The No-Longer-Hypothetical Case for Jumping on the Cloud
By N. Chandrasekaran, CEO and Managing Director, Tata Consultancy Services
Tata Consultancy Services has watched with great interest the ongoing development of cloud computing. We have advocated the opportunities in multiple Innovation Forums and through different media since 2004. We have sought out the best practices in using this new technology by bringing our clients, venture capital firms, startup companies, professors, industry analysts and other technology companies together to talk about the implications of this on major business and technology issues of the day.
We see cloud computing as an ecosystem play – an opportunity that requires us to work deeply with a range of entities from academia and start-ups to corporations, and technology providers –to bring world-class solutions to market. Cloud has become a key focus of our Co-Innovation Network (or COIN), which is our mechanism for collaborating with these entities.
We have invested in building capabilities of our engineers to create a suite of cloud-based solutions to help our clients capitalize on the cloud. We have been redesigning their business processes and shifting on-premises applications to the cloud; developing, testing and maintaining whole new applications for the cloud; and in some cases hosting and supporting their cloud applications.
We have developed new business models using the cloud paradigm. One year ago TCS launched iON, a cloud-based holistic IT offering for small and medium-sized businesses in India – services that can give the country’s 35 million SMBs enterprise-quality IT services on a pay-as-you-grow model. This requires no capital investments in technology and eliminates technology redundancy, thereby addressing two key concerns for capital-constrained SMBs.
We have used the cloud platform to drive financial inclusion in India and aided the expansion of rural banking services by offering the latest core banking solution engines that run on the cloud. And we have created special cloud offerings for insurance companies and banks, as well as offerings that provide certain business processes from the cloud.
There is no question that we are excited about its potential to be all over the cloud. But last fall, the question for us about the cloud was this: Does the world of large enterprises view cloud computing the same way? Are they as bullish on the cloud as we are? Are they making big bets on the cloud too?
As a result, we decided to conduct a major study to understand the expectations and the potential of this new paradigm in computing. We fielded an extensive survey that was completed by 606 companies around the world in 16 industries (most organizations came from a corporate group had more than $1 billion in annual revenue). We also engaged in in-depth interviews with six enterprises to dive well below the surface of these issues. Executives at a large bank in Australia, a leading educational assessment testing company, a large technology manufacturer, an online media company, a $5 billion consumer products company, and a major telco talked to us about their cloud activities.
We wanted to shed light on the extent to which large enterprises had adopted cloud applications and their cloud plans in the next two years. Has enterprise adoption of cloud reached an inflection point? What business applications have companies shifted from on-premises technology to the cloud? And what new opportunities is cloud opening up for IT functions that may view their role as “keeping the lights on” – of running data centers? Do they see opportunities from the cloud to create new value to their organizations?
What We Thought We’d Find
Going into the study, TCS viewed cloud computing as critical piece of a big, emerging puzzle: how companies can use it as a platform in combination with other technologies to create great experiences for customers who increasingly do their shopping on the mobile devices they carry in their pockets, backpacks and purses. We saw cloud computing as a key building block for bringing the “digital consumer” to life – as important as social media, mobile technology (and apps) and “big data.” We believe cloud makes it possible for companies to experiment with high-potential new online marketing, sales, customer service and other business processes, as well as promising new online products – all without having to make huge, fixed-cost technology investments. But were companies around the world viewing cloud applications the same way – as a tool to dramatically scale up their operations at variable costs, especially in emerging markets that had yet to prove out?
So what did we learn from our research? Our key takeaway is that as lofty as our vision may be for the long-term impact of cloud computing, we have, in fact, underestimated its potential. The research is moving us to believe that by 2020, when executives at large global companies reflect back on the major trends that shaped their businesses this decade, they will see cloud computing as one of the biggest.
The net of our findings is this: Cloud applications are an already-substantial piece of the large corporate IT infrastructure, one that is having significant impacts and is viewed to be even more important going forward. The views and activities of the companies that we surveyed and interviewed suggest there is no turning back from the cloud. The early benefits achieved are too substantial to revert to days of yore, when companies hosted all their application software on computers in their data centers and on their employees’ digital devices.
The Findings: We’ve Reached an Inflection Point with Cloud Applications
Every calculus lover knows that the inflection point on a curve is the place at which the curvature changes. The term “strategic inflection point” connotes a major change in the market – a point on which companies must change their offerings and/or the way they do business in order to keep up with the market. So is cloud computing at an inflection point – the moment in which companies have embraced it as a critical technology strategy? Our study tells us the answer is a strong yes.
We asked IT executives what percent of their total applications were cloud applications. The answer: an average 12% in European firms, 19% in U.S. firms, 28% in Asia-Pacific firms and a surprising 39% in Latin American firms. In light of that, saying cloud applications have gained a toehold in large enterprises would be a gross understatement. (See Exhibit 1.)
What’s more, these same companies projected those percentages to grow significantly by 2014. For example, in European companies cloud applications are projected to double to becoming 24% of all applications. U.S. firms see cloud applications being about a third (34%) of total applications by then, when Asia-Pacific companies project them to be a full half of all their applications and Latin American companies see them becoming 56% of total applications. That’s quite a change from the last 30 years, when the vast majority of companies ran their applications from computers located on their premises.
