Understanding Which Investments Should go to the Cloud

Mike The Architect: Understanding Which Investments Should go to the Cloud

In my last post in this series, “CIO Priorities for the Next 3 Years”, we examined the future of Corporate IT, and made some predictions on what CIO priorities for the next three years might be. According to research from IDC, IBM, and Gartner, the three areas that CIOs are expected to invest most heavily in will be data, mobility, and the cloud.

Today, we will take a closer look at the most recent and most aggressively growing of these three niches: The cloud. Our friends at Gartner estimate that, over the next five years, enterprises will likely spend about $112 billion cumulatively (no pun intended) on cloud services. Another example comes from a new survey of 600 large companies by Tata Consultancy Services. The Tata survey points out that companies in all regions expect their cloud usage to grow dramatically by 2014. For example, U.S. companies expect that 34 percent of their total applications will be cloud-based in two years. European respondents said they expect cloud applications to hit 25 percent in that period.

Clearly, the cloud is here to stay, so let’s talk about the power of the cloud. Specifically, what game changing elements does the cloud bring to businesses in the future?

Below is how I think about it from a Strategy and an Enterprise Architecture oriented way. This should resonate with most CIOs:

  • Convergence – The cloud is the ultimate power networker, bringing together the essential elements that enable both legacy and emerging technologies. The analyst community bears this out, positioning the cloud as the nerve center of the IT of the future. Gartner calls it the “CSMI Nexus,” and describes it as a junction of cloud, social, mobility and information. I agree with Gartner’s position that the future will be more integrated and connected when it comes to these four technologies, but the cloud will always be at the center, enabling all of this to occur.
  • A New Financial Model – Because the cloud requires no upfront investment for hardware and software, it enables a shift from capital expenditures to operational expenditures, wherein the bulk of the costs are absorbed into a utility model, with low monthly fees for applications and services. The challenge with this is that often, the implementation time and costs significantly reduce the value of the capital expenditure, and the investment is nearly depreciated before the value can be extracted. This can cause a bit of CFO angst.
  • Agility and Scalability – An agile, scalable enterprise is needed to support the rhythm of modern business—not all business cycles, after all, are static. Take for example the banking industry, which has a peak transaction volume between Thanksgiving and January 1; or healthcare and insurance, which are driven respectively by staggered enrollment periods and policy renewals. On-premises systems present a high barrier for agility, as they require sophisticated virtualization software, and significant investment in hardware and data communication equipment. Conversely, the cloud offers much greater flexibility via an on-demand environment that makes it easy to add more capacity as businesses evolve.
  • Streamlined IT – From deployment and management through administration and support, the cloud may deliver the biggest gifts to IT departments. Getting up and running is almost a no-brainer, often requiring nothing more than a standard internet connection. Standardizing PC environments and managing system and desktop updates are all made easier using the cloud. Cloud-based management also help drive down the cost of support. With a cloud-based system, it’s easier to proactively detect and manage issues to reduce help-desk calls, and to ensure that all managed PCs have the latest security updates using online distribution and management.
  • Productivity – The gains in productivity that can be garnered with the cloud are invaluable, given that more and more organizations have global workforces these days. Using the cloud to give users all the latest productivity tools is only the beginning. When employees have access to office desktops, files, and applications any time, from any location, they can get more done, faster—and even physically dispersed teams can collaborate more easily.

 

So what does this all mean for traditional, on-premises systems? The IBM Tech Trends Survey reports that 91% of IT professionals are anticipating that cloud will completely overtake on-premises computing in the next 5 years. Essentially, the challenge for on-premises systems with the advent of the cloud is their essential lack of innovation in the market. When faced with the explosive growth in the cloud paradigm that offers businesses more choice, extended capabilities, and exciting new emerging technologies, on-premises simply can’t compete.

 

The Financial Transition to the Cloud

From a financial aspect, it seems like a straightforward move: Operating primarily with a “pay-to-play” model, the cloud appears to be both cutting edge and cost-effective. But is it really that simple?

The truth is, most companies significantly underestimate the scope of change required to establish cloud services until it’s too late. In the traditional model, companies buy technology from a vendor as a capital investment, and continue to invest in maintaining and servicing it over time. With the cloud being a service, however, the financial model should be treated more like a utility, requiring the reallocation of budget from capital expenses into operating expenses.

We also have to consider that this monetization model could change over time. A recent in the Harvard Business Review Blog Network entitled, “The Truth About Cloud Economics” it talks about a potential and very valid shift in the way cloud providers will monetize their services. Below is the conclusion that Drue Reeves and Daryl Plummer make about this shift:

So, to combat this kind of risk, cloud providers will enter into what are called "enterprise agreements," where the two parties can define the parameters of the relationship based on mutual risk sharing. Essentially, this ensures that each party has a vested interest in the financial success of the other party. There’s risk, but there’s also reward for better service.

