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Have we reached peak SI

2011/08/03 in Business-Technology by peg | 2 comments

Have we hit the peak for systems integrators (SIs) (just as we appear to have reached “peak oil”), and it’s all downhill from here? While SIs are doing well at the moment, structural changes in the IT market suggest that the long term forecast is not all sunshine and roses as some pundits are predicting. With IT spend migrating from IT departments (the SI’s traditional buyer) into the lines of business, the ongoing shift to smaller projects delivering on-demand (rather than on-premesis) solutions, and the replacement of traditional support arrangements with outsourced and managed services, it’s hard to see how SIs will continue to grow when demand for their services seems to be tipping into decline. Globalisation, software as a service (SaaS) and cloud computer are reconfiguring the IT landscape and SIs look like they will be the big losers.

Predictions for the continued growth of the SI market are based on the understanding that companies are consuming more IT today than they were yesterday, and the assumption that increased IT consumption will result in tidy profits for SIs. Predictions are a funny things though, based as they are on historical trends. Guess that the market will continue to rise when you’re in the midst of a bull market and you’ll be right, most of the time. That is until something happens, something you didn’t anticipate, something that catches you unawares. The assumption that SI revenue is tied to IT consumption might no longer be true. New tools such as SaaS and cloud computing are enabling line-of-business leaders to step around the traditional IT department and engage with technology directly, bypassing the SIs traditional relationships in IT and providing them with fewer opportunities to sell their wares. At the same time the shift from on-premises to on-demand solutions – solutions which the business is happy to rent rather than own – is slashing the effort required to install, configure and integrate these new solutions, often by as much as seventy to eighty percent. On-demand solutions also have much lighter support needs relying on self-help wikis, users forums and power users, leaving the SI with little more than a small help desk to manage. With only limited access to this new class of IT buyer, dramatically smaller projects, and lower support revenue, the SIs role as IT enabler seems to be in decline. All good things come to an end though, and you usually only realise that the end has come after it has already passed. IT consumption might be going up, but there’s a good chance that SI revenue could soon be going down at the same time.

SIs are fundamentally sandwich shops[1]. When we don’t have the time or money to maintain our own kitchen or make our own sandwiches it can be more efficient to head over to the local sandwich shop to pick up what we need. Their margins are thin and revenue is largely tied to the size of the sandwich you just bought, so they’d really like you to buy a larger and more expensive sandwich. (Notice how sandwiches have grown so much bigger over the years, and everything is now gourmet?) And, of course, pre-made sandwiches are always a lot cheaper than special orders. This sandwich shop model is something that was established early on in the history of business IT. How else could companies afford to access the rare (and expensive) IT skills they needed to create all the systems they need? This might be a payroll system, or stock management, sales pipeline reporting, or the dreaded enterprise resource planning (ERP). Consuming IT used to mean hiring an SI to build and integrate something for you.

The world has changed since then. Back when I started in the industry my home computer couldn’t hold a candle to the beast I was given at work. Today, however, my shiny new 17″ MacBook Pro makes the locked down Windows XP laptops I’m offered seem like a bit of a joke. A new breed of business manager has crept into the business while the world has changed, these are people who grew up with technology and are comfortable solving their technology problems on their own. They know that there are alternatives to the expensive solutions proposed by the IT department (solutions that IT will engage an SI to deliver), and they’re happy to use these alternatives. Why spend a seven figure sum and wait a year for the IT department’s perfect, enterprise-wide project portfolio management solution when there’s one that is good enough, one you can buy on-demand via a company credit card, and one which you know will be up and running in a couple of weeks? We might argue about the regret cost[2], but the art of business is to make a timely decision and then make it work; it’s not to sit on your hands and wait for the perfect solution which will be delivered sometime in the distant future. While demand for new IT solutions might be growing, every time a business manager steps around IT to engage and on-demand solution SIs have one less opportunity to sell their wares.

