If someone told you that you could drop your operating costs by 40 percent, would you listen? If that same person said you could you save between $70 and $150 per user per year in energy savings alone if you tried something new, would you try it?
A lot of companies are listening, and those same businesses are trying something new — cloud computing and software as a service (SaaS) — and reaping the many benefits, which start with the aforementioned cost savings.
Renee Bergeron is vice president of managed services and cloud computing at Ingram Micro Inc., a Fortune 100 company and the world’s largest technology distributor.
“(Savings) vary by solution, and I’ve seen some models that are in the 20 percent range all the way up to 70 or 80 percent,” Bergeron says. “I know it’s a big range, but it is significant. If you’re in an organization that has its own server that isn’t leveraging any virtualization, and you’re moving to the cloud, you’ll get into the 70 or 80 percent [range].”
Jeff McNaught, chief marketing officer at Wyse Technology, says that nearly 80 percent of IT budgets are spent just to keep the lights on.
““It’s about saving money, and there’s a tremendous amount of money to be saved,” McNaught says.
McNaught’s company builds a device that replaces the PC, uses one-tenth the energy of a PC and connects you to the cloud. The device doesn’t make a lot of noise, but more importantly, it doesn’t cost a lot of money.
“When you look at cloud computing, operating expenses can drop by about 40 percent a year, and that’s real money,” McNaught says. “These devices use one-tenth of the energy of the PCs. Now you’re really talking about saving real money.”
How cloud works
So the idea of saving that much money has caught your attention, and now you may be asking, “What exactly is this whole cloud computing thing anyway?”
Feyzi Fatehi, CEO of Corent Technology, which is a leader in SaaS transformation, says that cloud can fall into two categories — hardware and software, but both of them essentially move you to a service as opposed to buying the hardware or software.
“Instead of buying a computer, you subscribe to the amount of computing that you need to accomplish the tasks you’re focused on,” Fatehi says. “That’s really the big trend — moving from computers to computing and moving from buying stuff to subscribing to services.”
Dave Hitz is the co-founder and executive vice president of NetApp, a company that sells enormous amounts of storage, which many companies build their cloud systems on. From his perspective, Hitz also sees two different definitions of cloud computing.
“Definition No. 1 of cloud computing is you no longer buy a computer,” Hitz says. “You access computing service over the Internet to somebody else’s data centers, and they spend the capital and they hire the people to build them and they do everything, and all you do is pay a monthly bill and access the service over the Internet. Style No. 2 of cloud computing is a completely technical definition (that) has to do with if you’re going to build a data center, what does the architecture look like? And if the architecture has a lot of shared infrastructure, then people tend to call that kind of environment a cloud computing environment.”
The idea of the cloud is essentially that you plug into the wall, and you get a whole data center without having to build it and take care of it yourself.
“In the old times, people needed electricity, and they had to buy a generator to have at their office or home,” Fatehi says. “They had to pay money to buy it and spend money to maintain it, and now we simply subscribe to it as a utility, as a service. The monthly fee we pay for our power takes care of all the maintenance and everything else that takes place at the power plant. Cloud computing is moving from generators you have to buy to a power-plant model.”
John Dillon, CEO of Engine Yard Inc., a company that delivers an environment for software developers to write programs that run inside the cloud, points out that in the United States, capital expenditures are huge and about 50 percent of capital expenditures are information technology.
“Unbelievable,” Dillon says. “How many people are getting the ROI on this? What’s happening with the cloud is some big companies are saying, ‘Look, I’ll build the data center.’ It’s changing who buys, why it’s bought, and it changes the capacity and the economic decision-making process around IT.”
When you look at how much of capital expenditure is spent on IT, Fatehi says cloud presents clear advantages, such as taking your cost of maintenance and administration of your hardware or software down to zero. For example, if you wanted to buy a CRM solution, it may cost tens, if not hundreds or thousands of dollars. Or you could start paying about $500 a month to subscribe to a service like Salesforce.com. You don’t have to purchase any hardware or software, and instantly you start receiving the service.
“At the heart of it, it moves capital expenditures to operational expenses,” Fatehi says. “People don’t need to allocate millions of dollars to budget to buy a piece of hardware or software that could be very quickly obsolete — probably the same week they purchase it. They can start subscribing to a cloud computer service provider and get their need for computing for a service and pay on a monthly basis.”
