Monday, April 05, 2010

BriefingsDirect Analysts Pick Winners and Losers of Cloud Computing's Economic Disruption and Enterprise Impact

Edited transcript of BriefingsDirect Analyst Insights Edition podcast, Vol. 51 on the impact of economics and business model disruption from cloud computing.

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Dana Gardner: Hello, and welcome to the latest BriefingsDirect Analyst Insights Edition, Volume 51. I'm your host and moderator Dana Gardner, principal analyst at Interarbor Solutions.

This periodic discussion and dissection of IT infrastructure related news and events, with a panel of industry analysts and guests, comes to you with the help of our charter sponsor, Active Endpoints, maker of the ActiveVOS business process management system.

Our topic this week on BriefingsDirect Analyst Insights Edition, and it is the week of March 8, 2010, focuses on cloud computing and dollars and cents. We'll dive into more than the technology, security, and viability issues that have dominated a lot of cloud discussions lately and move to the economics and the impact on buyers and sellers of cloud services.

When you ask any one person how cloud will affect their costs, you're bound to get a different answer each time. No one really knows, but the agreement comes when the questions move to, "Will cloud models impact how buyers and providers price their technology? And over the long-term what will buyers come to expect in terms of IT value?"

The agreement is that things are about to change, probably a lot and probably for good. The ways in which IT has been bought and sold will never be the same. So how does it become a different model? What comes when we move to a cloud based pay-per value pricing, buying, and budgeting for IT approach? How does the shift to high-volume, low-margin services and/or subscription models affect the IT vendor landscape? How does it affect the pure cloud and software-as-a-service (SaaS) providers, and perhaps most importantly, how do cloud models affect the buy side?

Not many enterprises and their IT budgets are yet set up for this shift. Who is in charge of the budget structure, and the changes, and what does that portend for a corporate power or politics shift around IT procurement?

These are just a few of the easy questions we have for our panel today. Please join me now in welcoming, Dave Linthicum, CTO of Bick Group, a cloud computing and data-center consulting firm. Welcome, Dave,

Dave Linthicum: Hey Dana, thank you for having me on.

Gardner: We're here also with Michael Krigsman. He is the CEO of Asuret and a blogger on ZDNet on IT failures. He also writes analyst reports for IDC. Welcome, Michael.

Michael Krigsman: Hey, Dana, how are you?

Gardner: Very good, thanks. We are also here with Sandy Rogers, an independent industry analyst. Welcome back, Sandy,

Sandy Rogers: Thanks, Dana, great to be here and participating in this timely discussion.

Gardner: Let me take my first question to you, Dave Linthicum. How much change should we expect in terms of IT economics as a result of cloud computing?

More money up front

Linthicum: We're probably going to have to spend more money initially. That's really what the takeaway is from the initial cloud-computing projects that I am involved in. At the end of the day, it's about strategic use of technology. Ultimately, cost reduction should be part of the result, but in getting there, we're going to have to spend additional dollars.

I was listening to your podcast with Peter Coffee, talking about service oriented architecture (SOA) and cloud computing, and he said something that was very profound. The fact of the matter is that, if you're looking for cheap IT, we can give you cheap IT. However, you're not going to be able to keep up with the competitive value that IT needs to bring to your enterprise. To get that competitive value, you're going to have to spend additional money.

The myth is that cloud computing is always going to be less expensive. I think cloud computing typically is going to be a better, more strategic, more agile architecture, but it's also typically going to be more expensive, at least on the outcome.

Gardner: Why is that, why is it more expensive on the outcome?

Linthicum: Because it does require lots of changes. You're going to have to redo your infrastructure, as I write in my book, to leverage newer architectural patterns, such as SOA, and that's typically very expensive to get out and access the services that are available to you on demand, out of the cloud. So that's an expense onto itself.