At the same time we find that these on-demand solutions – when SIs do get their hands on them – only provide a fraction of the revenue that a tradition on-premisis solution does. Time is money for an SI (literally, as most avoid risk by sticking to time and materials contracts) and fielding a SaaS solution takes only a fraction of the time required for a more traditional solution. There’s no hardware to commission with SaaS or cloud computing, nor are there disks to wait for or backup strategies to create. (You still need to worry about business continuity, but that’s another post.) There’s also little chance for customisation, and integration tends to be via standard APIs or pre-built adaptors. It’s not uncommon for a SaaS project to be eighty percent smaller than the more traditional solution. Fewer resources on ground and fewer billable hours means that that the SI can expect their revenues to head in the same direction: south.

We’re also seeing the erosion of SI support revenues. Support used to encompass both the application – in terms of application maintenance, patching and security – and the users – with training and a help desk. Many SaaS and cloud providers don’t want to provide traditional support services as it erodes their margins, margins based on huge scale and little human contact. One solution is to engage an SI to provide these services for them, either on a client-by-client bases or as part of some sort of alliance. A more attractive solution is to move – as much as possible – to a self support model where clients support each other via user forums or a Google search. We soon find that a much smaller help desk will suffice as it’s only required to be the point of last resort, or to support the more technologically illiterate users.

Taken together, these trends – reduced access to buyers, lower project revenues, and lower support revenues – seem to show that the future is not as rosy for the SIs as we first thought. Demand for IT might be growing, but growing demand for IT no longer implies growing demand for the services provided by SIs. The final nail in the coffin is the fairly recent move into SaaS by established IT application vendors. Microsoft has gone on record as wanting to capture a greater percentage of IT spend as license revenues, converting SI installation and customisation costs into licenses by providing clients with prepackaged configurations which can be turned on at the flick of a switch. Rather than pay for a SaaS CRM and then engaging an SI to configure it to your liking, you pay for the SaaS CRM along with a canned sales methodology (Miller Heiman[3]? Holden[4]?) which works out of the box (as it were). Integration between SaaS solutions is also being converted into a configuration option as SaaS vendors sign alliances – just as Google and Saleforce.com did with GoogleForce – enabling these alliances to offer complete application suites which work together out of the box.

Whichever way you look at it, now is not a good time to be a SI.

References

1. Business models for the old rules of IT @ PEG↑
2. The price of regret @ PEG↑
3. Miller Heiman: The Sales Performance Company ↑
4. Holden International: Outsell You Competition ↑

Tags: cloud computing, ERP, Google, Holden International, Microsoft, Miller Heiman, SaaS, Salesforce.com, system integrators

Cloud computing’s long game

2011/01/11 in Business-Technology, Cloud & SaaS, Mailing List by peg | 2 comments

For as long as we can remember, technology’s role has been to support business. Identify your target market, product and goals, map out the required business model and then line up technology behind the various activities to drive cost savings and provide scale.

For many people, cloud computing (and it’s evil twin, software as a service) is the ultimate expression of this approach — information technology as a cheap, efficient and flexible utility grade service: utility computing. Just like electricity or gas, we simple turn on the tap (or hit the light switch) when we want some, and the hole in the wall will provide as much as we need.

Many people struggle to look beyond the utility computing analogy, with Jeff Bezos and Eric Schmitt acting as modern day Samuel Insulls[1], striding across the technology landscape as they build their utility computing networks. This is a view that also equates utility computing with fractionally owned (or leased), multi-tenanted applications and infrastructure deployed at a scale never imagined preciously. Computing that is too cheap to meter.

Utility computing, however, seems to offer a much grander opportunity. When coupled with globalization, utility computing offers us the ability to change the way we think about constructing and managing a company.

Our existing business models are founded on the assumption of needing to manage scarce resources, focused on building command and control structures around leveraging a centrally owned asset. This asset might be monetary deposits, knowledge (often reified through patents), or something physical like a factory or fleet of trucks. Our biggest challenge is marshaling the resources we need to ensure that enough work was done, and the asset provides us with a lodestone to help attract and manage these resources.

Utility computing and globalization enables us to think about this problem in a different way. By providing us with computing power and labor on demand, our main concern becomes what product to deliver (with a second order challenge of where to deliver it), rather than how the product is created.

