The Cloud: Just Sayin’…

IBM reported its numbers which, in terms of revenue and guidance at least, were not happy.  I’ve talked about the opportunities IBM still has in some prior blogs, and speculated on some of the marketing factors and other decisions that may have led them to where they are.  What I’d like to focus on today is something a bit different, something that has impact not only on IBM but also on every other tech company that sells to business.  Call it the “politics of the cloud.”

IBM has for years been a master of the national account, the large-scale buyer whose IT activity justified a team dedicated to them.  This is a natural evolution from the early days of IT when the only accounts that could afford computers were large accounts.  I’ve argued that over the last decade, IBM has steadily divested itself of the hardware that had populist appeal, making itself more and more into the giant who targeted giants.  I think their current quarter is certainly consistent with that, but it’s not my story here.

You sell giant IT to giant companies, but most of all you sell it to professional IT types within those giant companies.  IBM’s reliance isn’t just on large buyers, it’s on technically sophisticated buyer organizations—CIOs with nice big staffs and budgets.  This is important because while most big companies aren’t very interested in becoming little, more and more of them appear interested in weaning away from those big IT organizations.  That’s where the cloud might come in.

If you slice and dice the numbers as you’re all aware I’m fond of doing, you come to the conclusion that business IT is a trillion dollar market annually, worldwide.  The most optimistic numbers I’ve seen for public cloud services peg the space at just south of thirty billion, which is less than 3%.  Further numbers-dicing brought me to the conclusion that the benefits of public cloud versus private IT in a pure economic sense would limit the public cloud market to about 24% of IT spending, roughly ten times what it is now.   The question that IBM may be raising is whether there are benefits that aren’t in the realm of pure economics, drivers beyond financial that dip into the realm of company politics.

Many, perhaps even most, of the big companies I’ve surveyed and worked with had considerable internal tension between IT and line departments.  One company I worked for went through regular cycles of decentralized versus centralized IT as the angst the line people felt overcame financial efficiency, then in turn was overcome by that efficiency down the line.  We’ve all heard stories about departments wanting IT to run itself as a profit center, competing with other outside options.  All of this made good media fodder but nothing really came of it.  Till the cloud.

The cloud, as a decentralized way of getting application support, has perhaps the first opportunity in the whole of the information age to unseat central IT.  Suppose that line departments played on that cloud characteristic and rolled their own per-department strategies?  Obviously you can’t have everyone doing their own thing to the exclusion of regulations or information integration, but you could darn sure reduce the role of IT in buying stuff and focus them on integration.

In this model, what happens to the IT giants like IBM who have bet on selling to the CIO and IT organizations, or at least have sold things that it takes centralized IT to consume?  Likely nothing good.  IBM saw good growth in its cloud services, but their annual run rate of $3.1 billion compares to over $22 billion in total revenue for this quarter alone.  First, how much of this is offsetting losses in sales of IT elements, and second how much of it depends on organized IT to buy it?

For the cloud overall, that’s the question.  We can’t get beyond about 24% penetration into IT spending for public cloud services unless we find drivers beyond the economic efficiencies that the IT organizations would recognize.  SMBs justify the cloud in large part through presumed reductions in technical support costs.  Might a larger company take the step of downsizing IT and end up in the same situation as an SMB—dependent on software services and not internal IT resources?

I don’t know the answer to that, frankly, and I’m not confident it would be possible to survey to find it out.  I also don’t know whether further development of cloud infrastructure by network operators and others (like Amazon) might create a new set of application services and big data analytics that would then tend to make mobile productivity support increasingly an exploitation of third-party services.  Might that trend bend further application development toward the cloud, and might that then combine with push-back against IT to build a larger trend?  I don’t know that either.

The mainframes of old were justified by two truths—you couldn’t buy a cheap small computer, and with IT serving the mission of capturing retrospective business data (remember data entry clerks?) it made sense to stick all the compute power in one place.  Cheaper systems begat distribution of IT resources, and even though we still have central data centers and repositories, we’re not done with the transformation created by distributing processing outward.  Workers with mobile devices, wearables…where does it stop?

Certainly, if there’s any validity to this position, SaaS is what matters, cloud-wise.  The migration of current applications to the cloud isn’t what a line department revolution would drive, and mobile worker productivity enhancement based on new software architectures clearly doesn’t require IaaS hosting of old stuff.  Amazon’s movement to “platform services” of cloud-resident software features and Microsoft’s and IBM’s enhancements of basic IaaS with PaaS features are probably valid stepping-stones, but perhaps more valuable to providers than to users themselves.  So a line-department cloud drive is going to require a different kind of marketing, one that stresses applications and not just platforms, ecosystems not products.

All of this is speculation, of course, and there are always counter-trends just as there are today and have been in all of IT’s history.  I don’t think that IBM will be killed by the cloud, that centralized IT will fall in some giant line-department coup.  I do think that the factors I’ve cited here will change how businesses use IT and how applications are linked to workers and their productivity.  As that happens, the basic rules of IT spending will change.  When they do, I have to admit that my 24% number will be harder to justify.  It might turn out to be right, but the value was derived by assessing relative cloud economics with current application models.  A major change to those models could create a major change in IT spending, cloud penetration, and vendor fame and fortune.

We are almost certainly underplaying the revolution we call “the cloud”, and in particular we’re discounting the impact that the cloud could have on the relationship between IT as a kind of universal staff function and the line organizations.  Nike and Reebok, as I used to say in my seminars, make sneakers not networks.  The purpose of business is not to consume IT, and many users in my survey complain that IT has become an end to itself.  You need information technology of course, like you need transportation, power, natural resources, capital, and labor.  The relationship among the last three of these has always been filled with tension.  Maybe that tension is expanding.  If it is, then we may see very different drivers emerge.

Different winners too.  The cloud is a unique partnership between hardware and software.   Of the two, it’s software that shapes the business value and the economic tradeoffs.  So can IBM or another “hardware vendor” build a software position strong enough to make hardware unimportant?  Is a cloud partnership inevitably one with a network operator or CSP and not an enterprise?  Can an IT vendor become a CSP by leveraging their current strength?  More questions I can’t answer, but that will likely be answered decisively by real-world company politics before the decade is out.