You're going to have to retrain and re-skill your people within your data center, all the way up into your executive ranks, on what cloud is able to do and how to manage, govern, and secure cloud. You're going to have to pay for the cloud computing providers, which in many instances are going to be less expensive than on-premise systems, but in many other instances are going to be much more costly than on-premise systems.

Ultimately, you get to a much better, higher value strategic architecture which is going to add more value to the business, but it's going to cost you some additional dollars to get there.

People and companies who are strategically thinking typically find cloud computing to be an easy sell.

Gardner: So it seems once again we are asking IT planners and those in charge of IT direction and strategy to make a bet along with the industry, which is to say, you will have to spend upfront but you will get something far better further down the road. Do you think they are receptive to that? Is there enough trust in cloud computing to make that kind of bet?

Linthicum: Some are receptive to that and they understand a long-term strategic direction of the technology can bring value to the business. People and companies who are strategically thinking typically find cloud computing to be an easy sell, and it's something they want to buy to basically add value to the existing IT.

Companies that think tactically, in quarter to quarter expenses, and consider IT kind of an expense that they rather not have to spend money on are going to fall by the wayside within cloud computing. They're just not going to get it.

It's very much like the Internet was in the mid-'90s. Suddenly, it's a big huge deal, and companies that got on board four or five years ago are leading the market, where companies that suddenly were trying to play catch-up football in 1999, 2000, found that the market left them behind. Many of those companies just went out of business, because they didn’t see the wave coming. Cloud computing is going to be very much like that.

Little bit of confusion

Gardner: Sandy Rogers, it sounds like there is a little bit of confusion. Dave Linthicum says it's the strategic long-term thinkers that get cloud and yet some of the discussions that I hear, it's the people who want to get out of the IT business in enterprises that are attracted to cloud. Can you have it both ways?

Rogers: One of the things that Dave noted was the idea of architecture, which is very important. There are particular use cases that are building with respect to leveraging cloud now, yet the technology and the architectures need to mature in order to really think about transitioning all of your IT into the cloud.

It's learning where you're going to need that elasticity, what is the short-term and long-term outlook for the types of solutions that are being built, and -- to Dave’s point -- what might be strategic to your organization in the long run versus what you might need to get tactically out the door.

It's a balancing act. It's one of many options to organizations to turn to cloud, and it's learning when to use it right and then how to use it correctly.

Gardner: So it sounds as if it's possible that some of those people who want to offload things, perhaps a certain set of applications, thinking about SaaS perhaps more than what we might consider pure cloud or infrastructure related cloud, might get what they want, which is to offload apps and maybe cut costs, but the other long-term thinkers, the other strategists could also look architecturally at a cloud and see a much more agile IT capability in the future.

Rogers: Right. Again, it's being able to look at all the different implications, as you scale out, and who are going to be the users of the technology? A lot of the innovation that we see happening on the cloud is really other providers that are starting to build their businesses on the cloud to leverage that partnership and the network that's starting to be created there.

They're learning that there is a web-scale business to be obtained out there, and that's really where we are seeing the biggest innovation.

They're learning that there is a web-scale business to be obtained out there, and that's really where we are seeing the biggest innovation. A lot of the enterprises are going to then learn from those organizations that have to act at web scale and understand which are the right use cases to put out there and how to leverage it.

What is also really interesting to know is that it's more than just technology. It's really transitioning to engage with services and services providers. Those who are attempting to move out there onto the cloud are learning that that is a big piece of the puzzle. Many technology providers have to grow into the role of a service provider.

Gardner: Sandy, we saw a lot of similar promises or expectations around SOA, say four or five years ago -- if you do this, later on you will really benefit. That was a hard sell. Now we're in a recession and we have tight budgets. Isn’t cloud going to be a hard sell as well?

Rogers: In some instances, in the short-term, it's an easier sell for those organizations that are looking very tactically at what they are going to be able to relinquish out of their capital expenditures. But, those who are looking at, "I need to grow, I need to be more agile," they are the ones who are really looking at the long-term benefits of cloud.