Zara, a fashion retailer, provides us with a glimpse of the future. Zara has created a pull model where the organization is built around reducing the time from runway to retail[2]. Decisions on what products to produce has been devolved to individual stores who pull in the inventory they think they will sell, rather than head office presenting retail stores with the latest collection. New products rotate through the shelves in matter of weeks, pulled by customer demand, rather than following the seasonal cycle traditional in the industry.

Rapid turnover of products has driven new behavior in Zara’s customers. Customers now visit their local store every week or so, rather than once a quarter, as they are interested in seeing what new products have arrived, slashing Zara’s marketing spend in the process. There’s also a stronger imperative for customers to make an impulsive decision, as they know that the same product will not be in the store when they next visit.

Zara’s approach has made them one of the most successful fashion retailers in the world.

Today’s business models are the culmination of generations of incremental improvements, as successive generations of managers have tweaked their business in an attempt to reach the customer just a little faster than the competition. The first challenge we solved was the one of mass: ensuring that we have enough products available to service the customer, if they choose us. More recently we’ve worried about velocity: aiming to get our product to the customer just when they need it, rather than having to hold stock near the customer on the chance that they might want something we product. The next challenge (as exemplified by Zara) is acceleration: being able to redesign our products rapidly enough to follow customer demands as they evolve.

Utility computing and globalization can provide us with the tools to complete the journey that companies like Zara have started. By commoditizing the basic building blocks of a business — materials, labor and communication — they provide us with the opportunity to make our business models fungible. Why stop at rapidly redesigning our products? Why not dynamically reconfigure our supply chain, following our customers as they move around? Or even rapidly reconfigure our entire value chain, if need be?

The centre of gravity within companies – which for centuries have been built around the management of a central asset held by the company – is shifting. The new centre of organizational gravity will be the ability to rapidly plan and mobilize a critical mass of stakeholders, leveraging staff and assets which you many not even own or directly control.

An agile business will be one that can rapidly evolve its product portfolio to follow customer demand. One that can quickly reconfigure how materials are sourced, products are manufactured and customers are served, across the full breadth of the value chain, allowing it to sail through disruptions that leave competitors stranded. One that can dynamically reconfigure the end-to-end supply chain, delivering the right product to the right customer, just when they realize they need it (or even before they come to this realization). One that can rapidly enter and leave markets and geographies, as need be. And one that can do all of this with resources and services that it does not explicitly own or manage. A company that is built around its ability to mobilize its staff, partners and even its customers. This is the opportunity provided to us by utility computing and globalization.

References

1. Samuel Insull @ Chicago “L” .org ↑
2. Kasra Ferdows, Michael A. Lewis and Jose A.D. Machuca (2005), Zara’s secret for fast fashion, Harvard Business Review ↑

Tags: cloud computing, Zara

Some new rules for IT

2010/06/15 in IT Strategy, Mailing List by peg | No comments

The other week I had a go at capturing the rules of enterprise IT[1]. The starting point was a few of those beery discussions we all have after work, where we came to wonder how the game of enterprise IT was changing. It’s the common refrain of big-to-small, the Sieble to Saleforce.com transition which sees the need for IT services (internal or external) change dramatically. The rules of IT are definitely changing. Now that I’ve had a go at old rules, I thought I’d have a go at seeing what the new rules might be.

As I mentioned before, enterprise IT has historically been seen as an asset management function, a production line for delivering large IT assets into the IT estate and then maintaining them. The rules are the therefore rules of business operations. My attempt at capturing 4 ± 2 rules (with friends) produced the following (in no particular order):

Keep the lights on. Much like being a trucker, the trick is to keep the truck rolling (and avoid spending money on tyres). Otherwise known as smooth running applications are the ticket to the strategy table.
Save money. Business IT was born as a cost saving exercise (out with the rooms full of people, in with the punch card machines), and most IT business cases are little different.
Build what you need. I wouldn’t be surprised if the team building LEO[2] blew their own valve tubes. You couldn’t buy parts of the shelf so you had to make everything. This is still with us in some organisations’ strong desire to build – or at least heavily customise – solutions.
Keep the outside outside. We trust whatever’s inside our four walls, while deploying security measures to keep the evil outside. This creates an us (employees) and them (customers, partners, and everyone else) mentality.