Bergeron says it’s also important to note that cloud technology allows you to pay for only what you use. For example, if you have to build a system that can handle your peak volume time, such as month end, you pay for that all month long, even though you may only use that system at 10 percent capacity the rest of the month. With cloud, you pay for the higher volume only when you use it instead of all month long.
When you look at how much money most organizations spend on their IT systems, these cost savings are a big driver and will, ultimately, be a game changer for business.
The other benefit aside from cost is that everything that is on your PC is now in one location that can be accessed from anywhere — not just from the PC itself — and that comes with numerous benefits.
“When you take your software and your applications and your data and you move it to the cloud, something’s happened,” McNaught says. “First off, the cloud is the data center of your company and you can always get to it. You’re connected to the Internet, so you can get there from home, from the conference center, from the airport. And guess what? Because it’s not on a PC with a hard drive failing and memory getting filled up, it’s protected. It’s backed up. It’s secure. So the cloud provides this real opportunity to take the things that make up our work life, and within five years our home life, as well, and move them to this one place where we can always find our stuff.”
One other benefit that cloud technology provides is agility.
“Cloud solutions can be brought to an enterprise within hours, days or weeks,” Bergeron says. “We’re no longer talking about months to procure the hardware, the software, get it tested and up and running. Solutions that used to take six, nine, 12 months can be done in hours, days or weeks because the environment is already in place and ready to go.”
The evolution of cloud
Dillon is amazed by cloud computing, and if you look at how it’s evolved and how it’s changing business, it’s hard to disagree with him.
“This cloud thing is the biggest thing that’s happened in technology since the IBM computer, and that’s pretty big, and at least as big as the Internet in terms of economic disruption because it changes how and where we do our computing,” Dillon says.
He says to go back a few years and remember how every small and medium-size business had a room with computers in it and maybe a server or two.
“As businesspeople, you probably didn’t understand what they were for, but you knew they were important and you wrote checks,” he says. “It was hard to be good at that because you had a business to run and, presumably, you were an expert at that business, and you used technology to be good at that business or best at that business, so it was a necessary evil.”
Over the last 10 to 15 years, a variety of things happened that became game changers. First, we got the Internet.
“Everybody is connected — not just a few people are connected — and we’re connected not just inside our companies but outside our companies,” Dillon says.
Second, access became ubiquitous with the advent of cell phones, iPhones, BlackBerrys, iPads and laptops.
Then access got cheap — almost free. It doesn’t cost you anything to go to Google and look up any information that you want.
McNaught would add another element to that perfect storm — the PC itself. He asks how many people really love their PC with all the noise and the weight and the fact that if you drop it, it’s useless.
“People don’t want to buy these anymore,” McNaught says. “The cloud is really the place where you take the things that were on the PC, and you go put it there.”
McNaught says the data indicates that PC market share, which is about 94 percent now, will drop over the next decade to about 10 percent.
“It’s not because less PCs will be sold — maybe a few less, but it will lose its role as the core device we use to access our stuff,” he says “You’ll see this huge proliferation has already started with tablets and mobile devices and mobile phones and the mobile Internet exploding now. The question becomes, how do I access my stuff? How do I access it securely? And how do I access it at the lowest cost?”
These are questions that most people would agree are incredibly important. In fact, these questions are reasons why cloud hasn’t been successful in the past.
“This had been tried before and it’s failed because there were two things we couldn’t get right as an industry,” McNaught says. “Early on, we couldn’t make all the software that was important to your business work reliably. We walked into the hospital and the hospital says, ‘We have 400 applications; we can only make 350 work on the cloud. Where are the other 50 we need to execute?’”
The other factor was user experience.
“If you get, from the cloud, an experience that is the slightest bit less robust than the experience you get at home or the office today, what are you going to do?” McNaught says. “You’re going to go beat the living daylights out of the IT guy who suggested the cloud.”
But now the technologies have changed, and these two pieces have largely been addressed. On top of that, security is now stronger than with a PC, and that’s why companies large and small are now deploying the cloud.
“If you think of the early security concerns that were raised with cloud service, but you look at multimillion clients on Salesforce.com with customers’ information with no breach of security, that’s really done a couple of things,” Bergeron says. “It’s quieted down the initial concerns around technology. It’s demonstrated that cloud solutions can be secure if it can be done properly.”
How cloud can affect you
You may read this and think how great it all sounds and see how it important cloud is to the future of business. But if you’re on the opposite side, the experts would caution you to rethink your approach.