Why Companies are Rushing to the Cloud, and the Returns They’re Getting
Why are companies embracing the cloud? Among U.S. and Asia-Pacific companies, the most important driver is not the one that many think it would be (to reduce technology costs). To be sure, cutting IT costs is a big driver. But more important was the need to standardize applications and the business operations those applications support – a critical need in an increasing number of global companies that want to establish common policies and procedures in the ways they hire people, take orders, serve customers, manage the books, and conduct other critical business activities. A major telco that we spoke to said standard cloud applications are helping business units cut IT costs and reduce its data center footprint.
Another big driver of cloud applications (especially in the U.S. and Asia-Pacific) was increasing the flexibility of applications – the ability to ramp up or down applications quickly. Online media firms are using the cloud to respond to huge variations in the demand for online services by online customers. One online media firm last year implemented its first private cloud in a new data center. It can get a new server running in minutes vs. the 6-12 weeks it took a decade ago. That’s critical when in a business where online viewers can increase in the millions from day to day or week to week.
The need to process “big data” – huge volumes of transactional and other digitized data – is also a big driver of cloud applications. About two-thirds of the U.S. companies surveyed said improving the way they gathered and analyzed data was a key factor in shifting to cloud applications.
Perhaps the most important piece of evidence that companies will embrace cloud applications in a big way is the value they have achieved to date from such applications. By shifting on-premises applications to the cloud, the companies we surveyed reduced their IT costs an average 31% in U.S. firms and 28% in European companies. (See Exhibit 2.) To us, this is not surprising. Such savings come from such sources as the ability to purchase network capacity and storage far less expensively, locate data centers in areas with lower post costs, and institute more highly automated data centers. By using public clouds (Internet services provided from data centers that host many companies’ applications), companies are able to tap into powerful application software that would have been cost-prohibitive for many.
But cost reduction is by no means the only benefit companies had generated from cloud applications. Those that launched whole new applications in the cloud — applications that might have been economically infeasible had they required costly new computer hardware — reported 13% (U.S.) to 32% (Latin America) average revenue gains from their new, cloud-based products and services. Whether they are replacing on-premises applications or representing whole new applications, the cloud is generating substantial business value in many companies.
To examine the impact of cloud applications up close, we interviewed executives at six companies who shared their cloud experiences. As an example of the cost-reduction potential of cloud, the previously mentioned telecommunications firm moved all HR applications to the cloud last year, standardizing on enterprise software packages. The company believes cloud applications hosted in its own data centers (so-called “private clouds,” which would eventually house 80% of its applications) could cut IT costs by $100 million to $200 million annually and its number of data centers 80%. Another example is a large financial institution based in Sydney, which reduced its cost of computer storage 40% by putting applications in the cloud.
But those stories just speak to the cost benefits of cloud applications. The companies we surveyed and interviewed said the business process improvement and revenue benefits were even more important. After beginning to shift on-premises applications to the cloud in 2007, the previously mentioned bank in Australia has been using the cost savings from the cloud to develop new banking services – apps that present offers on financial products to customers in real time – particularly on mobile devices, for instance.
Another example of a company that sees cloud applications to be critical to developing new products is one of the three largest U.S. suppliers of school assessment tests. The company has been shifting assessment testing of U.S. K-12 students from paper to online. Because many states are expected to require online assessment tests this decade, the company is experimenting with cloud-based solutions. It envisions having to deliver and score more than 40 million tests in a two-week period by 2014. The cost of building the technology infrastructure for such a short time would be enormous. That’s why the company is all over the cloud.
Companies have big plans to shift many more applications across all their business functions to the cloud over the next two years, particularly in customer-facing business processes of marketing, sales and customer service. Firms like the technology manufacturer that we interviewed are using cloud systems aggressively in their marketing campaigns, starting with online games (so-called gamification applications) that appeal to customers.
Certain Industries are in the Lead
Our survey found four industries have been much more aggressive in adopting cloud applications (in public or private clouds) than other industries. We asked companies to tell us how many cloud applications they were using in 10 core business functions: marketing, sales, R&D, manufacturing/operations, HR, finance, customer service, legal, distribution and procurement. At the top of the list were the computer/electronics, financial services, industrial manufacturing and telecom services industries (averaging with more than six cloud applications per function). At the bottom were healthcare services and chemicals companies, averaging less than four cloud applications per business function. (See Exhibit 3.)
Yet despite the strong embrace of the cloud in many industries, most companies have remained somewhat conservative about what systems and data they put in public clouds – in the data centers of third parties that host many companies’ applications and IT infrastructure. While our survey found that the majority of U.S., Asia-Pacific and Latin American companies would consider putting their core applications in private clouds, only a minority today would put core applications in public clouds. The reason is fear of data security and privacy. The companies we surveyed in all four regions said their biggest challenge to leveraging the cloud is overcoming their concerns about IT security.
Thus the challenge for companies and cloud vendors like TCS is clear: to greatly reduce the fear that most large companies have about putting mission-critical information systems and sensitive data in public clouds. Large companies now want to shift many applications to the cloud, and they realize that if they are to get the greatest cost savings, it will have to be to public clouds (where cloud vendors can spread their costs across hundreds or thousands of customers). But customers will need to be sold on cloud vendors’ information security promises. That will require bringing industrial-strength practices to information security and maintaining systems availability. All this will separate the cloud-proficient vendors from the cloud pretenders.