Things have changed since these rules were first laid down. From another post of mine on a similar topic[3] (somewhat trimmed and edited):

The recent global financial criss has fundamentally changed the business landscape, with many are even talking about the emergence of a new normal[4]. We’ve also seen the emergence of outsource, offshore, cloud computing, SaaS, Enterprise 2.0 and so much more.

Companies are becoming more focused, while leaning more heavily on partners and services companies (BPO, out-sourcers, consultants, and so on) to cover those areas of the business they don’t want to focus on. We can see this from the global companies who have effectively moved to a franchise model, though to the small end of town where startups are using on-line services such as Amazon S3, rather than building their own internal capabilities.

We’re also seeing more rapid business change: what used to take years now takes months, or even weeks. The constant value-chain optimisation we’ve been working on since the 70s has finally cumulated in product and regulatory life-cycles that change faster than we can keep up.

Money is also becoming (or has become) more expensive, causing companies and deals to operate with less leverage. This means that there is less capital available for major projects, pushing companies to favour renting over buying, as well as creating a preference for smaller, incremental change over the major business transformation of the past.

And finally, companies are starting to take a truly global outlook and operate as one cohesive business across the globe, rather than as a family of cloned business who operate more-or-less independently in each region.

So what are the new 4 ± 2 rules? They’re not the old rules of asset management. We could argue that they’re the rules of modern manoeuvre warfare[5] (which would allow me to sneak in one of my regular John Boyd references[6]), but that would be have the tail wagging the dog as it’s business, and not IT that has that responsibility.

I think that the new rules cast IT as something like that of a pit crew. IT doesn’t make the parts (though we might lash together something when in a pinch), nor do we steer the car. Our job is to swap the tyres, pump the fuel, and straighten the fender, all in that sliver of time available to us, so that the driver can focus on their race strategy and get back out on track as quickly as possible.

With that in mind, the following seems to be a fair (4 ± 2) minimum set to start with.

Timeliness. A late solution is often worse than no solution at all, as you’ve spent the money without realising any benefit. Or, as a wise sage once told me, management is the art of making a timely decision, and then making it work. Where before we could take the time to get it right (after all, the solution will be in the field for a long time and needs to support a lot of people, so better to discover problems early rather than later), now we just need to make sure the solution is good enough in the time available, and has the potential to grow to meet future demand. The large “productionisation” efforts of the past need to be broken into a series of incremental improvements (à la Gmail and the land of perpeputal beta), aligning investment with both opportunity and realised value.
Availability. Not just up time, but ensuring that all stakeholders (both in and outside the company, including partners and clients) can get access to the solutions and data they need. There’s little value in a sophisticated knowledge base solution if the sales team can’t use it in the field to answer customer questions in real time. Once they’ve had to fire up the laptop, and the 3G card, and the VPN, the moment has passed and the sale lost. Or worse, forcing them to head back to the bricks and mortar office. As I pointed out the other week, decisions are more important than data[7], and success in this environment means empowering stakeholders to make the best possible decisions by ensuring that the have the data and functions they need, where they need, when they need it, and in a format that make it easy to consume.
Agility. Agility means creating an IT estate that meet the challenges we can see coming down the road. It doesn’t mean creating an infinitely flexible IT estate. Every bit of flexibility we create, every flex point we add, comes at a cost. Too much flexibility is a bad thing[8], as it weighs us down. Think of formula one cars: they’re fast and they’re agile (which is why driving them tends to be a young mans game), and they’re very stiff. Agility comes from keeping the weight down and being prepared to act quickly. This means keeping things simple, ensuring that we have minimum set of moving parts required. The F1 crowd might have an eye for detail, such as putting nitrogen[9] in the tyres, but unnecessary moving parts that might reduce reliability or performance are eliminated. Agility is the cross product of weight, speed, reliability and flexibility, and we need to work to get them all into balance.
Sustainability. Business is not a sprint (ideally), and this means that cost and reliability remain important factors, but not the only factors. While timeliness, availability and agility might be what drive us forward, we need still need to ensure that IT is still a smooth running operation. The old rules saw cost and reliability as absolutes, and we strived to keep costs as low, and reliability as high, as possible. The new rules see us balancing sustainability with need, accepting (slightly) higher costs or lower reliability to provide a more timely, available or agile solution while still meeting business requirements. (I wonder if I should have called this one “balance”.)

