Ho John Lee's Weblog

Spent some time at CloudConnect last week. “Cloud computing” has an increasing amount of buzz lately. I notice that India is the top region and Korean is the top language for searches on the topic. The top 3 cities are Bangalore, San Jose, and Seoul. That sounds consistent with my impression of levels of interest and activity. Infoworld says “Cloud Computing shapes up as big trend for 2009″. It’s certainly turning into a hot label, although the underlying internet service infrastructure ideas have been around for a long time.

The current business environment is characterized by high uncertainty. However, assuming the global economy doesn’t totally collapse, companies that successfully migrate IT activities to the cloud can achieve lower costs and flexible scale, at the potential cost of vendor lock-in, regulatory uncertainty, and the operational risk of the transition itself.

Some of this reminds me of the dynamics around corporate ERP projects a decade ago. If you were the incumbent leader in your market, you’ve already invested in your line-of-business IT infrastructure, and it’s working. You may have even been an early adopter of ERP technologies, gaining time and experience in pilot projects to develop a competitive advantage in your in-house IT. At some point the other competitors in a given market end up in a difficult position – either continue as they are with a strategic disadvantage (no ERP), or take on a risky overhaul of their core IT systems and business processes to become more competitive (if the project succeeds). Kind of like Iron Man rebuilding the power supply for his heart and super-suit. It’s great, as long as it actually works. But it might kill you.

So who went down this path? The leaders tend to, because part of how they became the leaders in their markets is by looking for the next competitive edge, whether it is a technology, business process, or other. The interesting part is that in many ways it is more attractive for an *uncompetitive* company to attempt a radical technology and process overhaul, simply because what they’re doing is already *not* working. So it’s literally adapt or die. The implementation risks were substantial, sometimes companies suffered major setbacks through failed ERP adoption, Hershey’s being a the poster child for a disastrous SAP project, although it didn’t *quite* kill them.

Now let’s look at cloud computing. It is clearly a win for startups and insurgents in a given market. They gain IT capabilities and scale on par with all but the very largest organizations, and don’t have a sunk cost of equipment, staff, and existing business process. They can’t differentiate themselves on better IT per se, but they can develop their processes around the flexbility and scalability of the cloud, and design for competitive advantage within its constraints. They also have nothing to lose, so why not take the risk?

The more typical case is much more difficult. An existing enterprise already has substantial IT infrastracture assets, staff, and business processes. They will be severely criticized and probably sued if someone doesn’t like what they’re doing, which is problematic because they have an actual working business and assets. Nonetheless, in the current business environment, many existing organizations will be approaching that “adapt or die” point, in which the choices are to try something risky and maybe have it fail (in this case, moving IT services and processes to the cloud), or die (weighed down by higher costs and lower flexibility). One implementation risk is that the regulatory issues around privacy, security, accountability etc haven’t been worked out yet, and what major financial institution, bank, insurer, or health care provider would want to be the guinea pig in court? Not their first choice, but the prospect of lower incremental costs and the operating flexibility grow more and more appealing every day. Someone is going to be first, probably get sued, and then everyone will know what the rules are and jump in. Either that, or startups and insurgents in their markets are going to take over first.