Stories like these, and the responses of the 600+ companies that we surveyed, show that the cloud is beginning to have a profound impact on a number of industries. The benefits we’ve uncovered should remind business and IT executives that where there is smoke, there is fire. As an increasing number of companies publicly discuss the benefits of cloud computing, we expect many more enterprises will rush to adopt cloud applications in every facet of their business.
Now is the time for business and IT executives to look strongly at the cloud – both private clouds dedicated to the needs of one company or public clouds in which multiple companies can be served. Our research shows that companies have moved beyond the inflection point. The next few years will be ones in which market leaders are companies who quickly capitalized on the cloud.
Companies evaluate cloud vendors most on their security and reliability/uptime capabilities – and far less on their price. This was the case in all four regions. In fact, price finished at the bottom of a list of nine factors in making the cloud application purchasing decision.
- Most important capabilities that customers look for in cloud vendors
In determining how potential customers evaluate companies that sell cloud application services, it would be quite natural to conclude that price is at or near the top of the list of criteria. Isn’t one of the biggest benefits of cloud computing the ability to save immense IT costs from not having to fund the often enormous computing hardware costs required to run compute-intensive applications? Isn’t cloud about enabling companies to experiment with promising new applications without having to make investments in millions (or tens of millions) of dollars in servers and costly data center space?
Cloud is about that, for sure. Most companies said that the ability of a cloud vendor to reduce their IT costs was important. Yet the ability of a cloud vendor to offer rock-bottom prices doesn’t top most large companies’ list of buying criteria. In fact, we found “lowest price” the least important of nine factors that we asked executives to rate in two regions: the U.S. and Asia-Pacific. In Europe and Latin America, the ability to deliver the lowest-price services ranked eighth out of nine factors.
Rated far more highly were two criteria (among several): reliability (defined as the ability to keep applications up and running and available to users) and data security/privacy. They finished first or second in all four regions.
Other factors that finished high in importance included:
- Possessing expertise in the legal and regulatory aspects of cloud. Large companies in the U.S. rated this third in importance (knowledge of such issues as country data privacy laws); European and Latin American firms rated it fourth.
- Being willing to provide contract provisions on service levels, data privacy protections and other key performance expectations. This finished third in Latin America (rated important or very important by 84%) and third in Europe (71%). And it was fourth in the U.S. (68% said it was important or very important).
- Adhering to the increasing number of technical standards for cloud computing. Some 68% of U.S., 66% of European, 78% of Latin American, and 74% of Asia-Pacific companies said this was important or very important. Such technical standards make it easier for customers to shift cloud applications from one public cloud vendor’s data center to another, as well as make it easier to share applications across a large company’s private cloud technology infrastructure.
This tells us that price isn’t unimportant to companies contemplating using applications in public or private cloud settings – but that other considerations matter much, much more. Making sure their applications are available for use and not at greater risk of being hacked top the list of companies in all four regions.
Despite a significant shift to cloud applications, most companies (especially in Europe) remain conservative about which applications they put in public clouds. Less than 20% of U.S. and European companies would consider or seriously consider putting their most critical applications in public clouds. But 66% of U.S. and 48% of European companies would consider putting core applications in private clouds.
- Differences by region of world
With cloud applications having made more than a foothold in large companies around the world, it might appear that senior executives are putting aside their fears about the security of data and systems in the cloud. But that would be a wrong presumption.
Business and IT executives appear to largely endorse the use of applications hosted in “private” clouds – data center(s) devoted to the computing needs of a one company (whether or not that data center is owned by the company or a third party). But they are not so trustful of applications running in “public” clouds – data centers that third parties run for numerous customers.
That is what we found from the answers to a series of questions in our survey to gauge interest in using public and private clouds for two types of applications software: “core” (strategic applications that provide competitive advantage) and “non-core” (applications that are necessary for doing business but which don’t deliver a competitive edge).
In the U.S., for example, only 18% said they would consider or highly consider putting core applications in public clouds; in contrast, a slight majority (51%) said they would not consider it at all or only slightly consider it. Nonetheless, two-thirds (66%) said they would consider or highly consider putting core applications in private clouds. Only 3% said they would reject the idea out of hand, vs. 30% who would reject putting core apps in public clouds.
Putting non-core applications in the cloud was an entirely different matter. Some 42% of our U.S. respondents said they would consider or highly consider putting non-core apps in public clouds – more than said they would not consider it at all or would only slightly consider it (30%). And nearly three-quarters (72%) said they would consider or highly consider putting non-core apps in private clouds, a concept rejected by only 3%.
European Companies are Even More Conservative About the Cloud; Latin American and Asia-Pacific Companies are Less Conservative
Relative to their counterparts in Asia-Pacific and Latin America, U.S. and European companies were far less likely to put core applications in public clouds. But they and their counterparts in Asia-Pacific and Latin America were far more likely to put core apps in private clouds dedicated to their organizations. Still, European companies were very conservative on this measure, with less than half (48%) saying they were willing to put core apps in private clouds (vs. 79% of the Latin American companies that we surveyed).
