CIOs and Cloud Computing

CIOs and Cloud Computing

          
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CIOs and Cloud Computing

A Relationship Revisited
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  • In This Article
    • CIOs, once among cloud computing's biggest skeptics, are turning to the cloud in increasing numbers, lured by the potential for better, faster, and cheaper IT.

    • Nonetheless, CIOs see limits to the cloud's utility and believe it should be applied judiciously.

    • As CIOs seek to deploy cloud services more aggressively, they will need to assess their company's internal IT capabilities to ensure that they can leverage all that the cloud offers.

     

    For chief information officers, cloud computing is no longer a question of if. Rather, the focus now is on where and how to deploy it.

    This key message emerged from a recent survey of CIOs at larger companies, which was conducted by The Boston Consulting Group. CIOs, this latest survey revealed, have moved well past the dip-a-toe stage with regard to the cloud. (For a discussion of findings from our first survey, see “Cloud Computing in Large Enterprises: Questions for the C-Suite,” BCG article, September 2010.) They consider it a potent tool that can deliver benefits extending far beyond cost reduction. And CIOs are applying cloud services increasingly aggressively, although they do not consider the cloud a panacea. They believe it must be applied selectively—and managed closely.

    CIOs Are Embracing the Cloud

    After a lengthy wait-and-see period, CIOs are turning to cloud computing in large numbers, lured by the potential for better, faster, and cheaper IT. And the momentum continues to build. Virtually all the CIOs we polled have by now deployed some form of cloud services, using either their own or third-party resources. And roughly a quarter of their current IT capital spending is directed at some sort of cloud technology.

    Key Objectives. Driving this strong adoption is the fact that the cloud, through such levers as greater standardization and automation, enables CIOs to capture advantages that can be hard to achieve through conventional, in-house IT capabilities. (See Exhibit 1.) The potential for significant savings remains, of course, a major attraction. The CIO of a national postal service described the possible drop in costs as “so significant you can’t ignore it” and marveled at the gains his organization had achieved: “We expanded cloud services into 17 countries in less than six months and saw a 2.5-fold reduction in IT implementation costs.” 

    exhibit

    But CIOs’ reasons for embracing the cloud now extend well beyond cost reduction. Speed—measured, for example, in time to business benefit—is a particular aim. Indeed, 70 percent of the CIOs we interviewed said the potential speed benefits were of high or critical importance to their decision to utilize cloud services. The CIO of a mobile handset company said that, by moving to a cloud provider, “we reduced our provisioning time [for servers] from 37 days to a few minutes.”

    Focus Areas. CIOs see particular value in applying cloud services to such “commodity-like” functions as e-mail, procurement, and aspects of sales management. For such functions, where there is little business value to be gained by customization and the focus instead is on providing good-enough levels of service while containing costs, cloud services can prove ideal indeed.

    In particular, application of cloud-based software to such functions offers a host of advantages, including faster implementation and time to benefit, lower installation and change costs, fewer skills needed in-house, and greater ease in updating software. Use of such software also enforces standardization across the company, preventing unnecessary customization of functions and processes. And it can free IT management to focus on higher-value activities.

    CIOs are increasingly looking to expand the range of commodity-like functions they target with the cloud, our survey revealed. They view specific core-data applications, such as enterprise-resource-planning and billing systems, as potential candidates. They also see major opportunities in data center services, particularly in testing and development, which can account for more than half of data center costs. Indeed, CIOs expect that more than 60 percent of data center services will employ cloud technologies within three years. Whether that expectation is ultimately met will depend largely on how well cloud providers can address their key challenges, which include a shortage of necessary internal technical skills and capabilities, difficulty helping clients integrate legacy applications, pressure from clients to customize their offering, and lack of familiarity or comfort with the contracts and service-level agreements clients demand.

    We believe a combination of factors will encourage CIOs to continue to target higher-value-added areas with cloud services. Changing expectations from customers and the growing reach of digital technologies are putting a premium on IT agility and speed—and cloud technologies can serve as critical components of the platforms that enable these capabilities. Non-IT executives’ growing awareness of the cloud’s potential to create business value—for example, by increasing speed to market and facilitating entry into new markets—will also push CIOs in the direction of greater, more high-value use of cloud services.

    CIOs See Higher Limits, However

    Although CIOs view the cloud as a powerful tool, they do not consider it the answer to all problems. They note the barriers it must overcome before it can live up to its potential. And some CIOs, especially those whose companies have sufficiently large-scale IT operations, are deciding that building in-house cloud capabilities makes more sense than buying capacity from a cloud provider.

    Hurdles to Adoption. Among the significant remaining obstacles to widespread cloud adoption is the regulatory environment, especially rules regarding the location of data. “Finance and legal services lag behind the technology,” said the CIO of a mobile communications manufacturer. “Contracts cannot cope; vendors struggle, too. Anything beyond basic services is beyond the maturity of both demand and supply.” CIOs also note the challenges of latency issues and what to do with legacy systems.