Gardner: Michael Krigsman, you've been studying how IT failures manifest themselves and are difficult to understand. When you listen to these discussions about cloud computing and you hear things about shifts in cultures and budgets, no one really knows what the cost implications would be, but we are pretty sure that over time it's going to be better. Do you have any kind of tingles in your antenna, any lights flashing? What do you sense?

Hopes and dreams

Krigsman: Hopes and dreams are always delightful, in a sense, but we've been talking so far about IT value. Dave brought up the notion of cheap IT, and I ask the question, is cheap IT really the goal? I realize that that's not what Dave was proposing, but I think for many organizations there is this tactical sense, as Sandy was saying, to embrace the cloud, because they say, "Our costs are going to go down in this very short-term."

To me, the real question, the longer term strategic question, is "How does this new IT infrastructure map onto our business processes and our business requirements looking forward into the long-term?" There are some mismatches and mismatched expectations in that domain.

Gardner: What happens when we have mismatched expectations?

Krigsman: When you have one group that is expecting certain types of outcomes and results and you have another group that is capable of delivering results that don’t match the first, namely between buyers and sellers, then the end result is predictable failure or disappointment somewhere down the line.

Gardner: With that knowledge and hindsight into other business and IT activities, Dave Linthicum, what do you think we need to do to prevent that potential failure? How do we match expectations of buyers and sellers? How do we accomplish a sense of value throughout the progression to cloud?

First and foremost is to set the expectations as to what the value is going to bring and where the value is going to come from.

Linthicum: First and foremost is to set the expectations as to what the value is going to bring and where the value is going to come from. We've had a tendency to focus on reducing cost over the last few years, with the recession and all, and ultimately cloud computing and SOA is about bringing strategic value back into the business in the form of IT. The ability to align your IT resources to the needs of the business quickly, get into markets fast, delight customers, sell more, and create supply chain integration systems that provide with frictionless commerce is really where the value is in this.

It's not about the number of servers you can save, the number of virtualized systems you can have, or the number of public clouds you can sign up with. It's about moving to that kind of an architecture. The traditional architectures that exist in enterprises today are highly dysfunctional. They're very fragile. They're overly complex. They can't be changed easily, and that puts a limitation on the business.

What we're moving to is something that's much more configurable and agile. Leveraging cloud computing is just a target architecture to get there. It doesn’t necessarily mean that it's going to provide less expensive IT, but it always should bring potential value to the business.

The first thing I do is walk someone through what this really means to your IT architecture, what this really means to the business. And, how this is going to provide value back into the business, both in hard costs, in other words, the dollars and cents around the IT expenditures, which typically may bolt up a bit initially as you do the strategic stuff.

Where the money is

More importantly, the strategic cost, the ability to get more customers, get more supply chains, add more value to the core business is really where the money is made. Those expectations need to be set in the minds of the people who are going to pay the bills, the stakeholders. We are just doing an awful job in that right now.

Gardner: It strikes me that it's hard enough with on-premises IT to get a handle on what your actual costs are. There is the short-term cost. There is cost over time. There are four- to five-year cycles of maturation around technologies. There are the operations and maintenance budgets on top of the initial. It's really hard to ask any enterprise to say precisely what IT costs.

Don’t we muddy the waters even further when we start doing cloud computing in addition to on-premises, hybrid types of models, mixing of on-premise traditional pricing as well as subscription model pricing? Will we lose track of how to even know what IT costs as a result of cloud?

Krigsman: You're talking about muddying the waters and bringing complexity. Complexity exists. It's here today. If you're not able to keep track of your costs and expenses now, and you add in new elements, the situation is going to get worse. But, the situation is pretty bad right now. So, from that standpoint, what's the big deal?

If you're not able to keep track of your costs and expenses now, and you add in new elements, the situation is going to get worse.

Gardner: Is there an opportunity to make it better?