While by no mean complete or definitive, I think that’s a fair set of rules to start the discussion.

References

1. The rules of Enterprise IT @ PEG↑
2. LEO: Lyons Electronic Office. The first business computer. @ Wikipedia ↑
3. The IT department we have today is not the IT department we’ll need tomorrow @ PEG↑
4. The new normal @ McKinsey Quarterly ↑
5. Maneuver warfare @ Wikipedia ↑
6. John Boyd @ Wikipedia ↑
7. Decisions are more important than data @ PEG↑
8. Having too much SOA is a bad thing (and what we might do about it) @ PEG↑
9. Understanding the sport: Tyres @ formula1.com ↑

Tags: 3G, Amazon, Amazon Web Services, BPO, cloud computing, Enterprise 2.0, F1, Gmail, John Boyd, LEO, maneuver warfare, New Normal, offshore, outsource, pit crew, SaaS, The rules of IT, VPN

Is the market for IT services and solutions shrinking or growing?

2010/05/04 in Business-Technology, Cloud & SaaS by peg | 2 comments

Here’s an interesting and topical question: is the market for enterprise IT services (SI, BPO, advisory et al) growing or shrinking? I’m doing the rounds at the moment to see where the market is going (a side effect of moving on), and different folk seems to have quite different views.

It’s shrinking as the new normal is squeezing budgets and OPEX is the new CAPEX.
It’s growing as companies are externalising more functions than ever before as they attempt to create a laser like focus on their core business.
It’s shrinking as the transition from on-premsis applications to SaaS implies a dramatic reduction (some folk are saying around 80-90%) in the effort required to deploy and maintain a solution.
It’s growing as the mid market is becoming a lot more sophisticated and starting to spend a lot more on enterprise software (witness Microsoft Dynamics huge market share).
It’s shrinking as SaaS is replacing BPO, in effect replacing people with cheaper software solutions? (Remember when TrueAdvantage, and Indian BPO, laid off all 150 of its workers after being purchased by InsideView?)
It’s growing as the need for more mobility solutions, and the massive growth in the mobile web, is driving us to create a new generation of enterprise solutions.
It’s shrinking as cloud computing and netbooks remove what little margin was left in infrastructure services.
It’s growing as investment in IT is a bit like gas, and tends to expand until it consumes all available funds. (Remember integration? As the cost of integration went down, we just found more integration projects to fill the gap.)

Like of a lot of these questions, it depends.

Update: Gartner finds that the worldwide IT services declined 5.3% last year, while Computer World UK tells us to expect another year of decline. How much of this is cyclic, and how much is due to a definition of “services” which could be more inclusive?

Updated: It appears that some organisations are not happy with the size and dominance of the IT services industry.

CBA has come out in favour of leaner, more cost effective solutions, and is rumoured to be putting together global syndicate with Bank of America and Deutsche Bank to use their collective buying power to push down prices charged by tech industry heavyweights and encourage take-up of shared applications through the cloud.
The Victorian state government has also become “gun shy” on big IT projects, prompting the question whether overall IT spending is set to decline, with IT activity being consolidated into the shared services agency CenITex.

Tags: BPO, CBA, CenITex, CIO Magazine, cloud computing, Computer World, Gartner, Microsoft, Microsoft Dynamics, mobile web, netbooks, New Normal, Ovum, SaaS

With cloud computing, the world is not flat

2010/03/09 in Cloud & SaaS, IT Strategy, Mailing List by peg | No comments

Does location matter? Or, put another way, is the world no longer flat? Many cloud and SaaS providers work under the assumption that where we store data where it is most efficient from an application performance point of view, ignoring political considerations. This runs counter to many company and governments who care greatly where their data is stored. Have we entered a time where location does matter, not for technical reasons, but for political reasons? Is globalisation (as a political thing) finally starting to impact IT architecture and strategy?

