Cloud Computing as the Economic Tide Shifts

May 7, 2010 Appirio

Thoughts from Bay Area Council Outlook 2010
by Ryan Nichols

I was honored to be the guest of Accenture at this year’s Bay Area Council Outlook 2010. The conference marked the release of McKinsey’s annual report on the regional economy (which, in a sign that everything comes full circle, I was privileged to work on with my mentor Lenny Mendonca when I was at McKinsey ten years ago).

Overall, there was a tone of cautious optimism in the presentation of this report to a room of regional business leaders, suggesting that the tide of the regional economy has reached its low-water mark. In fact, the biggest risk may be that we let this crisis “go to waste” as a once-in-a-generation opportunity to fix some of the underlying problems in our economy.

Gary Pinkus, Managing Director of McKinsey’s west coast practice, extended the analogy between our regional economy and the tide: there’s a benefit to a low tide – it reveals the rocks that have been lurking beneath the waterline all along, and exposes those who aren’t wearing their bathing suits.

More than half of the people in the US expect a return to “business as usual” at the end of this crisis. As the economic tide rises, the message we heard from McKinsey was to not forget that the rocks are still there. For the Bay Area, this means changing how we govern ourselves, how we educate our children, how we invest in infrastructure, and how we maintain our reputation in the global economy.

Now, what does all of this mean for the IT industry?

Certainly the receding tide of the economy has exposed a lot of hidden rocks in how we use IT to support our businesses. Reduced budgets have sharpened corporate focus on the real value proposition of entire categories of IT spending. What exactly will you get out of your next ERP upgrade? What exactly are you getting for the maintenance payments you make to your on-premise software vendors? Why do you spend up to 10 times as much implementing software as you do on the software itself? Do you really need to be in the business of operating your own data center?

Over the past 2 years, these questions, combined with the need to do more with less, has had dramatic impact on the enterprise adoption of cloud computing technology. Companies facing IT budget cuts postponed or canceled expenditures on their traditional on-premise infrastructure, and spent money on cloud computing projects instead. Salesforce, Successfactors, Taleo, Concur, and other cloud-computing pure plays had record years in 2009. SAP, Oracle, Microsoft, HP, not so much. The receding tide of the economy exposed some ugly rocks indeed, and allowed CIOs to chart a better course toward achieving their goals.

The receding economic tide also exposed many IT industry stakeholders who weren’t wearing their bathing suits. ISVs were resisting the switch to SaaS because of the impact to their revenue streams. Data center providers were relabeling old technology with new names, selling “private clouds” to companies that had no business operating data centers. Services firms were going along, because they have more to gain than they have to lose in the transition to the cloud. Many IT professionals themselves were resistant to change because of fears to their job security.

Now, as the tidewaters slowly return, the IT industry is faced with the same question as the broader economy—will we use this opportunity to fix our underlying problems? or will we go back to “business as usual”?

Our view is that there is no going back. CIOs who initially were attracted to SaaS solutions for their lower TCO are now discovering that they have a powerful platform in their enterprise, one that’s suitable for running more and more of their business. They’re moving from opportunistic adoption of point SaaS applications to what’s being called “cloudsourcing”sourcing complete business solutions from one or more cloud platforms.

A low tide isn’t always pretty. But if the focus forced by tough economic conditions helps you chart a path towards clearer waters, then a crisis truly is a terrible thing to waste.

And in this business, we’re very happy to see clouds on the horizon.

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