Rogers: In some respects cloud providers, because they are in the business of providing a service, are starting to become much more transparent regarding the usage in order to help their customers make decisions and plan for the future. In a way, the ability to correlate the computing that's being used with what the value is to the business may actually move forward with cloud and put a lot of pressure on those that are providing computing resources on-premise to provide the same kind of metrics.

Gardner: Dave Linthicum, does a service level agreement (SLA) model with a price card the size of a postcard help compared to the licensing and maintenance and other hidden gotchas that companies have been unfortunately accustomed to on the on-premises procurement process?

Linthicum: It actually does help. Even some of the on-premise guys sold services, basically renting software. That was a nice, innovative model. Now, we have the same sort of thing within the cloud computing universe.

The pay-as-you-go model of cloud computing, even though it can be more expensive in many instances, when you really kind of amortize the cost over many years, is something that's attractive to at least United States IT. It's not always to foreign corporations, but definitely in the United States.

We like the pay-as-you-go cable bill kind of thing that we get, and also the ability to turn the stuff off or move away from it, if we need to, without having a big footprint already in the data center and things we need to deinstall and millions of dollars of hardware that we have to sell on Craigslist if the thing doesn’t work out.

The selling point

That becomes a selling point and really is part and parcel of value of cloud computing. But, it also can be the Achilles' heel of cloud computing, because ultimately people are going to make decisions around financial metrics that may not be realistic. If you look at those financial metrics in light of the requirements of the business, in many instances people are buying cloud computing because of the cost model and not necessarily the strategic value it's going to have to the architecture and therefore have to the business.

Gardner: In talking with some folks recently, I've heard them say that the move to cloud computing -- planning and thinking and architecting for cloud computing -- actually helps companies discipline themselves and modernize themselves around security, green and energy costs, governance and management, and even into business process management and people productivity issues. Does that make sense to anyone that there are these other paybacks from cloud computing beyond the dollars

Rogers: What I have seen is that immediately upon speaking about cloud computing, the idea of SOA has been brought up much more. What was very difficult to get across to the business and to varying roles within the IT ecosystem was what SOA and service orientation is all about. Cloud is really giving that use case to organizations, and a better way for them to understand it and embrace it. In that respect, it definitely is moving the bar forward and with a set goal in mind.

Gardner: Wait a minute. So what you are saying is that cloud computing is the killer application of SOA.

Rogers: It always has been when you think about cloud computing in a broader sense. It's really about taking advantage of network resources and services, wherever they exist, and to be able to provide and scale to whatever is necessary to support a business process or business function. It's the sharing of the resources. It's that next step in the shared services model, only at a much grander scale.

There really are no cloud vendors today that I can think of that can support the backbone infrastructure of a large corporation across all the functions.

Gardner: Michael Krigsman, do you see any indications from your work that the conceptualization, even the theory, around cloud computing is helping organizations tidy up areas that have been messy, such as how to make security holistic across IT activities and governance as more of a holistic undertaking? What do you think?

Krigsman: I think that for those processes that are automated with cloud, the cloud vendors have security built-in, for example. From that standpoint, security becomes easier. But, there really are no cloud vendors today that I can think of that can support the backbone infrastructure of a large corporation across all the functions.

You end up today, still having the security problems and so forth, but now your environment is mixed. Some of your functions are in cloud and some are on-premise, and you add it all together and, at least in the short run, there is this greater complexity.

Ultimately, if you had a theoretical vendor that could support a wide range of processes and they had a unified security model and so forth, in that case it would be simpler, but for large organization today, I don't see that simplicity.

Gardner: Dave Linthicum, any thoughts on this notion that cloud computing provides an on ramp to discipline for greater scale across some of these other major challenges, like governance, security, energy consumption, and the business process productivity?

Linthicum: Actually it does. I'm bullish on cloud computing being a catalyst for architectural change and typically for the better. So cloud, to the point just made, is not great at security and governance as of yet, but in many instances it's much better than the current security and governance in lots of these existing enterprises, which is poorly defined or nonexistent.

