Despite the hype, cloud applications do not rule the large corporation, although their usage is expected to increase significantly. Cloud applications are still in the minority of all applications in companies (19% of the average large U.S. company’s applications, 12% in Europe, 28% in Asia-Pacific, and a healthy 39% in Latin American companies). But they expect the ratio of cloud to on-premises applications to increase greatly by 2014. The case of Australia’s largest bank, Commonwealth Bank of Australia, illustrates why many companies have gained a voracious appetite for cloud applications.
- Cloud applications as a percent of total applications (by region of world)
- Cloud applications as a percent of total applications (by size of company)
- Case Study: Commonwealth Bank of Australia
Despite all the press and technology research firm coverage of cloud computing in the last few years (especially in 2011), software applications that are hosted in public or private clouds still represent only a minority of total applications software for large companies. The clear majority of applications in 2011 – 81% in the U.S. companies and 88% in European companies – were resident on computers located on their premises.
To a lesser extent, this was also the case in the Asia-Pacific and Latin American companies that we surveyed. In Asia-Pacific, on-premises applications were 72% of all applications in 2011, while 28% were based in the cloud. In Latin America, 61% of all corporate applications software were on-premises vs. 39% that were in the cloud.
However, the companies we surveyed expected these percentages to change significantly by 2014. American companies projected cloud applications to increase from 19% of all applications (cloud + on-premises) to 34% by then. The European companies surveyed expected that cloud applications as a percent of total applications would double, from 12% in 2011 to 24% by 2014.
The comparisons of the above regions reflect a mix of company sizes, both large and mid-sized. For example, 88% of the European respondents had revenue of at least $1 billion, while 75% of the Asia-Pacific and 49% of the Latin American respondents were $1 billion+. Even if we look only at companies with at least $1 billion in annual revenue in all four regions of the world, cloud applications as a percent of total corporation applications show a trend similar to the overall results.
In the U.S., $1B-$10B Companies Have the Greatest Percentage of Cloud Apps
In each region, we looked at cloud apps as a percent of total apps by company size and saw some interesting patterns. One was that in American companies the “mid-sized” large firms ($1 billion to $10 billion in revenue) were the heaviest users of cloud applications. In these companies, cloud applications represented 27%-28% of total applications. And by 2014, U.S. companies with revenue of between $1B-$5B said they expected cloud applications to be 52% of all applications – more than twice the percentage (23%) expected by companies of more than $50B in revenue. (See Exhibit II-3.)
In contrast, cloud applications were only 14%-17% of total applications in companies with revenue of more than $10 billion. In Europe, there was much less variation in cloud applications as a percent of total applications by company size (for 2011, and projected for 2014). (See Exhibit II-4 below.)
Cloud Adoption: Reaching Critical Mass
The numbers showing future cloud usage by 2014 are striking – ranging from one-quarter of all corporate applications being in the cloud in Europe, to one-third in U.S. companies to about half in Asia-Pacific and Latin American companies. Yet even though these numbers are projections of future adoption trends, we nonetheless believe that large corporations have passed the inflection point, or critical mass, in adopting cloud applications – at the very least, in private clouds that a company owns (or are run for them by a third party).
Our study of a large telco illustrates this point. Today, about 30% of its applications are cloud-based (mostly private cloud-based systems that it runs in its own data centers). In the last two years, the company has moved all its financial systems for its general ledger, payables and fixed assets to the cloud. At the end of 2011, it was moving all HR applications to the cloud, standardizing on SAP and other enterprise applications. However, by the end of this year the company expects 80% of its applications to be in its private clouds. The company has also launched many new cloud applications that had no on-premises predecessors. A good number of these were cloud-based financial applications – specifically, general ledger and fixed asset applications that are helping the company track its sizable capital investments in both its wire-line and wireless networks.
The telecommunications services company’s aggressive of adoption of cloud computing was far from unusual, even outside the U.S. Consider the Commonwealth Bank of Australia. The bank began shifting applications to the cloud in 2008. Today, the bank has dozens of cloud applications serving its sales, customer service, HR, operations and IT functions. And the bank continues to identify which of its more than 3,500 applications that it has amassed over the last 30 years can (and can’t) be shifted to the cloud. The objective, however, is to put as many applications into the cloud as possible, said Dilan Rajasingham, executive advisor to the bank’s chief information officer. (See case study below.)