    Another recurring complaint from some business stakeholders is the lack of cloud customization options, despite the recognition that the one-size-fits-all aspect of cloud offerings is a key reason for the speed and cost savings they deliver. This tradeoff can be too big for some companies, however. “Why align with a cloud provider if it means you lose your competitive advantage?” asked the CIO of a financial services company.

    Concerns About Public Offerings. Most CIOs of large companies remain skeptical about the availability of robust public-cloud offerings. They worry especially about security, data backup, and disaster recovery. As a result, most are adopting private clouds. (See “Terms Defined,” below.) As another CIO of a mobile telecommunications manufacturer said, “You need the guarantee of a level of service management that, at the moment, is not there.”

    Terms Defined

    This article refers to two types of clouds: 

    • Public clouds are computing services made available to the general public over public networks, including the Internet.

    • Private clouds are computing services accessed over a dedicated network operated solely for a particular organization. These services may be operated by either the organization itself or a third party.

     
    Several varieties of cloud services are available, including the following:

    • Software as a service is the provision of an application offered over a network. Users are not required to install and run the application on their own computers.

    • Infrastructure as a service is the availability of storage, processing, and network capacity billed on the basis of consumption.

       

    • Platform as a service refers to a development environment and associated tools and services offered to customers for building their own applications.

       

    • Process as a service is the full provisioning of a process, such as accounts-receivable collection, in the cloud.

    CIOs also have concerns about pricing, noting that the hidden costs of public-cloud services can grow quite high with heavy use. “Current public-cloud offerings are still too expensive for large companies,” said the CIO of a Japanese company. “At present, only startup companies would see substantial benefit.”

    Going It Alone. Many companies with large-scale IT operations have achieved efficiencies through internal deployment of cloud technologies, negating the appeal of external cloud sourcing. Another CIO of a financial services company told us, “We have such scale that we can implement cloud at lower cost internally—and we don’t charge a profit.”

    Other companies believe the cloud offering falls short of their requirements. “We have a highly optimized internal infrastructure,” said an automaker CIO, “and the outside proposition is not adequate for our needs.”

    Keys to Cloud Success Tomorrow—BCG’s View

    As CIOs increasingly test the limits of the cloud, they likely will need to rethink aspects of how they manage it. In particular, we recommend that, as they plan their next wave of investments, they consider dividing the range of scenarios in which the cloud can add value into four categories—what we term commodity IT, agile IT, scale IT, and growth IT. Each has its own characteristics and demands and will respond best to different cloud strategies, technologies, and services. (See Exhibit 2.)

    exhibit
    • Commodity IT includes nondifferentiating services, where the demands change little over time and the goal is adequate service at low cost. Here the focus of cloud deployment should be software as a service, process as a service, and infrastructure as a service, with the ultimate objective of driving down the organization’s costs by enforcing standardization.

    • Agile IT can include digital channels and business-to-business services. These are potentially highly differentiating areas where the demands can change rapidly and there is a premium on speed. Here the emphasis should be on building agile development and testing platforms.

    • Scale IT refers to situations where IT has sufficient scale or requires especially high performance. Examples include large-scale core-banking platforms and situations where internal computing resources are provided as external services. Typically, these are differentiating areas with high performance demands and large but stable volumes.

       

    • Growth IT includes R&D and the capabilities necessary to support new products. Here the demand and requirements are uncertain and there is a need for scalability. The emphasis should be on maximizing cloud utilization to optimize the ratio of variable costs to fixed costs.


    In addition to viewing cloud deployment through this lens, CIOs will need to pay increasing attention to skills and capabilities within their own organizations to ensure that they can leverage all that the cloud offers. Demand management skills, in particular, will be an essential element. Indeed, some companies, given variable internal demand for IT services and the pay-as-you-go nature of cloud computing, could find their IT costs actually rising after a major move to the cloud if they neglect to manage demand actively.

    Other capabilities—especially service integration, supplier management, and strategic data management—will need enhancements as cloud adoption increases and the IT organization’s focus shifts away from the direct provision of services. CIOs must manage this. They also have to manage the cultural changes within both the IT organization and the business that the cloud’s growing role brings. “The biggest mindset shift for IT,” said an energy company CIO, “is to get used to the idea that you can manage systems that are secure and are not on your own infrastructure.”


    Cloud computing is reshaping business and IT practices—and CIOs are increasingly leading the charge. Indeed, we detect a significant shift in attitude from what we saw in our last survey two years ago. CIOs are thinking in increasingly bold terms about the cloud, trying to map out their next wave of investments and determine the implications for their organizations. And they are beginning to negotiate the inevitable hurdles. As the CIO of a wireless-communications company told us, “I am convinced that our vision of cloud is right, but I need to articulate the business value more clearly to senior executives. The cloud has huge implications for our business.” Clearly cloud computing has reached—perhaps even passed—an inflection point in the minds of some of its once-toughest critics.


    Acknowledgments

    The authors would like to thank Matthew McCormick for his contribution to this article.

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