The relatively high percentage of Latin American (30%) and Asia-Pacific (41%) companies that are willing to consider putting strategic applications in public clouds signifies that they have a higher risk tolerance than their colleagues in Europe (especially) and the U.S. Thus, it appears that private clouds are far more acceptable to most large companies today than public clouds – even though private clouds can’t deliver the cost savings of public clouds, which share costs among many clients.
The early returns on cloud applications are impressive. Companies using cloud applications are increasing the number of standard applications and business processes, reducing cycle times to ramp up IT resources, cutting IT costs, and launching a greater number of new products and processes. The story of a major telco shows the ambitions of the some of the most aggressive cloud adopters.
- Operational and financial improvements from shifting on-premises applications to the cloud
- Operational and financial improvements from launching new applications in the cloud
- Case study: AOL Inc.
- Case study: Major telco
We asked the companies we surveyed whether their use of cloud applications had generated benefits – both cloud applications that they shifted from on-premises computers, as well as whole new cloud applications for which they previously had no on-premises versions. For both types of cloud applications, their answers indicate that cloud applications are generating significant improvements in operational and financial performance.
Benefits from Shifting Existing Apps to the Cloud
In all four regions of the world, the average benefits from cloud applications of this type were impressive, especially in Latin American and Asia-Pacific companies:
- In IT costs, 28% (Europe) to 55% (Latin America) average reductions
- In standard applications and business processes, between 34% (Europe) and 60% (Latin America) increases in the number of apps and business processes that have been made common across a company or business
- In cycle-time reductions to ramp IT resources up or down (a measure of “flexibility”): between 35% (U.S.) and 64% (Latin America) reductions
- In systems downtime, 33% (Europe) to 59% (Latin America) reductions
- In the time it takes to enhance applications, 37% (U.S. and Europe) to 57% (Latin America) reductions
- Application fixes, from 35% (U.S.) to 64% (Latin America) reductions in the number of patches
- In analytic reports, from 34% (Europe) to 66% (Latin America) increases in the number of reports, which gives companies greater ability to mine and analyze volumes of data
The more aggressive adopters of cloud computing – Latin American and Asia-Pacific companies (which had higher percentages of cloud apps to total corporate apps) – also reported much greater benefits from their cloud apps. Why is this the case? Perhaps greater benefits is a function of experience; the more you use cloud applications, the more knowledge you gain about how to deploy and use them, and thus the greater likelihood to generate benefits. Or it could be that using a higher number of cloud applications simply brings more cumulative benefits.
For a $5 billion consumer products company, the cloud enabled one of its business functions to implement a new application without needing the typical “$10 million and 18 months to build it,” says an IT executive in the company. And the aforementioned telco hopes that standardizing applications through its private cloud data centers will help it reduce the number of those centers by 80% and save as much as $200 million in annual IT costs.
Companies Report Sizable Benefits from Launching Whole New Apps in the Cloud
We also asked survey respondents to report on benefits received to date from new applications that they launched in the cloud. Specifically, we had them indicate improvements in six areas:
- Testing of new business processes that they would have considered too costly to test prior to the advent of the cloud (because of excessive technology costs). Here we asked them to indicate the percentage increase in new business processes tested.
- The number of new business processes they actually launched or instituted
- The number of new products/services they tested
- The number of new products/services they launched
- The annual revenue increase from launching new products/services in markets that they already served
- The average reduction in the time it took to enter new markets with new products/services
While the average percentage improvements in these areas were about half those that companies reported from shifting on-premises applications to the cloud, they were nonetheless noteworthy:
- Increases from 15% to 19% in the number of new business processes tested and launched in U.S., Europe and Asia-Pacific companies. Latin American companies, however, reported higher average numbers (22-27%)
- Increases from 13% to 19% in the number of new products or services tested and launched by companies in the U.S., Europe and Asia-Pacific (which, again, trailed the 31-32% increases in new products/services in Latin America)
- An average 14-17% reduction in cycle time to enter new markets with new products/services in the U.S., Europe and Asia-Pacific (bested again by Latin American companies, which claimed an average 35% cycle time reduction)
- Average revenue increases of 13-17% from launching new, cloud-based products and services in existing markets (vs. an average 32% revenue increase reported by Latin American companies)
At AOL, a Private Cloud is Helping the Shift to a Web Advertising Model
Three decades ago AOL Inc. was a trailblazer in opening the online world to the American public. Today, despite competition from Facebook, Google, Yahoo and many other sites, AOL remains the sixth most heavily visited U.S. Website, with 106 million unique visitors in November 2011. The $2.4 billion company will be 30 years old next year, an unusual lifespan in an industry that buried AltaVista, Boo.com, Pets.com and many other online companies long ago.
AOL outlasted them all because of its ability to shift strategies quickly and capably as the Web created new capabilities and competitors. The company has reincarnated itself several times – from proprietary online service in the early 1990s (supported by subscription fees) to Internet access provider in the late 1990s and 2000s (dial-up access fees) to online media content provider today (funded by advertising). In just the last five years, the company’s revenue mix has changed from about 43% advertising/54% subscription to 60% advertising/40% subscription and other.1
But because of its long history of providing online services such as email, instant messaging and Web media and entertainment content, AOL had accumulated a vast amount of computers, storage, other computing devices and software over that time, says Michael Manos, senior vice president of technologies at AOL. He has a playful name for this technology tangle: “cruft.” These legacy systems can weigh down companies that must continually adopt new web technologies while keeping IT infrastructure costs low. This is especially the case at AOL, whose strategy today requires focusing investments on online content and the people who produce it.