Improvement model

Ultimately, as people revamp their architectures to leverage cloud, moving into SOA, looking at cloud as an architectural option for bit pieces of parts of their data and parts of their processes, they go through an improvement model.

They go through some architectural changes, create new governance models, and create new security models. They leverage identity management versus simple encryption. They learn to be more secure. If they didn't have a chief security officer, they may now have a one, if they are moving into cloud.

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The target systems that are using cloud computing, the target architectures that are leveraging cloud computing, are almost always more secure than the traditional systems from which they came. That doesn't mean they're completely secure and without issues, especially in the cloud computing side. But, people make logical choices about what pieces of information and what processes to run in the cloud and which ones to run on-premise based on security models, and typically, if they are revamping into a new architecture, they are always going to be more secure and better governed, if the architects know what they're doing.

Gardner: I subscribe to that as well. This is an opportunity for a catalyst, for some of the shifts that we have been looking for, for some time, this sort of pulls it together. It's like the web. As the word pulled people together to understand the Internet, cloud is a word that helps pull people together to understand some of the major shifts in IT across a number of different aspects of IT.

Let's look at some of the shifts. If we move into IT as an organization, in many enterprises, it strikes me that one of the things it's going to have to shift is the way that IT organizations behave and the role that they play. While many IT organizations focus on operations and maintenance as sort of their core reason for being and the procurement and development and customization as an add-on, it strikes me that cloud and the movement to cloud can shift that.

The operations on maintenance side is more of an add-on, and that the role of IT becomes more as the definer of the SLAs, the enforcer and governor and policy manager for what constitutes good computing, while opening up more customization and flexibility and agility to the business users.

The lack of governance that exists today across the industry is pretty startling.

If you subscribe to that, or even if you don't, Michael Krigsman, what are your thoughts, about the shift within IT culture and isn't that an important necessary step to prevent failure as you move towards cloud?

Krigsman: Well, I think that there is no question, as Dave just mentioned, that driving toward cloud changes the architecture and requires proper governance. The lack of governance that exists today across the industry is pretty startling. So, as organizations move in this direction, there is simply no question that the cultural dimension of getting IT to work more effectively with the business side and so forth must drive with it.

If it doesn't, then, in the end, the solutions that are built with cloud will still have the same set of problems from a business standpoint that current IT solutions have today. This has nothing to do with technology. This is a matter of collaboration and communication across these various information silos.

Gardner: So to your company, Asuret, it's important to measure the progress you might be making at that cultural level, if you want to recover the investments that you have made on the technology side?

Data to work with

Krigsman: Regardless of architecture, you need to have data to work with, if you want to make decisions that are the right decisions, not just based on ad hoc guesses, and you want to get people on the same page. This aspect of it has nothing to do with technology, however the drive toward a unified architecture can be a great motivator to get different parts of an organization focused on these very important issues.

Gardner: Sandy Rogers, you worked with a lot of enterprise IT departments back when you were at IDC in another capacity. Do you see them making this cultural shift, and do you think it would be welcomed by IT to move beyond maintenance and red light-green light management into, "Let's define the best way to do IT and then give those tools to the business that they need to succeed?"

Rogers: A lot of organizations have already been trying to do that, but they were constrained by their own internal resources. In a way, it opened up the toolbox for them to help solve and help be a partner of the business.

One thing that we're finding from those cloud service providers that had originally targeted the end business customer, is that they're working with the CIOs and the IT departments more. They're working through those issues of security and having backup contingency plans.

It's just a state of education that varying parties within the IT ecosystem have to come on board and understand how to leverage this.

It's just a state of education that varying parties within the IT ecosystem have to come on board and understand how to leverage this.

One of the biggest points -- and Mike brought up the issue -- if there is a vendor out there that can support all of this, it's still a mixture of different technologies that have to come together. That’s always been one of the biggest, complex roles that IT needs to serve.

Right now, there are a lot of dependencies on specific technologies internally. A lot of organizations do not want to make those same mistakes with external providers. They're really looking to the IT group as an advisor to guide them and help them in the decisions moving forward.

