More than a century ago, many of the world’s largest companies had to weigh whether to sink heavy dollars in powerful electric generators housed in the basements of skyscrapers or to begin shifting toward the growing public power grid being provided by electric utility companies.
Make no mistake: it wasn’t nearly as obvious a decision then as it might seem today. Corporations had to weigh the security of self-sufficiency against the cost-effectiveness of out-sourcing.
Companies are faced with a startlingly similar choice with the emergence of the cloud. Cloud computing offers an effective way to scale computing capacity based on shifting needs, while lowering the operating cost of IT services.
So why haven’t more companies made the migration? According to Michael Hugos, a former chief information officer and a principal of the Center for Systems Innovation who spoke at the Beyond Budgeting Conference in Chicago on Tuesday, executives still find themselves following antiquated IT strategies of building economies of scale.
“What you’re still seeing is that classic black Model T Henry Ford model of thinking,” says Hugos. “It just doesn’t work anymore. We know it intellectually, but in our gut, we still cling to those economies of scale. We have to make that transition.”
Hugos addressed many of the misperceptions that relate to the cloud. Many companies, for instance, are wary of moving systems with highly sensitive information to the cloud due to the threat of a breach in security. Hugos, however, is quick to point to the rapid growth of Salesforce.com and the security capabilities of providers of cloud-based infrastructure such as Amazon, Google, IBM, and Hewlett-Packard, whose profits are directly tied to providing secure data centers.
If anything, says Hugos, a key advantage of the cloud is that it can lowers risks for a company, allowing it the flexibility to probe into new markets with minimal cost and exit without over-leveraging itself.
That’s not to say the cloud is devoid of risk. Many companies are wary of the so-called lock-in effect. Cloud vendors are still using different operating systems and processes and haven’t yet provided clear specifications for portability of data and applications. Many users of programs such as Salesforce.com, for instance, worry that they will become dependent on the system and unable to use another vendor without substantial switching costs.
Lock-in concern is very real, says Hugos, but it’s no different than when a company that rolls out a new ERP system: there are only four major vendors left to choose from and the initial costs might be into the hundreds of millions of dollars.
“When one of those vendors says this year’s support contract rose by 50%, what are you going to do?” he asks. “Are you going to negotiate with them? You could be General Motors. You have no leverage. Lock-in already exists.”
There is an element of timing that underlies many of the decisions companies are weighing. Every five years, Hugoes says, IT departments need to refurbish their servers, often replacing aging hardware. But as the cloud presents a cheaper alternative, it becomes less a technical decision and, instead, one of capital expense.
This, naturally, creates friction for those in IT departments who see the emergence of the cloud being a direct threat against their jobs. It’s not all that unlike the trend manufacturing plant laborers watched over the last 30 years as more and more jobs left the United States.
“To be very blunt and deliberately controversial, excessive talk of security over the cloud is the last refuge of a scoundrel,” says Hugos. “It’s people who don’t want to change coming up with a reason not to change. And my response is, we have to take security seriously, but security is not an excuse to avoid what is happening anyway. And make no mistake: it is happening.”