“Cruft adds tremendous complexity to a company’s technology operations and makes it difficult for it to be agile,” Manos explains.
To reduce its IT costs, AOL has embraced a private cloud infrastructure over the last year. It has dramatically lowered the technology expenses of sales, marketing and customer service. Manos estimated that 20% of the company’s business applications have moved to cloud in the last six months, and that another 15% will shift by mid-year.
That’s crucial in a company whose subscriber revenue has been falling sharply over the years. A decade ago, AOL had about 30 million subscribers. Today, the number is around 4 million. In 2011, the company reduced total expenses more than $500 million to make up for the decline in subscription revenue.1
Adopting a Private Cloud at Light Speed
Manos joined AOL in January 2011 after 17 years of managing data centers for such media and technology icons as Walt Disney Co., Microsoft, and Nokia. He had earned a solid track record in making data centers more effective and efficient.
In just 90 days, Manos and his team implemented AOL’s first-ever private cloud in a new data center the company calls ATC. (AOL operates three other data centers in the U.S. – two in Virginia and one in Silicon Valley.1) Since going live last Oct. 1, ATC and the private cloud have enabled AOL to shut down about 10,000 computer servers at its other computer facilities. Furthermore, AOL’s private cloud can more quickly increase the firm’s computing capacity on demand, without the need for additional manpower. Such “dynamic scalability” is essential in a business like AOL, where breaking news such as election results generates huge spikes in viewers clicking on its websites.
Because of its private cloud, AOL can now get a new server up and running in just minutes, compared to 6-12 weeks a decade ago.1 In fact, on the ATC data center’s first day of operation, it took only an hour to have nearly 100 virtual servers running. Manos says provisioning a new server now takes only about 5 minutes via the cloud, compared to the 8-12 hours it previously took. “We now can spin up capacity extremely quickly,” he says. “More importantly, we can spin down capacity very quickly. So it’s given us a substantial amount of agility within our business that we’ve never had before.” The cloud has also reduced energy costs. The more efficient servers at ATC (about 800 in all) have replaced 3,000 old servers, paring AOL’s electricity bill by about $700,000 a year.
Biggest Barrier to Embracing the Cloud: IT People
Manos says the biggest barrier to adopting cloud technology at AOL is that IT employees worry that cloud technology will replace them. However, companies like AOL have no choice but to reduce costs in technology and other realms. ATC is a 100% “lights-out” facility, meaning it doesn’t need anyone operating the machines on its premises. Manos’ team of five people can now manage 12,000-15,000 servers that are spread across the company’s data centers. Still, the main objective is not to eliminate IT staff but rather to deploy them in jobs where they can play a more important role.
Manos has gained support for cloud computing throughout AOL, from the CEO down. Through regular emails, newsletters and meetings, CEO Tim Armstrong has gone to great lengths to make the transition transparent. Armstrong has become a big proponent of the firm’s private cloud because of the cost savings and ability to launch new Web content more quickly.
“If you would have told me nine months ago that the CEO would be talking about the technology side of the business, I would have said you were crazy,” Manos says. “But he is now saying that AOL is a technology company as well as a media company.”
Major Telco: Cloud as Game-Changer and Data Center Consolidator
This company sees cloud as a major external and internal opportunity — to sell new services to customers and induce large reductions in its technology costs as well as standardized business processes and applications software.
Top management at the telco believes that if the company wishes to get numerous customers to adopt cloud services, it must demonstrate how it has benefited from using the cloud internally. With that mandate, the company in the last two years has moved financial systems such as general ledger, payables and fixed assets to its private cloud. It is also moving human resource applications to the cloud (including the corporate email system, and employee savings and financial plans). Customer records ordering and processing will move to cloud as well. All in all, the company has moved 30% of its applications to its private clouds (data centers that it owns and operates), a number it hopes will reach 80% by year-end.
The company is moving to organize its IT architecture completely around its private clouds, with the intention of eventually putting all applications in the cloud and providing cloud services for each company business unit. Today, its business units have their own financial, HR, customer management and other systems. That, of course, results in large duplications of software, hardware and data center space that could be consolidated if business units could standardize on many fewer applications and let them run on hardware at fewer but centrally managed data centers.
If the firm can achieve this, it believes it will reduce the need for dozens of data centers (reducing the number by as much as 80%), which would achieve cost savings in the range of $100 million to $200 million.
What must the company do to reach such ambitious goals? The two biggest obstacles that we heard were “fear of the unknown” and “fear of losing control” – both coming especially from the IT functions within the company’s business units.
That said, the company believes the issue is no longer whether the company will broadly adopt cloud computing but rather how quickly it will do so. “We believe cloud is something that is going to be gaming-changing,” says one executive. “It’s going to become a way of life. I think we’re at the very beginning of this, and that many companies have a ‘toe in the water’ approach because of the security concerns.” The gating factor, he believes, is whether cloud vendors can provide a highly secure service with nearly 100% uptime.