Gardner: Dave Linthicum, in your work with Bick Group, in terms of your customer base, are there any lessons or wisdom to be drawn from how IT perceives itself and may shift in its definition of its role and character as it moves to cloud? Are there any success indicators in terms of the culture?

Linthicum: The culture that can adapt to these changes and understand that the investment in these changes is strategic to the business are really the cultures that are going to win the game.

In moving to cloud computing, the patterns are very similar to the on-premise systems. We store stuff, we have databases, and it's just a matter of where they reside. Through economies of scale, shareability, and also very innovative mechanisms that would be in the cloud, we can get a hand up in the way in which architecture can be constructed.

Evolution not revolution

I'm seeing more of an evolution than revolution. People who are evolving to leverage bits and pieces of their architecture to move into the cloud computing, where it make sense, around the innovative nature of the cloud and embracing what's going to work for them are the ones who win.

The ones who are going to lose are those with the same kind of behavior I saw in the early and mid-'90s, when the web started to pop-up Those who folded their arms and said, "We're never going to have the Internet running in this organization. We're never going to be on the web," ultimately missed out. We're seeing a very similar revolution today.

It's a little different. It's more IT resources versus content, but, in five years, if you go forward, you are going to find that the winning companies are the ones that are more innovative around their IT infrastructure, inclusive of cloud computing.

They're going to be more integrated with their suppliers and more integrated with the vendors and the customers that they are dealing with. Their customers are going to be delighted with them, because the speed of response, they're able to get information to them and able to get their products, goods, and services to them. They're going to be the real winners there.

Those people who have that kind of innovative nature around these changes, can figure out how it functionally works within the enterprise and then how to evolve their architecture in that direction are going to be the winners.

The losers are the arm folders and the guys who push back on any kind of technology that’s out there, without understanding the value of that technology and how it fits in the context of their business.

In five years, you are going to find that the winning companies are the ones that are more innovative around their IT infrastructure, inclusive of cloud computing.

Gardner: I suppose there's another constituency in the enterprise that needs to be brought on board with all of this and that would be the budgeters, those who are in-charge of the money and how its spent and even the planning about how budgets operate and/or change.

The reason I bring that up is that I have a cousin who is an IT executive at a telecommunications company. I can't describe it more than that, given that he doesn’t have permission to talk in public.

One of his frustrations as a IT person is that he wants to go out and explore and experiment with cloud and services, but the budgets don’t have any line items for him to do that. The people he reports to financially don’t like the idea of opening up a whole new set of line items around “cloud” when you can't take from Peter, that being the already existing IT budget, to pay Paul.

So, to your point Dave, you need to spend a little and invest a little more to get somewhere. He doesn’t have the means to get those monies and he is having a hard time explaining to the budget people why they should.

What message can we take in terms of cloud computing for the business accounting, CFO types, whose job of course it is to keep costs as low as possible?

Fundamental point

Krigsman: Can I just make a comment responding both to this and amplifying something that Dave just said. This is a fundamental point -- the cloud computing winners are going to be those who combine architectural vision and discipline with superior governance and who are also capable of making the adaptive cultural and business transformation changes, such as you were just talking about, things like budgeting, for example. Success in the cloud will require a mixture of all of these things together.

Gardner: So, perhaps this is a board-level discussion and not an IT discussion or even a business management or process management or organizational discussion. It has to go pretty much at the top, which I guess is what we used to say about SOA as well.

Rogers: Exactly, One of the things that we saw was that there needs to be a real business case to utilize any new technology and any new architecture. Nothing is really different here. It's really looking into what the organization requires in targeting those use cases that are tested out and tested out when it needs to scale.

Gardner: I suppose another way to get the attention of the board is through the competitive issues. If your competitor does cloud computing really well and you don’t -- you're folding your arms, as Dave says -- what's the likely competitive result?

