey (Deloitte, 2012) reported 41% of respondents already engaged in a cloud strategy, suggesting the move into cloud computing continues. The next question asked, If you are considering implementing or have implemented (cloud computing), which of the following applications/services would/did you initially move to the cloud? All respondents answered this question, which seeks to identify which cloud services or applications are seen to be the most useful to move from the internal environment at the outset of a migration project. As web-based systems have become more akin to the on-device applications, it makes sense that is the most popular service to move into the cloud at the outset, as indicated by almost 55% of respondents. SMME managers will find it easier to access from any device in any location using a cloud service, rather than setting up (for example) an Exchange Server. The ITWeb Survey (ITWeb Surveys, 2011) had 70% of respondents putting mail systems at the top of this list. For a small enterprise, moving their File Servers (34%) and Data Storage & Backup (41%) into the cloud is often as easy as using a free service such as Dropbox, Google Drive or SkyDrive. As their needs outgrow the entry-level services, it is an easy transition into a more formal process. While we note that 36% of respondents mentioned moving web servers into the cloud, we believe that (in many cases) they were already there. Certainly at the micro to small level of the market, not many enterprises will host their own web servers. Most will use an external service provider. In the 2011 surveys noted by Hinde and Van Belle (Hinde & Van Belle, 2012), web hosting and hosting were the top two services, followed by data backup and CRM. The preference for the various business applications that can move into the cloud would seem to reflect the maturity and reputation of the offerings from the vendor community. Microsoft, Sage and Oracle are among the trusted brands that users are confident will meet their needs. Finally, in this section, we asked two questions to establish the type and model of cloud computing that SMMEs are adopting. Only 84% of respondents answered the question about the type of cloud they were moving into, with a fairly even spread between public, private and hybrid. Economic Impact of Cloud Services on South African SMMEs Page 18

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