A couple of weeks ago Harvard Business School professor Andrew McAfee posted the following question on Twitter:
@amcafee Is cloud computing something that every exec (even NON-IT ones) needs to know about? Should I cover it in my MBA course this semester?
My answer to Professor McAfee is that it is, because cloud computing is as much a business phenomenon as it is a technological one. Most industries will be affected by cloud computing as it catches on and is embraced by the mainstream.
I classify the importance of cloud computing to business in two broad categories: operational and strategic. But before I jump into details, a quick general note. Increasingly, industries are driven by IT. From manufacturing to travel & shipping to telecommunications to financial services, growing aspects of the business run on computers and software. So much so, that some industries, such as capital markets trading, are primarily technology businesses. With that in mind, if we accept that cloud computing is a "once in a decade" kind of innovation, then surely it will have a significant impact on a multitude of businesses. An obvious previous example of this is the Internet.
But still, the question remains if cloud computing should be primarily the concern of the IT execs. After all, much of it is about deep technical issues (or so it is perceived) and many of the business execs lack the knowledge of those details to make a contribution to the decision-making -- or so some have suggested.
The Operational Importance of Cloud Computing
The operational importance of cloud computing is for the most part a tactical benefit, but it can evolve into a strategic one. Cloud computing -- and I include in this IaaS, PaaS and SaaS -- acts as an efficiency driver. It reduces costs and increases agility through the combined benefits of outsourcing and on-demand pay-per-use as opposed to over-utilization and a large upfront investment. It also gives a scalability guarantee: quick access to additional resources in case additional capacity is needed to handle success.
The implications of some of the decisions about cloud computing are so substantial to the business that every executive in the business needs to understand the key high-level considerations and the possible consequences. This is especially true because in some cases the IT execs may have various vested interests in the decision and are not basing it purely on what's best for the firm. For example, because cloud computing is an act of outsourcing, this may affect IT jobs in the company. An opposite example might be that the IT execs want to adopt cloud computing because it removes "headaches" from them.
In a presentation I have been giving to executives at different companies I discuss at length the various issues that business execs need to understand as they discuss cloud strategy with their IT counterparts. They include assessing whether the proposed cloud-sourced functions are core to the business or not, whether they create a competitive advantage, vendor lock-in and strategies to minimize it, and how the company can get the most bang for the buck (ROI analysis). I also discuss what elements of a company's business should be "cloudsourced". Does it make sense to build an internal cloud or a hybrid?
The Strategic Importance of Cloud Computing
But perhaps far more interesting is how cloud computing can be a transformational technology that drives innovation and creates a breakthrough strategy.
Consider the case of Amazon and their rationale for coming out with Amazon Web Services. As CEO Jeff Bezos explains in an interview with Om Malik, Amazon needed to develop the various services in AWS for their own internal purposes -- specifically, to create more efficiency in the interactions between network engineering and application development groups. They quickly realized, however, that they have come up with a true innovation that would benefit external users as well.
Amazon, by the way, has a history of looking at their business in this fashion -- trying to identify where their core strengths are in a way that may not be obvious to external observers. Years ago, they were one of the first companies on the Internet to open up their platform for other retailers. Amazon understood that one of its distinct competencies is running an extremely efficient infrastructure for online retailing -- payment processing, warehousing, supply chain management, personalization and recommendation engines and so on.
Like Amazon, many companies have developed distinct competencies that go deeper than the products and services they sell. For example, I talked to a Wall Street investment bank that developed what they believe is a very powerful platform for Value-at-Risk (VaR) analysis and other intense calculations. It provides a full infrastructure which allows plugging in various models and algorithms. The bank is already providing the platform as a service to hedge funds and insurance companies, but this service is almost an afterthought and is extremely ineffcient. The bank is now seriously onsidering opening it up as a full-fledged Platform-as-a-Service to which companies can sign up online and use a self-service approach to run their models on it.
I've presented these concepts at large companies in a range of insudtries, and invariably a flow of ideas comes streaming on what aspects of the company's internal operations can they open up as a service.
Another classic example is Salesforce.com, which opened up the underlying platform on which they built their salesforce automation (SFA) and CRM application for anyone to build applications with. Salesforce.com goes even further. It allows these third-party applications to access customer data already entered into the SFA application (with the customer's permission of course).
Another interesting example is Intuit, which announced last year that it is opening its Quickbase PaaS for 3rd parties to develop applications on. But here's the twist: there will be easy integration to customers' existing Quickbooks data (and presumably to data on TurboTax and Quicken). Intuit realized that it has distinct competencies in 1) building an extremely secure, reliable and scalable application platform, and 2) possessing vast amounts of financial data of American businesses, households and taxpayers. And it wants to leverage these assets -- perhaps opening up a whole new high growth business.
Similarly, many businesses should take a long, hard look at their distinctive competencies (note that this is different than "core competency", but I will dive into that another time). This might be on all levels of cloud computing, for example:
Infrastructure-as-a-Service: A healthcare company might provide infrastructure that is HIPPA-compliant for use by other businesses in the industry.
Platform-as-a-Service: A logistics and supply chain management company such as FedEx might open up its platform for companies to build customized versions of applications that target specific industry or niche needs.
Software-as-a-Service: Many companies that today provide different services via software that is used in-house only, can expose that software to the end consumer. We've seen many examples of this on the Web for years. A classic one would be the travel industry, which opened web versions of reservation and booking software that was once exclusively accessible to the travel companies themselves or travel agencies.
I've been working with a number of companies on ways to uncover and develop such ideas by looking at the principles underlying cloud computing and combining them with innovation models such as those found in Blue Ocean Strategy
and Seeing What's Next.
and Seeing What's Next.For example, I ask the question "Are there areas in your business that were traditionally considered too complex for end customers to access in a self-service model?" There always are and it often turns out that with today's technology developments many of the assumptions no longer hold true.
But more importantly, it often turns out that cloud computing enables targeting new kinds of customers and opening new markets, or what Clayton Christensen calls in Seeing What's Next nonconsumers, overshot customers and undershot customers.
In conclusion, cloud computing is a game-changer, both technologically and business-wise and wise business execs should understand the forces that will impact their industry. So Professor McAfee, please teach your students about Cloud Computing.