Just who is taking your order?

Thomas Friedman‘s book, The World is Flat, contained a number of stories which where real eye openers. The one I remember the most was the McDonald’s drive through. The idea was simple: once you’ve removed direct physical contact from the ordering process, then it’s more efficient to accept orders from a contact centre than from within the restaurant itself. We could event locate that contact centre in a cheaper geography such as another state, or even another country.

Telecommunications made the world flat, as cheap telecommunications allows us to locate work wherever it is cheapest. The opportunity for labour arbitrage this created drove offshoring through the late nineties and into the new millenium. Everything from call centres to tax returns and medical image diagnosis started to migrate to cheaper geographies. Competition to be the cheapest and most efficient service provider, rather than location, determines who does the work. The entire world would compete on a level playing field.

In the background, whilst this was happening, enterprise applications went from common to ubiquitous. Adoption was driven by the productivity benefits the applications brought, which started of as a source of differentiation, but has now become one of the many requirements of being in business. SaaS and cloud are the most recent step in this evolution, leveraging the global market to create solutions operating at such a massive scale that they can provide price points and service levels which are hard, if not impossible, for most companies to achieve internally.

The growth of the U.S. enterprise application market (via INPUT)

Despite the world being laser levelled within an inch of its life, many companies are finding it difficult to move their operations to the cost-effective nirvana that is cloud and SaaS services. Location matters, it seems. Not for technical reasons, but for political ones.

Where we store our assets is important. Organisations want to put their assets somewhere safe, because without assets these the organisations don’t amount to much. Companies want to keep their information — their confidential trade secrets — hidden from prying eyes. Governments need to ensure they have the trust of their citizens by respecting their privacy. (Not to mention the skullduggery this is international relations.) While communications technology has made it incredibly easy to move this information around and keep it secure, it has yet to solve the political problem of ensuring that we can trust the people responsible for safeguarding our assets. And all these applications we have created — both the traditional on-premesis, hosted or SaaS and cloud versions — are really just asset management tools.

We’re reached a point where one of the a larger hidden assumptions of enterprise applications has been exposed. Each application was designed to live and operate within a single organisation. This organisation might be a company, or it might be a country, or it might be some combination of the two. The application you select to manage your data determines the political boundary it lives within. If you use any U.S. SaaS or cloud solution provider to manage your data, then your data falls under U.S. judicial discovery laws, irregardless of where you yourself are located. If your data transits through the U.S., then assume that the U.S. government has a copy. The world might be flat, but where you store your assets and where you send them still matters.

Country-specific regulations governing privacy and data protection vary greatly.

Global data protection heat map (via Forrester)

We can already see some moves by the vendors to address this problem. Microsoft, for example, has developed a dedicated cloud for the U.S. government, known as BPOS Federal, which is designed to meet the government’s stringent security and privacy standards. Amazon has also taken a portion of the cloud it runs and dedicated it to, and located it in, the EU, for similar reasons.

If we consider enterprise applications to be asset management tools rather than productivity tools, then ideas like private clouds start to make a lot of sense. Cloud technology reifies a lot of the knowledge required to configure and manage a virtualised environment in software, eliminating the data centre voodoo and empowering the development teams to manage the solutions themselves. This makes cloud technology simply a better asset management tool, but we need to freedom to locate the data (and therefore the application) where it makes the most sense from an asset management point of view. Sometimes this might imply a large, location agnostic, public cloud. Other times it might require a much smaller private cloud located within a specific political boundary. (And the need to prevent some data even transiting through a few specific geographies – requiring us to move the code to the data, rather than the data to the code – might be the killer application that mobile agents have been waiting for.)

