The potential of cloud-based services has found expression in beautifully crafted marketing material from IT firms and consulting firms alike. Most of the visions are on the right track. What they fail to show is the development of the backend and the winners and losers that will emerge as cloud becomes a dominant IT paradigm.
Less than ten years ago, technology scholars Frank Levy and Richard Murnane argued that driverless cars were likely not possible. The argument was simple. Computers could never reproduce the combination of reflexes, sensory inputs, selective attention, spatial reasoning, and coordination required to navigate traffic and park a vehicle. Google has proved them wrong.
Along with players such as Amazon, Salesforce, NetSuite, and a slew of smaller firms, Google is also proving that traditional software models will soon be "wrong". As with driverless cars, the snowballing of processing power - which has doubled every 18-24 months for the past 50 years - is knocking down restrictions related to data volumes, networking, and the use of remote applications. Near-universal connectivity in large firms and more generally in the developed world means everyone can be online pretty much all the time. Moreover, the extraordinary popularity of cloud-based social media has acclimatized users to the idea of doing everything online. This combination has created an environment ripe for IT as a service, which now includes infrastructure, storage, middleware, and of course, software. "Traditional IT" players are also getting on board, with firms such as Microsoft, SAP, Oracle, IBM and global and national telcos, having all launched major initiatives.
Large and very large firms, with staff numbers ranging from the thousands to the tens of thousands, are making the switch to the services model. The numbers for Google Apps alone are impressive and have been building up over the years. For example, the U.K.'s largest indigenous food manufacturer, Premier Foods, switched 4,500 users from Lotus Notes to Google Apps last year while enabling 1,000 mobile devices. In 2012, global healthcare powerhouse Roche migrated more than 90,000 employees to Google Apps. In the same year, the leading Spanish bank BBVA switched an impressive 111,000 employees to Google's software. In 2011, General Motors announced it was doing the same for around 100,000 employees. Firms in Central and Eastern Europe are following suit. This year, Ceska Sporitelna, the largest retail bank in the Czech Republic, announced it is moving to Google Apps, following hot on the heels of the city of Cesky Krumlov and the home-grown cola company Kofola. In Poland, large manufacturers have joined business services and publishing companies in making the switch.
Saving money and working together
Cost is one of the primary driving factors for making the switch. In the Czech Republic, the Faculty of Sciences at Charles University made the switch to cloud-based apps and claims to have saved up to 80% on its IT costs. Even though the price per license may be higher than traditional software (though often this is not the case) total costs can go down. One firm that IDC spoke with noted that Salesforce was actually more expensive per user than the systems it had been using. However, Salesforce allowed the firm to cut costs overall by granting licenses only to those that actually use the program. Its software-as-a-service (SaaS) approach has also proven extraordinary flexible. One IDC analyst reported that he saw the application plug into a 20-year-old, green-screen application and into a 20-year-old enterprise resource planning (ERP) solution and work nearly straight away. Google also shapes costs indirectly, as the price of Google Apps is used by many other suppliers as a benchmark for the SaaS market (just as Amazon Web Services has become a benchmark for infrastructure as a service [IaaS]). This forces other SaaS companies - from Microsoft to local providers - to position their offerings directly against Google, helping end users get lower pricing in the process.
Collaboration and integration are other driving factors. In addition to the major software and services providers, consulting firms such as McKinsey and Accenture, the Big 4 accountancy firms, large IT suppliers, and market research firms (including IDC and its direct competitors) all have visions of the future and how business will look. Aside from a few minor differences and definitions, the visions overlap tremendously, with each firm borrowing from what the others make public and piling it into marketing materials and product and services development that range from in-depth research reports and online presentations to beautifully crafted videos and interactive graphics. At the center of them all is a seamless, smart, omni-channel experience, where algorithms predict behavior, automate work, locate people and places, identify useful trends, and make business and personal transactions easy. The question is no longer about whether something can be done, but rather how to position it philosophically, emotionally, and fiscally once it has been (or will be) done.
