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Beyond the Jargon

The story of cloud computing isn’t about technology; its about massive economies of scale leading to significant bottom-line business benefits.

Information technology continues to be a primary driver and enabler of business strategy for most organizations. Personal productivity solutions empower workers, forecasting tools provide manager’s with an unprecedented level of business insight, and data mining techniques allow for vast improvements to customer service and retention. According to the US Bureau of Economic Analysis, annual IT spending has skyrocketed from approximately $5 billion in annual spending in 1970 to nearly $350 billion in 2008.

Despite both the magnitude of this investment and the wide-reaching impact technology has had on profitability and productivity executives outside the IT department continue to view long-term technology strategy as outside their domain. Often, this is no more than a communication issue; these conversations tend to be so laden with ‘tech talk’ that business managers perceive them irrelevant to their own goals. However, given that long-term economic potential, rather than the nuances of implementation, determines the value of a given technology to the business, these managers would do well to insert themselves in such discussions.

To understand the role return on investment plays in helping a new technology to reach critical mass, let’s consider the evolution of e-commerce.

In 1997, a poll from USA Today revealed that 95% of Americans were unwilling to give out their credit card details online. Thirteen years later, comScore reports the highest ever online spending on a single day; nine million online buyers spent over $1 billion on Cyber Monday. It begs to question: how did a mere thirteen years bring about such a dramatic change in events?

The answer lies in the economics of e-commerce. For consumers, online shopping ultimately offered a combination of convenience, pricing and availability that was compelling enough to overcome their security concerns. The opportunity was better still for merchants, who invested considerably in improving the online buying experience and received the benefits of reduced staffing and equipment needs, or the elimination of  commercial space entirely. Selling online represents a huge cost savings over operating a physical store. With geography a lesser issue, businesses saw tremendous growth in their potential reach – suddenly anyone with an Internet connection had become a potential customer.

Of course, the online shopping industry did not flourish overnight. In the early days, merchants faced hurdles in developing secure payment programs, software glitches and unplanned downtime. Because e-commerce was a disruptive innovation, in that it involves radical changes to business as usual, the retail industry has undoubtedly experienced some growing pains in accommodating its rapid growth. Unsurprisingly, all retailers did not fare equally. Early adopters, such as Amazon, eBay, Nordstrom and Intel, benefited tremendously from the new business model’s success.Conversely, firms arriving late to the game found it challenging to catch up to the robust web presence their competitors had already established.

The story of e-commerce echoes in the evolution of cloud computing – hosted, web-based applications built on shared infrastructure.

Much like online shopping, cloud based services are growing incredibly quickly, and will succeed not because of the nuances of their technology, but rather, as a result of the ability to deliver exponential gains to a business’s bottom line. The way firms manage the shift from client-server to cloud computing today will have significant influence on their cost structure, performance and scalability for years to come—creating sustainable competitive advantage for some, while holding others back.

It is said that the pace of technology adoption typically occurs in an S-curve. This means few firms adopt at the beginning or end of the cycle; most chose to fall somewhere in the middle. While adopting too early can be risky, the curve’s inflection point, in which a next-generation technology has just reached critical mass, is considered the ‘sweet spot’ for adoption, as it enables companies to get a leg up on their competition without worrying that they are investing in a technology that is fast-becoming obsolete.

Cloud computing has reached this inflection point. According to IDC Chief Analyst Frank Gens, 2011 is the year we can expect cloud computing to “make the critical transition from early adopter status to early mainstream adoption” and we can anticipate that it will remain “the dominant technology platform for the next 20 years”. As further evidence that cloud services are here to stay, IDG Research Services reports that 75% of firms plan to be using enterprise-grade cloud computing solutions within the next five years.

Despite the conspicuous signs of imminent change, many non-IT executives are still wondering how cloud computing will revolutionize their business, and more fundamentally, what the term means altogether.

This is hardly their fault. After all, cloud computing’s definition is murky at best. Inspired by the cloud symbol that’s often used to represent the Internet in flowcharts and diagrams, the term has morphed into an overused and misunderstood technology buzzword. Michael Coté of Red Monk, a self-proclaimed “cloudnut”, has described cloud computing “a sort of silly-putty… that you can jam into any hole or problem.”

To provide a bit more context, we are in the midst of a transition from client-server to cloud computing that constitutes a change in the way a company’s information is stored. The client-server model involves management data on a physical machine, whereas with cloud computing, data is hosted in the ‘cloud’ (aka the Internet). In contrast to the traditional hosting model, cloud services are sold on demand, typically by the minute or the hour; are elastic — a user can have as much or as little of a service as they want at any given time; and the service is fully managed by the provider.

Moving beyond the tech jargon, business leaders need to understand that these services operate based on massive economies of scale and will deliver significant benefits to their businesses – both in short and long term.

By switching to a cloud based solution, most companies will experience cost-efficiencies almost immediately as the on demand, elastic services managed by provide typically provide businesses with significant reductions in the cost of web hosting. Similarly, by providing employees with an array of tools for doing their jobs more efficiently, remote access to corporate resources, and enhanced business intelligence, firms can expect their workforce to quickly demonstrate increased productivity.

At its core, cloud computing is about a business’s future and keeping pace with modern business practices.  To this end, many firms will find that the aspects of cloud services that facilitate collaboration and the sharing of ideas across working groups help them to develop a culture of innovation. Further, implementing cloud-based solutions drastically improves a company’s agility and ability to respond quickly to business challenges. Additionally, because cloud-based providers operate at scale, they can often afford to invest considerably in security and network reliability. This means that for firms whose needs have outgrown the capabilities of their internal legacy data centers, early data migration can prevent costly incidents such as security breaches or unplanned network downtime.

As we saw with the rapid rise of e-commerce, technology with a strong business value proposition will accelerate at a fervent pace. Given both the myriad of advantages cloud hosting offers over its desktop counterpart and the economic value it drives for the businesses who embrace it, we can anticipate that the pace of its adoption will rival even that of online shopping. As a result, managers with an eye on the bottom line ought not to be content to watch early adopters as they stumble, or leave the decision making to their colleagues in IT. If they choose do so, they may find that rather than mitigating risk, they are in fact inviting it by allowing their businesses to fall behind the competition.

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