The biggest driver of cloud applications is not to cut IT costs. IT cost reduction is an important factor, but not the most important. Rather, standardizing software applications and business processes across a company (in the U.S. and Asia-Pacific) and ramping systems up or down faster (in Europe and Latin America) are the most highly rated drivers for shifting on-premises applications to the cloud. And the factors driving companies to launch entirely new applications in the cloud are quite different – to institute new business processes and launch new technology-dependent products and services. The case of assessment testing company CTB/McGraw-Hill shows why cloud computing will become a key tool for delivering pioneering IT-enabled offerings.
- Factors driving companies to shift on-premises applications to the cloud
- Factors driving companies to launch whole new applications in the cloud
- Case study: CTB/McGraw-Hill
We asked companies to rate on a scale of importance (1 to 5) what had driven them to implement two kinds of cloud applications:
- Cloud applications that had previously been installed on on-premises computers
- Entirely new cloud-based applications for which there had been no on-premises versions before
How they rated a set of drivers that we offered provides insights into the motivations for adopting cloud applications. We’ll start with the factors that pushed companies to shift on-premises apps to the cloud.
Shifting On-Premises Apps to the Cloud: IT Cost-Cutting Isn’t the Leading Driver
Among U.S. and Asia-Pacific companies, the most important driver of shifting on-premises applications to the cloud is not what many think it would be – to reduce technology costs (although that is a key driver). Ahead of that is something that is not as well understood by the press, analysts and others covering cloud trends: standardizing applications and the business operations that those applications support.
Numerous large companies – especially those with multiple business units/divisions – are saddled with huge duplications in technologies: commercial application software packages, hardware and data centers that are serve individual business units (and sometimes even just a single compute-intensive business function such as R&D or manufacturing in a division). By giving companies the ability to take such applications out of departmental or business unit data centers and put them in a centrally accessible location – a private or public data center that hosts the applications – cloud computing creates the prospect of standardizing applications across a big business.
The major telco that we spoke with said offering standardized cloud applications will help its business units reduce their IT costs and the need for so many data centers (which today are in the hundreds). Having dozens of financial, HR, customer management and other applications today – each devoted to a narrow slice of its business – has resulted in huge IT costs (software, hardware and data centers). In fact, the company believes that its shift to cloud applications will help it reduce its number of data centers by 80%, which would produce an estimated annual cost savings of $100 million to $200 million.
Another highly rated driver of cloud applications in both the U.S. and Asia-Pacific companies was increasing applications or systems “flexibility.” In both regions, this was the third most important driver of shifting on-premises applications to the cloud. What does this mean? It refers to the ability to scale an application up or down.
The need to process “big data” – huge volumes of transactional and other digitized data (video, social media chatter, and other) — appears to be a big driver of cloud applications. Nearly two-thirds (65%) of the U.S. survey respondents they were driven to the cloud to improve the way they gathered and analyzed data (rated as an important or very important factor). A similar number of Asia-Pacific companies said this was an important or very important driver of their shift to the cloud. Less than half (47%) of the European companies said it was an important or very important factor in using cloud. However, 80% of the Latin American companies said this was an important or very important factor. One of the biggest differences that we found between the companies that had generated the largest benefits from the cloud and the ones that had generated the least benefits was, in fact, their interest in using the cloud to manage “big data.”
Big Data and the Push for Cloud
Our U.S. data shows that savvier uses of cloud applications are distinct in many ways – one of which is their interest in using the cloud to process and analyze volumes of digital data.
We compared the answers of the companies in the top quartile of benefits achieved from shifting on-premises apps to the cloud (the “leaders”) to those in the bottom quartile (“laggards”). Some 74% of the leaders said using the cloud to process and analyze data for trend identification was important or very important. But a much lower percentage of laggards (55%) said that was a key driver.
We found a similar set of drivers in the Asia-Pacific companies that we polled. The three most important drivers in this region – just like in the U.S. – were 1) standardizing applications and business processes, 2) reducing IT costs, and 3) increasing application flexibility.
The biggest factor driving Commonwealth Bank of Australia to shift on-premises applications to its private cloud was to use the savings in IT costs to providing more bank services through mobile applications and social media. “For us, cloud is not just about on-demand, selective scalability and automation,” says Rajasingham. “It’s also about self-funding IT, removing cost from running the business – and reallocating that into delivering more value-added services.”
In both Europe and Latin America, the most important driver of shifting to cloud applications was the need to increase “system flexibility” – the ability to launch or shut down applications quickly.
In Latin America, standardizing applications and business processes ranked below four other drivers, which were led by increasing application flexibility. IT cost-cutting was rated the lowest of the seven options we provided. Perhaps Latin American companies look at cloud less as giving them more efficient ways to deploy computing applications and more as a tool giving them a greater ability to adopt strategic applications of technology.
Why Companies are Launching Entirely New Applications in the Cloud: They Want to be Quicker to the Punch with New Business Processes
We also surveyed companies about any new applications that they launched in the cloud – applications for which they had no previous versions installed on their on-premises computers. In three of the four regions (all except for Europe), the factor rated as the most important was the need to institute new business processes to generate revenue and increase customer loyalty.This was not a surprise to us. Increasingly, companies are doing business with customers online, and cloud computing can give those businesses a faster route to changing the way they do business on the Web. The Web has become a critical place for many customers to find out about a company’s products and services, place orders, check on shipment status, and (post-delivery) get answers to questions about how to use the product or otherwise get support.
