Cloud Computing and Competitive Positioning
(Recently posted on CIO.com)
To understand the implications of cloud computing on your organization’s competitive position, it is helpful to think about the cloud proposition from two perspectives: cost and capabilities.
Recently a contributor to these pages, citing a McKinsey & Co. report, posited that external clouds do not provide cost advantages over internal data centres for organizations with scale. Let’s assume that this is true. We can infer, at least as a hypothetically, that external clouds do provide cost advantages for smaller organizations over the in-house alternative. So, on a relative basis, a small organization that successfully exploits the potential cost savings offered by external clouds will improve its competitive position versus a competitor that is already exploiting its scale effectively and to which external clouds can provide no incremental cost advantage. The implication for CIOs at sub-scale operations is that they should examine the business case for migrating to external clouds as a means of improving their organizations’ competitive positions.
For their counterparts at larger organizations, the potential for eroding advantage means that they need to find ways to preserve or extend the cost advantages that their scale provides. Two possible approaches, not mutually exclusive, present themselves. One is to challenge their hardware and infrastructure software vendors to adjust their pricing so that large customer organizations can defend their current cost advantages against the threat posed by the new, alternative business model which seems to favour smaller organizations on a relative basis. The other is to bring cloud managements technologies and techniques into their own data centres, seeking to identify and exploit whatever inherent efficiency advantages cloud providers may enjoy without paying those providers the profit margins on which their businesses operate. Presumably any IT organization with substantial scale is already well down this path, at least with regard to host virtualization.
The sliding relationship between internal and external infrastructure costs as a function of scale is likely to have a slight but measurable impact on the relative competitive positions of smaller and larger IT organizations. The potential impact of changes in relative capabilities between cloud adopters and no-adopters is much more significant.
From an application perspective, a cloud (internal or external) is the ideal setting for horizontally scaling applications. The ability to deploy incremental processing power on demand and at low incremental cost is the perfect compliment to scalable application architectures. External clouds offer small or start-up organizations the ability to deploy applications with much greater actual or potential capacity than they could otherwise afford. Small or start-up organizations that perceive and capitalize on this potential can quickly improve their relative positioning with regard to competitors.
The ability of a newer or smaller player to punch well above its weight in terms of application capacity can neutralize a traditional advantage of scale players, transforming start-ups or small competitors into significant adversaries. Of course, exploiting this potential advantage requires that these smaller organizations adopt newer application architectures that are designed for horizontal scalability, something that larger and better established competitors may be less inclined to do. For newer, smaller or more agile players, adopting scalable application architectures may be both easier (because they are less prone to organizational inertia) and more of a strategic necessity. The risk to better established and more complacent organizations is that these upstart competitors will not only challenge the larger organizations’ competitive positions in the short term through clever use of complimentary application and infrastructure strategies, but that they will also develop a more enduing strategic advantage through there embrace of newer application paradigms.
Digesting and understanding the possible implications of the emergence of external cloud services on competitive position is difficult due to the newness of these services and fog of hype that envelops the topic of cloud computing. Clues are beginning to emerge, however, as to how this new way of acquiring and managing technical infrastructure may impact organizations differently depending on size, competitive position, and rates of adoption of newer application architectures. Thinking through these issues and developing a view on their potential competitive impact is a worthwhile exercise for any IT executive.