Commonwealth Bank of Australia: Using the Cloud to Fund a Wave of Innovative Financial Services
Founded exactly 100 years ago and headquartered today in Australia’s largest city (Sydney), Commonwealth Bank of Australia is the country’s largest bank, with revenue of US $35 billion. Naturally, as a large financial institution, the bank has a healthy appetite for IT, spending nearly $1 billion on it annually. It has more than 3,500 software applications, amassed over 30 years.
That’s where cloud computing comes in: Given the bank’s penchant for introducing a steady stream of innovative technology-based services to its retail and other customers, it must find ways to economize on IT. Four years ago, the bank launched what it refers to as a core banking modernization program for its vast number of information systems. It has also been identifying applications that should go in public clouds, a private cloud or a hybrid of the two.
By shifting dozens of on-premises applications to the cloud starting four years ago, the bank has reduced operational costs. This has freed up money that the bank has reallocated into delivering new services. “We want to get out of infrastructure computing and into fine-grain components and highly granular data so that our customers enjoy new services,” the bank’s chief information officer, Michael Harte, explained to CIO magazine.
To reduce costs, CBA has created “As a Service”/cloud offerings in sales, customer service, HR, operations and IT applications and environments over the last four years, says Dilan Rajasingham, executive adviser to the CIO. Some of these are core enterprise systems – e.g., payments and talent management, while others are pilots and proof of concepts such as “Big Data,” and others still are support environments such as development and testing.
How can moving to “As a Service” and cloud reduce IT costs at CBA? A prime example is the bank’s “as a service” payment hub. By developing a single payment solution once to be used across the bank, from front office to back office, and with standard interfaces, CBA has achieved significant savings in system integration and development costs and time. Components of the solution’s modular architecture, such as SWIFT (for international money transfers), have also been extended to CBA group entities across Australia and Asia.
The bank has also become a provider of cloud services to its customers. For example:
- It has collaborated with pharmaceutical, manufacturing, and distribution companies – and even other banks — in the creation and provision of cloud-based databases “as a service.”
- It provides cloud infrastructure services running on CBA servers (as well as the capability to run on Amazon’s cloud servers). With these services, CBA develops and tests new computing applications used internally and externally. Harte told CIO magazine that the bank can launch new cloud computing services in less than 10 minutes and at as little as one-tenth the cost of testing and developing applications in the past.
So how do you add up the benefits? Rajasingham categorizes them in three ways:
- Cost reduction. For example, “as a service” storage has cut CBA’s cost of computing storage by around 40%. Even more impressively, the “as a service” overdraft offering has reduced processing time of standard overdrafts by 90%. Harte told the Australian Financial Review that CBA was “saving tens of millions of dollars and [potentially] hundreds of millions [over the next three or four years] from buying services on demand, paying a unit price for them and having the flexibility.”
- Faster development of computer systems. The bank refers to this benefit as one of “agility.” The bank’s payment system – which combines a stack of technologies necessary to offer payment services (the application, its underlying middleware, operating system and other infrastructure, and the server and storage hardware) – is a case in point. No longer does the bank need to build a new payment system every time a business unit or department asks for one.
- Mindset shifts from getting business units to share IT applications. CBA’s HR function has adopted so-called talent management applications to better understand trends in turnover, recruitment, hiring patterns and future hiring needs, absenteeism and other areas. CBA has created a cloud-based talent management application that any of its banking units – e.g., Bankwest (a 2008 acquisition) and ASB (its New Zealand bank) – could adopt. This has reduced costs dramatically.
Harte has talked publicly about how the IT infrastructure cost savings from cloud computing is freeing up time and money for CBA to focus on providing new banking services (much of it online) that let customers do such things as get offers on financial products in real time. This is because more bank people can now focus on evaluating customers’ individual needs and pricing products and services based on their risk profile and loyalty. Cloud computing, he said, will let CBA shift from spending “half of our budget on maintaining lights-on [IT] infrastructure, and get more of that money into creating really high-value, highly responsive services.” He sees cloud computing as enabling banks like CBA to invest less in the backend IT infrastructure and more in online banking services that customers have come to demand – applications to bank from their mobile phones, tablet computers and other digital devices.
Shifting technology spending from backroom to front office applications is necessary because banks are no longer competing just against other banks in exploding areas such as mobile payments, CBA’s CEO Ralph Norris said in a 2011 presentation to investors. “Our business is not going to be about competing against banks or other current payment players; it’s against phone companies, providers of technology themselves, and the new social media entities,” said Norris. “You have to bring to bear new features and functions that are going to resonate with customers using those sorts of facilities.”