Take the case of Dell Inc., the multibillion-dollar supplier of innovative technology and technology services. One of the Round Rock, Texas-based company’s online marketing groups caters to large corporate and government customers (the Public and Large Enterprise business unit). It has put cloud applications at the center of the marketing tool strategy that it uses, according to Rishi Dave executive director of online marketing. Many vendors of online marketing tools – for example, those that assess social media influencers – provide their products via the cloud, he explained. Using cloud vendors’ applications enables Dell’s online marketing function to execute online marketing, social and community programs without having to “touch our internal infrastructure,” Dave explains.
The cloud helped Dell introduce gamification to customers and prospects at the 2011 Dell World conference. In the four months prior to Dell’s first Dell World client conference (which ran from Oct. 12-14, 2011 in Austin, Texas), Dell’s online marketing group decided to provide gamification to motivate customers to download Dell marketing content, visit physical locations at the conference, and network with each other. By using the cloud-based gamification services of one vendor, Dell was able to plan and execute the project in less than four months.
CTB/McGraw-Hill: Looking to the Cloud to Set the Pace in Online Student Testing
CTB/McGraw-Hill is one of the three largest suppliers of assessment tests for public and private schools in the U.S. and other countries. Million of students in all 50 states take CTB’s tests. They help school districts and states rate the quality of the teaching delivered in their classrooms, as well as determine how to improve it.
The company, based in Monterey, Calif., believes cloud computing will be essential for competing in a highly price-sensitive market (U.S. public schools). CTB/McGraw-Hill also feels that cloud will be critical to shifting its testing services from a paper-and-pencil process to an online experience – one with great potential to improve teachers’ ability to address students’ learning deficiencies. The company believes cloud computing will be a crucial channel for delivering its products and services to school districts in the future.
But given the nature of CTB’s business – delivering tests to hundreds of thousands of K-12 students over two weeks each year – that creates enormous demand for the ability to scale computing resources up or down to administer online tests, which it believes will be the wave of the future. “Given that we have high spikes in capacity, we must be able to increase it and lower it quickly,” says CTB’s chief technology officer, Jayaram “Bala” Balachander. “We can’t do that today. That’s where cloud will be critical.”
In 2011, CTB delivered online assessment testing to 180,000 U.S. K-12 students over a two-week period. With each student taking as many as five tests, this meant the company had to score 800,000 online tests concurrently. “This lends itself very much to the cloud because we can go up or down depending on the activity in our business.” In 2012, the numbers are expected to more than double, creating an increasing need for ramping up and down infrastructure resources. As a result, CTB is experimenting with cloud-based solutions.
Balachander predicts that about a million U.S. students will take their assessment tests online (including CTB’s tests) in 2012. Moreover, with U.S. schools wanting 100% of their assessment testing to be online at some point, that would require CTB to have the computing resources to serve the online assessment needs of millions of American children in K-12 grades at once, a number he believes could be reached as early as 2015.
Even if that turns out to be a smaller number in three years – say 75% of the 55 million U.S. students take online assessment tests — if CTB commanded a 20% share of that market, it would need computing resources to support the delivery and scoring of more than 40 million tests in a short period of time. “It would be very difficult for us to do that without the cloud – to invest in the infrastructure from a capital expenditure standpoint, and then make the ongoing technology investments,” Balachander explains.
By this August, CTB intends to shift six to eight on-premises applications to the cloud, one of which is the online testing. The firm’s website and extranet are also being evaluated as potential candidates to put in the cloud.
Balachander believes all new CTB applications should be cloud applications. “With new applications, we are saying that by default we should put them in the cloud.”
“At the end of the day, CTB needs IT services that can adapt to varying scalability demands,” Balachander says. “We clearly don’t want to invest in fixed infrastructure costs to handle our spikes in volume and scalability. The current set of cloud services and ongoing advances in technology in this area give us an ability to approach our infrastructure needs in a whole different way.”
In the fall of 2011, Tata Consultancy Services (TCS) conducted an extensive study on how 600+ primarily large companies (most with more than $1 billion in revenue) were using applications in “the cloud” – software residing on remote data centers that organizations access via the Internet. Such data centers can be run by third parties that co-locate applications of multiple companies (so-called public clouds). Or these data centers can be run for the sole use of one organization, operated by that organization itself (private clouds).
Public cloud computing vendors provide shared computing resources (hardware and software) to companies that don’t want to incur the cost of such IT infrastructure. A cloud vendor’s offerings typically provide computing resources on demand, automated system deployment and scaling, and pay-per-usage pricing. There are three primary benefits of cloud services: computing resources on-demand (which saves companies from having to plan ahead for securing such resources); the elimination of upfront commitments to IT (and thus avoid purchasing new hardware, software or whole data centers for computing demand that may be uncertain in the future); and pay-per-usage pricing (e.g., processors by the hour), which reduces the amount of computing resources that are sitting idle.
TCS believed that while numerous studies have been published on cloud computing since 2008, none had deeply explored how business functions such as marketing, sales, R&D, distribution, manufacturing, operations, finance and others were using cloud applications (also known as “software as a service,” or SaaS).