What we really need are meta-clouds: clouds created by aggregating a number of different clouds, just as the Internet is a network of separate networks. While the clouds would all be technically similar, each would be located in a different political geography. This might be inside vs. outside the organisation, or in different states, or even different countries. The data would be stored and maintained where it made the most sense from an asset management point of view, with few technical considerations, the meta-cloud providing a consistent approach to locating and moving our assets within and across individual clouds as we see fit.

Tags: cloud computing, Forrester, INPUT, IT Strategy, McDonalds, mobile agents, SaaS, The World is Flat, Thomas Friedman

Reducing costs is not the only benefit of cloud computing & SaaS

2010/01/12 in Cloud & SaaS, IT Strategy, Mailing List by peg | 11 comments

The wisdom of the crowd seems to have decided that both cloud computing and its sibling SaaS are cost plays. You engage a cloud or SaaS vendor to reduce costs, as their software utility has the scale to deliver the same functionality at a lower price point than you could do yourself.

I think this misses some of the potential benefits that these new delivery models can provide, from reducing your management overhead, allowing you to focus on more important or pressing problems, through to acting as a large flex resource or providing you with a testbed for innovation. In an environment where we’re all racing to keep up, the time and space we can create through intelligently leveraging cloud and SaaS solutions could provide us with the competitive advantage we need.

Sameul Insull

Could and SaaS are going to take over the world, or so I hear. And it increasingly looks that way, from Nicholas Carr‘s entertaining stories about Sameul Insull through to Salesforce.com, Google and Amazon‘s attempts to box-up SaaS and cloud for easy consumption. These companies massive economies of scale enable them to deliver commoditized functionality at a dramatically lower price point that most companies could achieve with even the best on-premises applications.

This simple fact causes many analysts to point out the folly of creating a private cloud. While a private cloud enables a company to avoid the security and ownership issues associated with a public service, they will never be able to realise the same economies of scale as their public brethren. It’s these economies of scale that enables companies like Google to devote significant time and effort into finding new and ever more creative techniques to extract every last drip of efficiency from their data centres, techniques which give them a competitive advantage.

I’ve always had problems with this point of view, as it ignores one important fact: a modern IT estate must deliver more than efficiency. Constant and dramatic business change means that our IT estate must be able to be rapidly reconfigured to support an ever evolving business environment. This might be as simple as scaling up and down, inline with changing transaction volumes, but it might also involve rewriting business rules and processes as the organisation enters and leaves countries with differing regulation regimes, as well as adapting to mergers, acquisitions and divestments.

Once we look beyond cost, a few interesting potential uses for cloud and SaaS emerge.

First, we can use cloud as a tool to increase the flexibility of our IT estate. Using a standard cloud platform, such as an Amazon Machine Image, provides us with more deployment options than more traditional approaches. Development and testing can be streamlined, compressing development and testing time, while deployed applications can be migrated to the cloud instance which makes the most sense. We might choose to use public cloud for development and testing, while deploying to a private cloud under our own control to address privacy or political concerns. We might develop, test and deploy all into the public cloud. Or we might even use a hybrid strategy, retaining some business functionality in a private cloud, while using one or more public clouds as a flex resource to cope with peak loads.

Second, we can use cloud and SaaS as tools to increase the agility of our IT estate. By externalising the the management of our infrastructure (via cloud), or even the management of entire applications (via SaaS), we can create time and space to worry about more important problems. This enables us to focus on what needs to happen, rather than how to make it happen, and rely on the greater scale of our SaaS or cloud provider to respond more rapidly than we could if we were maintaining a traditional on-premises solution.

And finally, we can use cloud as the basis of an incubator strategy where an organisation may test a new idea using externalised resources, proving the business case before (potentially) moving to a more traditional internal deployment model.

One problem I’ve been thinking about recently is how to make our incredibly stable and reliable IT estates respond better to business change. Cloud and SaaS, with the ability to shape the flexibility and agility of our IT estate to meet what the business needs, might just be the tools we need to do this.

Tags: Amazon, Amazon Web Services, cloud computing, IT Strategy, Nicholas G. Carr, SaaS, Salesforce.com, Samuel Insull