In the end, providers that deliver better service and better guarantees will ask for — and get — more money. Consumers, on the other hand, will get the flexibility of "pay-as-you-go." As long as they can figure out a way to pay for it.

http://blogs.hbr.org/cs/2012/04/the_truth_about_cloud_economic.html

 

What I think this means is that we should consider the value and risk for cloud providers as well as ourselves when making these de
cisions. The future financial viability for our cloud providers are important in this equation as well. Simply put, if they are not making money in the cloud business, there is no reason to have a cloud business.

From a CFO perspective, they will have a bone to pick, pointing out that this shift can present challenges when a company must still also pay to maintain legacy infrastructure. And if the new cloud services aren’t replacing existing services, new lines of expenditure must be created, which is rarely a smooth process.

Governance is also an issue to consider. With the ease of cloud deployment, it’s important to consider the ramifications of being able to add services quickly as a company grows and needs change. Having a predictable cloud requisition/governance strategy in place can go a long way toward making future service acquisitions easy.

 

Making the right choice

So now that we have identified some of the significant financial issues around the cloud, how do you determine what’s right for your organization?

  1. Rationalize your strategy. Understand where your business wants to go, what is important, and why. In this process, you need to distill the business and IT strategies to identify cloud-ready capabilities that align to strategy, and provide the maximum amount of value with minimal risk to the business.
  2. Get clear on capabilities. Understand what business capabilities will be a good fit for the cloud through a valuation process. This way, you’ll understand what investments should go to the cloud through a rigorous evaluation of the prioritized set of opportunities identified through strategy rationalization. Through this valuation an assessment of the business and technology capabilities will uncover the value and risk that each capability would bring the company if ported to the cloud.
  3. Make a plan. Create a business transformation plan that will prioritize investment opportunities, balanced across the enterprise and integrated into a transformation roadmap.

 

Below is a simple three phased approach to making a top down, business value driven decision on which investments to port to the cloud. It’s important that we take this value driven approach to ensure that we don’t make the mistakes we made with other very large technology initiatives such as SOA, CRM or ERP. We should focus on the value add capabilities first to realize value sooner, more reliably and predictably.

 

Mike The Architect: Understanding Which Investments Should go to the Cloud

 

We want to take a top-down business value driven approach to process, analyze and refine. This in turn will allow us to describe the business capabilities and to match those with cloud technologies enabling maps to the business-driven strategy that cloud services support. Entering into cloud assessments at a lower level can diminish the level of business impact—and the amount of value—that an organization will realize with the cloud, as seen below.

Mike The Architect: Understanding Which Investments Should go to the Cloud

 

This picture tells is that the lower in the “stack” we go the lower the overall business value we will realize. This is critical for decision makers to understand as we make decision to go to the cloud.

By respecting both the business and IT dimensions of an organization, and balancing value and risk to identify cloud opportunities while mitigating threats, companies can be assured that the cloud solutions chosen will be flexible, adaptable, and reusable—and just the right fit for their needs.

So that’s it for today. Next time, I’m going to dig a little bit deeper, and talk about how we can balance value and risk through effective cloud strategy.

 

Additional Resources

 

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CIO Priorities for the Next 3 Years

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In my last post, I was examining The Evolution of Today’s CIO and What kind of CIO’s will transform businesses?, and how it has morphed into a more strategic, business-driven role than ever before—one that directly affects top-line business goals. Today, I want to dig deeper into what this means for the future of corporate IT. Regardless of CIO Profile (i.e., Optimizer, Transformative or Innovative), what will CIO’s priorities be over the next three years?

My prediction is that by 2015, there will be a groundswell of CIOs that will have morphed into “strategy athletes;” that is, a stronger/faster/savvier version of today's CIO. We’ll see more CIOs who are entrepreneurial, adapting to and initiating major business shifts, and carrying equal responsibility with the CEO. These executives will no longer be measured primarily by the scope of their innovation; they will also be held responsible for the same financial metrics of the other C-level execs. That isn’t to say that all will suddenly convert over into a Transformative CIO or even that it required for all either. But I do think that there will be a majority that will move into this space. Not because of desire but out of need.

Converging Priorities

When we look at this there are two angles we need to come from. First the higher level strategic themes and objectives. This is where you will see soft or intangible goals that are meant to span across the entire enterprise and to last for more than one year. The second type of priority is the actionable tactical priorities and much more tangible goals and objectives. These tend to occur within a fiscal year and have very concrete success criteria.

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Looking at the strategic priorities I see a convergence of IT and business strategy that means both the growth and innovation will be at the forefront of business decision making—but will the CEO and CIO be on the same page? According to IBM’s CIO study, The Essential CIO, it’s highly likely.

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The IBM report, based on face-to-face conversations with more than 3,000 CIOs worldwide, found that the three key business issues that will be top-of-mind for both the CEO and the CIO in the coming years will be data (BI and analytics), people skills to manage growing organizational complexity, and client relationships.

As far for the second level of tactical priorities, there is variability in what I see as far as percentages on the predictions however the themes still stay the same. I would suspect that this is due in part by specific industry segments, their market needs and regulation.