We designed the study to explore five core issues:
- The factors that are driving companies to put their applications software in the cloud – whether those cloud applications were shifted from computers on-premises or were entirely new applications that had no on-premises predecessors
- Which cloud applications have been adopted by what business functions and why
- The benefits they had generated to date from shifting on-premises apps to the cloud and from launching entirely new apps in the cloud
- The success factors to generating buy-in, adoption and benefits
- Their future plans for cloud apps – specifically, what types of cloud apps their business functions planned to have by 2014
We conducted several research streams. The first was quantitative research: an online survey of 600+ companies from four regions of the world. The survey was extensive and polled the experiences of both senior business functional managers and corporate IT executives.
The second stream of research was in-depth interviews with six companies on their attitudes and experiences with cloud applications. Their stories shed further light on what’s driving companies to shift existing applications or put new applications in the cloud, the benefits and competitive advantages those applications are generating, and the challenges to getting the organization to adopt cloud applications (both those in public and private clouds). These companies were:
- CTB/McGraw Hill – an educational assessment testing company that believes cloud applications will help it fund the investments it needs to continue to move its school assessments from a print to an online world.
- Commonwealth Bank of Australia – One of the four largest Australian banks has moved dozens of sales, customer service, HR, operations and IT applications to the cloud over the last three years. The result: the ability to offer bank customers a range of innovative new banking services.
- Dell Inc. – The $61 billion technology company has been using the cloud to provide engaging online marketing programs that win over customers and keep them coming back for more.
- Major telecommunications services company – Why a telco is rapidly shifting on-premises applications to the cloud in order to create common applications and cut millions of dollars in data center costs.
- Large consumer products company – How cloud computing has helped the $5 billion company more effectively field consumer complaints while keeping technology costs low.
- AOL Inc. – The cost savings and other benefits that the iconic consumer online media company has gained from a new private cloud.
Our final stream of research was capturing the experiences of TCS cloud experts – professionals who are working with companies on a daily basis about cloud computing issues. From our analysis of the data from all three research streams, we uncovered 10 findings that explain how large companies around the world are using cloud applications, to what benefit, with what concerns, and with what future plans:
Finding No. 1: 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 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. (Read more)
Finding No. 2: The biggest driver of cloud applications is not to cut IT costs. IT cost reduction is an important factor, but not the most important. Rather, standardizing software applications and business processes across a company (in the U.S. and Asia-Pacific) and ramping systems up or down faster (in Europe and Latin America) are the most highly rated drivers for shifting on-premises applications to the cloud. And the factors driving companies to launch entirely new applications in the cloud are quite different – to institute new business processes and launch new technology-dependent products and services. The case of assessment testing company CTB/McGraw-Hill shows why cloud computing will become a key tool for delivering pioneering IT-enabled offerings. (Read more)
Finding No. 3: The early returns on cloud applications are impressive. Companies using cloud applications are increasing the number of standard applications and business processes, reducing cycle times to ramp up IT resources, cutting IT costs, and launching a greater number of new products and processes. The story of a major telco shows the ambitions of the some of the most aggressive cloud adopters. (Read more)
Finding No. 4: Customer-facing business functions are garnering the largest share of the cloud application budget. Marketing, sales and service are capturing at least 40% of that budget in all four regions. The experiences of Dell’s enterprise sector online marketing function shows how one large company is trying to get closer to customers through cloud marketing applications. And a new private cloud at Web media company AOL Inc. explains how a technology-dependent company can make its technology more responsive and cost-effective. (Read more)
Finding No. 5: Many companies are reluctant to put applications with sensitive data in the cloud. In the U.S. and Europe, the applications least frequently shifted from on-premises computers to the cloud were those that compiled data on employees (e.g., payroll), legal issues (legal management systems), product (pricing and product testing), and certain customer information (e.g., customer loyalty and e-commerce transactions). Still, some companies had shifted applications with customer data to the cloud, especially in customer service, and many planned to shift a number of customer-related applications to the cloud by 2014. (Read more)
Finding No. 6: The heaviest users of cloud applications are the companies that manufacture the technology hardware that enables cloud computing (computers/electronics/telecom equipment), while healthcare services providers are the lightest users (in terms of average number cloud apps per business function). (Read more)
Finding No. 7: The most aggressive adopters of cloud applications are companies in Asia-Pacific and Latin America. They report having much higher percentages of cloud apps to total apps – and bigger results from cloud apps than their peers in the U.S. and Europe. We show how a large consumer products company uses the cloud to respond rapidly and effectively to consumer issues around the world. (Read more)
Finding No. 8: Despite a significant shift to cloud applications, most companies (especially in Europe) remain conservative about which applications they put in public clouds. Less than 20% of U.S. and European companies would consider or seriously consider putting their most critical applications in public clouds. But 66% of U.S. and 48% of European companies would consider putting core applications in private clouds. (Read more)
Finding No. 9: The keys to adopting and benefiting from cloud applications are overcoming fear of security risks and skepticism about ROI. (Read more)
Finding No. 10: Companies evaluate cloud vendors most on their security and reliability/uptime capabilities – and far less on their price. This was the case in all four regions. In fact, price typically finished at the bottom of a list of nine factors in making the cloud application purchasing decision. (Read more)