Analyzing The Cloud: Beyond Blinking Lights and Acronyms

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Analyzing The Cloud Wed 29 Apr 09

A recent report says cloud computing may not be cost effective for big companies. But that's not the whole story.

A few weeks ago, I had lunch with an old friend and his associate, who happened to be an analyst at one of the major information technology research firms, and our conversation drifted to cloud computing.

During this conversation, we agreed that cloud computing would make inroads with small- to medium-enterprises (SMEs) but not with large enterprises. Our conclusion wasn't based on economics but on IT culture. As my new friend stated, "The No. 1 barrier to the use of the cloud is IT culture."

SMEs are more likely to go to the cloud because it is likely their best practical choice. It allows them to scale up their operations without having to add assets or staff. Culturally, SMEs are more nimble and readily accepting of new concepts; the IT culture and bureaucracy is not as firmly entrenched there as it is in large enterprises.

To be sure, the IT groups in SMEs would no doubt prefer to run their own operations rather than go to the cloud. IT has a love affair with the hardware. We want to be able to see it, to touch it and to control it, even though technology has for the most part eliminated the need for this. For SMEs, however, the advantages of the cloud will quickly outweigh this cultural bias, especially since the decision likely will be made by people outside of IT.

In large enterprises, this bias is alive and well and thriving. In addition, large enterprises already have large computing operations in place, and some may see the cloud as a threat to their job security (it might well be). However, in large enterprises, IT will have some political clout to hold off the move to the cloud, and IT will be intimately involved in the decision.

Additionally, cloud computing will change the role of IT in your firm. Rather than operating the data center, IT will now have to manage the cloud provider to make sure it is performing as required. This will be a big change for the IT organization and, as we all know, change is difficult.

Subsequent to all of this, Will Forrest of the strategic consulting firm, McKinsey & Co. produced a report, Clearing the air on cloud computing, which challenges the idea that cloud computing is an economically attractive alternative to maintaining your own data center. Forrest indicates that while SMEs may find it economically sound to go to the cloud, large enterprises may find the economics to be over-hyped.

Forrest contends that the labor savings of going to the cloud are not as significant as perceived as it relates primarily to "touch labor" roles of the data center. This analysis is basically a traditional "make vs. buy" supply chain analysis, and therefore, it is not surprising that some large enterprises could have equal or better economics by keeping the data center in-house.

If you agree with Forrest's analysis, it would be logical to expect cloud computing to make inroads within SMEs but not large enterprises. This is the exact same conclusion we came to earlier but from an entirely different approach.

I'm sure that Forrest's report will be used as ammunition by some IT groups to fight the cloud--"See. McKinsey says we shouldn't go to the cloud," even though I doubt Forrest was suggesting a hard and fast rule for all situations. IT economics are obviously a critical component, but I'm a little surprised that a McKinsey report didn't bring up issues such as whether or not data center operations are a core competency of your company and strategy.

The reality is that the cloud isn't an all or nothing proposition. It will make sense for some parts of your IT operations but not others. It may also be the best option for some large enterprises and the absolutely wrong solution for some SMEs. A lot of factors go into deciding if going to the cloud is the right decision for your company.

When you evaluate going to the cloud, you should most definitely consider the economic factors as Forrest has done. At the same time, don't forget the intangibles such as strategy, risk and core competencies. And by all means, don't ignore the IT culture and its potential impact on their analysis of the cloud and the change-management process you may have to go through if you do choose the cloud.

This article is also posted on Forbes.com. Feel free to join in the discussion either on this site or at Forbes.com