Dave Linthicum, any thoughts about a bifurcation in the market between those who embrace cloud computing and those who don't, and whether that will get the attention of boards across the board?

I think that they're waiting for 100 companies to be successful with the technology, before they start investing and moving forward. I keep hearing that over and over again.

Linthicum: It's going to be those people who win in the market around cloud computing, very much like -- I keep going back 10 years -- those who won in the web. They're going to really get the attention of the Board. Everybody has a tendency to follow, not necessarily lead. I think that they're waiting for 100 companies to be successful with the technology, before they start investing and moving forward. I keep hearing that over and over again.

It's going to be rather a tough sell within these boards of directors and people who are making critical decisions around utilization and new technologies, strategic technology, inclusive of cloud computing. You really need to lead with the value. You need to understand, there has to be a commitment for return on investment (ROI) from IT.

They need to put some skin in the game, as to the fact that this is going to actually have some kind of a core benefit to the business. And if they are not willing to do that and not wiling to take the risk, I don’t think that the stakeholders are going to sign off on it.

If you are in the IT world today, you need to understand that if you are moving to a new architecture, you have to commit to a certain amount of value that comes back to the business. Typically, it's going to be a five-year horizon in the United States, perhaps a ten year horizon in the Asia-Pacific. But, that has to be shown and that has to be returned. If it's not returned, then ultimately it's going to be considered a failure.

Start now

You need to start committing to this stuff right now and putting some skin in the game, and I think a lot of people in these IT organizations are very politically savvy and want to protect their positions. There are a few of them who want to put that skin in the game right now.

Gardner: Another way that we have seen disruption in the market -- and I'll double down on your comparison to the early days of the web 15 years ago -- was that newcomers to the market, whether they are startups or they are existing businesses that changed their strategy and entered new and different markets, is there a greenfield advantage here that’s significant enough to convince people of the power and value of cloud computing as a productivity and agility enhancer?

Will newcomers to some markets that embrace cloud efficiencies get such a leg up? We've seen this happen with Amazon in retail, Google in advertising, and of course there are a number of other examples across ecommerce. Is that perhaps a likely way in which cloud computing from a business standpoint will become a bit more of a priority?

Linthicum: I think we are going to see kind of an unfairness in business. People who are starting businesses these days and building it around cloud infrastructures are learning to accept the fact that a lot of their IT is going to reside out on the Internet and the cost effective nature of that. They're going to have a huge strategic advantage over legacy businesses, people who've been around for years and years and years.

There are going to be a lot of traditional companies out there that are going to be looking at these vendors and learning from them.

As they grow and they start to go public and they start to grow as a business, they get up to a half a billion mark, they are going to find that they are able to provide a much more higher cost and price advantage over their competitors and just eat their lunch ultimately.

We're going to see that, not necessarily now, because those guys are typically smaller and just up and coming, but in five years, as they start to grow up, their infrastructure is just going to be much more cost effective and they are just going to run circles around the competition.

Gardner: So I guess we could call this the Barbarians at the Gate effect. How do you see that, Sandy?

Rogers: What's really different is that startups in the space are starting to learn how to run their businesses beyond their technology much earlier. How to manage that partnership ecosystem is really important to how they can capitalize and grow their business. Given the low cost dimension, the per usage type of charging that cloud providers initially engage in, they have a lot of startup cost. It's what I've heard venture funders call "getting that flywheel going."

They're looking at both the short term to ramp up and promote that agility, and get that low hanging fruit and then move into sort of that broader scale. There are going to be a lot of traditional companies out there that are going to be looking at these vendors and learning from them, and it's really about being able to garner that trust.

Tried and true

Large enterprises will often look to the tried and true, because they feel they're going to be around for a long time. So for those that are starting up, they need to present a case that they are working well across the entire IT periphery and working well with those traditional providers in order to gain that trust and mitigate risk.