“At the end of the day, there is no choice,” Fatehi says. “If a business needs to succeed and compete for the future, they have to do this. They better enjoy it and do it with a positive attitude if they want to stay in business. The cost of doing business the old way is so costly that the business, if they don’t move to the new cloud computing model, they cannot compete. The cost of doing business would be so high, it would not be competitive.”
For example, if somebody’s IT cost is 30 percent of cost of goods sold versus another’s is 10 percent, that’s a 20 percent margin for profit — the one operating at 30 percent simply cannot compete with that.
And if you think that cloud isn’t really affecting you, Hitz says to think again.
“I’ve had the opportunity to ask a lot of CIOs, ‘How is cloud computing affecting your business? How much cloud computing are you using?’” he says. “The most common answer I get is, ‘It doesn’t affect our business at all yet, and we’re not using it at all yet.’ I will tell you that almost all those CIOs are wrong. They’re already using it but not thinking right.”
He say that CIOs need to think differently and compares it to the early days of the transition from the mainframe to the PC. In those days, if you asked a CIO if they had a PC strategy, many said, “Oh no, that’s not part of what we’re doing,” but half the employees had PCs.
“When data started leaking out the door because somebody lost their PC, who do you think the CEO went to beat up?” Hitz says. “The CIO, and the CIO said, ‘Well, PCs aren’t really IT.’ Those are the CIOs that are gone. I predict the exact same thing is going to happen to the CIOs who think that cloud computing isn’t happening in their business.
“… It’s affecting a lot more than people are realizing because they’re not defining it broadly enough. If they look at that broader definition, the stuff they’re already sort of doing or in denial about, that stuff is a pretty good road map to where the future is headed, just more.”
Bergeron couldn’t agree more. Ingram has seen its cloud services grow 88 percent year over year. She also says how we live our private lives should be a huge indicator of where business is heading.
“It’s going to radically change how business is done — cloud service is not a fad,” she says. “It’s here to stay. It’s already had an impact. Look at what impact it has on us as consumers. If you look at us as consumers, we embrace the cloud every single day. We have our e-mail on maybe Google or G-mail, which is in the cloud. We store and distribute and post pictures through Kodak Gallery or Snapfish, and that’s in a cloud. … It’s been pervasive in our lives as consumers, and it’s starting to do the same for business.”
Not only is it affecting how your business will run, but it’s also going to change the game for how new companies enter the market. Brian Jacobs is founder and general partner of Emergence Capital Partners, a Silicon Valley-based venture capital company.
“Silicon Valley is very much a startup culture — there’s always something starting up here, and it’s important to note that cloud computing also changes the economics of a startup,” Jacobs says. “A startup today doesn’t need as much capital to get going because of cloud computing. A developer, who could be an independent contractor, an engineer who’s working at a day job and at night has a new product he wants to develop — he can log in to a platform as a service like Engine Yard, and they can start developing their product without a single dollar of investment. They can work for free developing the product until they’re at the point they can introduce it to the market.”
As a result, the venture capital industry is much different than it was 20 years ago. In fact, Jacobs’ company started in 2003 with the idea that more and more technology would be delivered as a service as opposed to built by companies within their four walls.
“Cloud computing and software service has really hit technology like a giant wave and all of these business models are service providers — companies that are building technologies and not selling to their customers but operating it on behalf of their customers and charging their customers a monthly fee in exchange for that service,” he says. “That’s a different kind of venture capital and that’s the focus of Emergence Capital.”
Aside from all the ways that cloud computing will change business, it’s also changing how employees approach their jobs. While people can work from home in their pajamas, it’s often difficult, and in many cases, employees don’t have access to everything that they could if they were on their PC actually in the office. But cloud gives you everything from the convenience of your home, and you get to work in your pajamas on your couch, so employees tend to be willing to do a little more because they have the luxury of being in the comfort of their home.
To give you a real example, Hilton Hotels decided to close its physical reservation centers and send all of its reservationists home with these devices that connected them securely to the Hilton system, which saved Hilton big money on real estate costs and not having to call IT people as often.
“Cloud computing allowed Hilton to save money in so many ways that satisfaction increased, and they found that people working at home would take a lower pay,” McNaught says. “They saved on all sorts of fronts. Cloud computing has a transformative effect on all kinds of business.”
How to reach: NetApp, www.netapp.com; Engine Yard Inc., www.engineyard.com; Wyse Technology, www.wyse.com; Emergence Capital Partners, www.emergencecap.com; Ingram Micro Inc., (714) 566-1000 or www.ingrammicro.com; Corent Technology Inc., (949) 614-0634 or www.corenttech.com