IT will soon be "winner takes all"
And this is where competition will leave the slow and feeble behind. Cloud-based delivery and the recognition that nearly anything is possible means we are entering a "winner-takes-all" era. Search provides an apt parallel. In the early days of the Internet, a slew of portals popped up to help users sort through the massive volumes of information suddenly available with a few keystrokes and mouse clicks. The paradigm was "we help you sort it all out." Then Google came along with a new paradigm: "you know it is out there, we take you to it." The search market rapidly consolidated, with Yahoo! the only real survivor from those early years; and Google now controlling anywhere from half to three quarters of search, depending on the market.
The same is happening with IT as a service. Businesses can select any supplier they like. Even for firms subjected to regulatory limits on where data can be stored, the global players provide plenty of options that satisfy legal requirements (some even use that as a selling point). Moreover, the global recession sparked a fire for low-cost solutions that has continued to burn, despite the expected return of economic growth. As a result, services contracts have gotten shorter, smaller, and more focused as firms abandon solutions that do it all. Yet the global cloud services market will expand by around 25% per year for the foreseeable future. In Central and Eastern Europe, this market is also gaining traction. While overall numbers are small compared to total IT spending, growth is in high double digits and is set to remain that way through at least 2017. In Poland, demand for public cloud services is soaring by just under 30% annually. In the Czech Republic, the number is a smaller-but-still-impressive 22.8%; in Hungary, it is a whopping 43%. In addition, these numbers are inherently conservative, as companies often spend even more on cloud than they actually realize, not fully grasping the reach of the current base of solutions. Spending will, however, be increasingly concentrated in the hands of the few, with the large cloud-based providers having the edge due to considerable economies of scale.
Tragedy and comedy go hand in hand
This is bad news for IT firms. While Jeremy Rifkin is bizarrely optimistic in stating his case in his new book, the Zero Marginal Cost Society (2014), which essentially does a deep dive behind the glossy marketing material of the consultancy firms, his basic argument is sound, and echoes ideas found in books by other Internet sages such as Jaron Lanier (in the rambling Who Owns the Future, 2013) and Erik Brynjolfsson and Andrew McAfee (in the rigorously researched Second Machine Age, 2014). In a nutshell, despite the bad press around large scale ERP solutions that failed to go to completion and the high failure rate for many IT projects, the ability of IT to enhance productivity will accelerate on the back of cloud, the Internet of Things, 3D printing, algorithms that mirror human cognition, and Big Data analytics. The productivity gains that have resulted in downward price pressures will leave margins at near zero for many products, including PCs, storage, and servers. Connectivity, processing power, and the cloud are now creating massive productivity gains in the software and services sectors as well. Moreover, the large firms that have entered the fray derive their revenue from others sources (such as search-based advertising or books), so they can afford to undersell the existing competition. To compete, classic software providers and regional and national players will need to lower prices, improve service, and likely cut staff, further hampering their ability to effectively compete. It is almost like an online version of the "WalMart effect".
This is mainly good news for business IT buyers. There is no need to settle for second best. Buyers still face complexities in piecing together solutions or in selecting a consulting firm or IT supplier to do it for them. And they need to wrestle with process and resource changes engendered by IT, which include both knowing where to cut costs and knowing which new technologies to leverage first. Fortunately, the large providers most likely to win the consolidation footrace are those that are most able to deploy new technology and introduce much greater flexibility to firms ranging from banks and retailers to manufacturers and logistics firms. Business-to-consumer (B2C) firms will lead the change, as competitive pressures driven by consumer demand and expectations will thin the weak and slow from the herd. Organizations in the business-to-business (B2B) arena will follow, with analytics tools and near-universal connectivity evaporating the restrictions of geography. Government-to-consumer (G2C) and government-to-business (G2B) agencies will be the stragglers, as their primary citizen and business clients tend to take what they get; though this too will change, and already has in some markets, as countries and cities realize that they too compete for citizens, businesses, immigration, and foreign investment.
The benefits of the cloud may not be as apparent as the driverless car. But they are nonetheless changing the rules of the road - and far faster than most people realize.
Eva Zborowska is a research manager at IDC CEMA's Poland office. Mark Yates is a research manager at IDC CEMA's Prague office.
IDC leads the innovation discussion through events, research, and consulting. For nearly five decades it has been giving IT and business professionals data and insight for making strategic and practical decisions. IDC is a subsidiary of IDG, the world's leading technology media, research, and events company. Learn more at www.idc.com.
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