Tuesday, March 10, 2009

The creative destruction unleashed by cloud computing

What can we learn from history? A lot actually. At the outset of WWI the opposing armies were all led by men who favoured using the manouevrability of cavalry to achieve decisive victories instead of fighting costly wars of attrition. Technological innovations forced them to rethink their strategy completely as the armies became bogged down in trench warfare.

When WWII broke out, the French and the British thought they would be fighting WWI all over again. Trying to avoid the heavy casualties of the fighting in the trenches the French built a line of defensive positions with fixed artillery and concrete bunkers along the German border called the Maginot Line. But the strategic thinking of German general Heinz Guderian which emphasized making the most of modern telecommunications and the mobility and agility of Germany's Panzer forces changed things completely. All the costly investments the French put into the Maginot Line proved futile as the German armored divisions simply circumvented it by making a detour trough Belgium.

Cloud computing is similar to the German armor divisions that conquered France, because just like armor, cloud computing is a resource that you can concentrate where and when it is needed and thus fits hand in glove with the lean enterprise philosophy. Traditional computing is more like the Maginot Line, massive resources tied up in fixed positions waiting to handle a crisis that might or might not occur. Businesses who remain in their bunkers will allow their competitors to reap the benefits.

So how do we define cloud computing? The narrow definition is the serving up of data and applications in the same way we plug a electric cord into the wall. At the end of each month or quarter there will be a bill charging us for the usage. The application and the data can be served by either a software as a service solution or a virtual server.

Nicholas Carr compares the evolution of Cloud Computing with the emergence of large-scale electric utilities during the first half of the 20th century in his book The Big Switch and how this affected manufacturing businesses. The early 20th century manufacturers adopted the new electric grid technology out of economic necessity as the utilities achieved economies of scale that individual manufacturers producing their own electricity could not match. Carr argues that the economic forces that drove businesses to swap their own electrical power sources for the new electric grid, are the same forces that will drive the businesses of today to swap their own servers for cloud computing.

So what are the economic benefits of cloud computing from a business perspective? Among the more important ones are cost reduction and time to market,the benefits of a utility payment model, and resilience.

Economies of scale allow cloud computing utility companies to lower costs.

Time to market (TTM) is shortened because companies will spend less time on procurement of hardware. You just need to sign up with a vendor and you have all the computing power you need at your disposal.

The utility payment model used by companies such as Amazon means that you will only pay for the services you use, not for excess capacity.

Resilience, cloud computing allows you to scale up your application platform in a way that is not possible using a traditional hardware setup or a hosting solution. An example: Using Amazon's Elastic Compute Cloud (EC2) Animoto, were able to scale up from 50 EC2 servers to 3500 in a week. This means that it is easy for companies to handle fast growth or peaks in demand but, as Amazon's founder Jeff Bezos put it: "Don't try this at home".

What are the drawbacks from a business perspective? The ones that immediately spring to mind are lack of maturity, lack of applications, and lack of subscriber competence.

Lack of maturity: Cloud computing is still in its infancy. Even though many companies profess an interest in the benefits, few have any experience.

Lack of applications: Most existing software applications have been designed with traditional desktop or server-client environments in mind. Even if traditional applications can be run on virtual servers in the cloud, a paradigm shift is required to fully harness the power of cloud computing.

Lack of subscriber competence: Even companies that would reap benefits trough the implementation of cloud computing are vacillating due to a perceived sense of loss of control and a perceived security threat.

So what does the future hold?

The current economic downturn is affecting the entire IT industry and although I think it is reasonable to expect fewer IT-related bankruptcies than during the dot bomb crisis, I expect to see cost cutting, lower hourly rates for consultants and staff reductions. But this gloom aside, I hope that the the crisis will drive technological change, particularly when it comes to the adoption of cloud computing.

The businesses most likely to adopt revolutionary cloud computing strategies are start ups and although starting an IT-business has never been cheaper, it is quite possible that the lack of venture capital will be a millstone around the neck of many innovators. Even so I still believe that the technology is here to stay and we better get used to it.

Cloud computing is a formidable force of creative destruction that in the next five years will to do traditional client-server computing what the effective use of armor did to the Maginot line. This means that players like Microsoft, Oracle, and SAP will have to catch up with the likes of Google, Zoho, GoGrid, Salesforce and Amazon. The question is, will they succeed?

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