Gardner: Michael Krigsman, when you look at IT failures, if the startup that exploits cloud computing to the hilt can quickly more from $100 million a year company to $700 million a year company rapidly because IT can keep up with them, in that it's a cloud based, or largely cloud based IT, does that scenario make sense, and is there a cloud benefit to avoiding IT failures?

Krigsman: Both Sandy and Dave hit on this. When a company starts up, they are trying to save money and so they become very adaptable very quickly, and they gain the experience of what's it like to have their data out there in the ether some place, and as that company grows, they are able to make better use of the flexibility and the agility that the cloud offers.

From that standpoint, they do have an advantage over an incumbent, and, again, the cultural aspect here is very important, because there are differences in how an organization relates to on-premise software versus the cloud.

Gardner: Last question and it's a follow-up to this last one. Dave Linthicum, you mentioned that there is a difference between the way the U.S. goes about IT and business compared to say other regions, for example, Asia-Pacific. Now, if the same advantage to being a newcomer to a field works at an individual company level, is there a regional benefit? That is to say, if the United States or any other region, were to embrace cloud computing and aggressively move into markets, would they have an advantage on the global scene? Is there a globalization effect of cloud computing?

Linthicum: I think they would have an effect on the global scene, because of the efficiencies to the architecture and also their ability to move quickly around some new technology spaces in some of the European and Asia-Pacific companies. Again, generally speaking, there are instances of very innovative and very quick moving companies in those areas.

What you're going to find is the biggest uptake of any kind of new technological shift is going to be in the United States or the North American marketplaces.

Ultimately, it would be about the ability to leverage technology that's pervasive around the world. What you're going to find is the biggest uptake of any kind of new technological shift is going to be in the United States or the North American marketplaces. We're seeing that in the U.S. right now.

The uptake on cloud computing in Europe is there, but it's not necessarily as quick as it is in the United States. The uptake in the Asia-Pacific countries is very slow typically, as they usually follow new technology. So, we could find that the cloud computing advantage it has brought to the corporate U.S. infrastructure is going to be significant in the next four years, based on the European enterprises out there and some of the Asia-Pacific enterprises out there that will play catch-up toward the end.

Also, they're dealing with some rather draconian regulations around data. In other words, in many countries, they can't let their financial data or the customer data reside outside of their country. So, if there is no cloud-computing presence in those countries, Amazon or the cloud computing providers, then it's illegal for them to leverage cloud computing.

Either laws are going to have to change or they are going to have to figure out some way around those laws in order for them to take advantage of the emerging cloud computing marketplace.

Gardner: Well, great, We have covered a lot of ground. I want to thank our panel. There's certainly a lot more to keep track of over the next several years to see where the economic and productivity advantages do or don't exist vis-à-vis cloud computing.

So let me thank our guests. Dave Linthicum, CTO of Bick Group. Thank you so much.

Linthicum: Thank you, Dana.

Gardner: Michael Krigsman. He is the CEO of Asuret and a blogger on ZDNet on IT failures. He also writes analyst reports for IDC. Thank you, Michael.

Krigsman: Thank you.

Gardner: And, Sandy Rogers, independent industry analyst, thanks so much for your perspective.

Rogers: Thanks, Dana, and the rest of the panelists.

Gardner: I would also like to thank the sponsor, our charter sponsor for today's BriefingsDirect Analyst Insights Edition, that's Active Endpoints, maker of the ActiveVOS business process management system.

Gardner: We have been discussing cloud computing through the lens of economics and the impact on cost and productivity. This is Dana Gardner, Principal Analyst at Interarbor Solutions. Thanks for listening and come back next time.

Listen to the podcast. Find it on iTunes/iPod and Download the transcript. Charter Sponsor: Active Endpoints.

Special offer: Download a free, supported 30-day trial of Active Endpoint's ActiveVOS at

Edited transcript of BriefingsDirect Analyst Insights Edition podcast, Vol. 51 on the impact of economics and business model disruption from cloud computing. Copyright Interarbor Solutions, LLC, 2005-2010. All rights reserved.


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