So for these yearly priorities how do these joint CEO/CIO business priorities sync with CIO technology priorities? Will the core CIO agenda go out the window? Hardly. According to Gartner’s 2012 CIO Survey, CIOs have reported that they expect to spent 46% more over last year, and 61% plan to improve their companies’ mobile functions. The top technology priority, BI and analytics, is right in line with the business priorities, and mobile and virtualization (cloud) rank 2nd and 3rd, respectively.

The respondents to a 2012 IDG CIO survey had a slightly more focused take: Nearly 40% indicated that cloud services would take top priority moving forward. And the IBM group? They put data, mobility, and the cloud at the top of their lists.

 

CIO Priority Projection

So what does this mean for the prioritization of IT spend between now and 2015? Well there is a lot of data out there with different priorities and subsequent rankings. There are three priorities that do surface to the top every time though. Those common priorities include:

  • Cloud – The cloud has finally emerged from the 2011 purgatory of supplier propaganda, and is now being taken seriously—very seriously—by CIOs around the globe. It’s proven to be a game-changer, making competitive advantage more easily attainable for organizations regardless of size.
  • Information – Once a very stale topic, BI is now going through a resurgence thanks to new technology innovation like cloud and social. We are seeing the legacy reporting and analytics morph into Big Data and Collaborative BI. These new trends are helping companies build better customer relationships, and drive new business. According to Gartner fellow Dave Aron, “It is about more data, faster data, and the ability to crunch it in faster time.” These new technology enablers are allowing this to occur.
  • Mobility – In order to maintain a growth trajectory regardless of economic climate, more and more businesses have realized that having an employee base that can work from anywhere is key. Laptops, smart phones, and tablet devices have become the new standard equipment for organizations focusing on growth and innovation.

And since we’re on the subject, it seems like just about everybody is thinking about the cloud to some extent these days. It started out as a rather enigmatic concept, and was a catalyst for many a heated discussion in the industry as it emerged in the late 1990s. Now that the technology is becoming more ubiquitous, the benefits of economy, scalability, and administration are more clear and concrete. And as we’ve seen from the research, it’s garnered a position of top priority with technical decision makers.

With more and more CIOs now ready, willing, and able to invest in the cloud, my next post will look at the strategies around cloud implementation, and how to make true value-driven investments in the cloud to support strategic business goals.

 

What kind of CIO’s will transform businesses?

Mike Walker's Blog: What kind of CIO’s will transform businesses?

 

In a previous post entitled, The Evolution of Today’s CIO, I discussed the increasing pressure on CIOs to deliver beyond traditional roles, and become more of a strategic asset for CEOs. Due in part to the market conditions I outlined in that post, today we see CIOs evolving well beyond the domain of strategic information systems.

More and more strategic business decisions these days are being made based upon direct input from CIOs. CIOs are being asked to think beyond IT value and TCO, and contribute directly to creating competitive advantage, strategic innovation, expansion of services, and bottom-line metrics.

 

Mike Walker's Blog: What kind of CIO’s will transform businesses?

 

This is not just speculation, or an isolated phenomenon. According to a report on CIOUpdate.com, 47% of CIOs indicated they have broadened their roles to absorb some form of business responsibility. Interestingly enough, 35% of those responding indicated that they come from a business background. This shows a fascinating trend that says CIOs are coming in with a business background, instead of trying to learn it on the job. That is certainly one strategy to acquire business acumen in IT. I would suspect that trend will continue.

With regards to how broad organization-wide decisions are made, we are seeing changes as well. Gartner states that 16% of CIOs are sitting on Boards of Directors. And McKinsey reports that nearly three-quarters of IT and business executives feel that IT should be tightly integrated with business strategy—but only 27% saw it happening in their own organizations.

As you can see in the following image, there are a number of elements supporting this hypothesis. In the middle of the image, you see that CIOs will continue to manage demands from an IT perspective, but that strategy, value drivers, and the operational and delivery models will be driven from a business perspective. Business demands will not replace the IT demands, but rather they will balance them. Certain characteristics (tiled across the top of the diagram) will manifest and drive the behavior of the CIO with respect to the business and IT demands. This evidence is borne out by industry analysis we see from sources like CIO Executive Counsel, IBM, Gartner, Corporate Executive Board, and McKinsey.

 

Mike Walker's Blog: What kind of CIO’s will transform businesses?

 

As shown above, this shows us that the CIO is now at the core of nearly everything that drives business. Clearly, the opportunity here is significant.

 

 

 

What kind of CIO do you want to be?

Based on market research, industry trends, and my own experiences with the Microsoft Enterprise Strategy program, I see that some common patterns are emerging. IT customers are expecting—not hoping—for more business acumen in IT.

Upon distilling information from a variety of sources, I came up with a set of common profiles that can be applied to current and future CIO aspirations. There are three main types of CIO, and the strategic goals of each are very different.

 

Which one are you? Below are the three core profiles that start emerge:

 

The Optimizer

Mike Walker's Blog: What kind of CIO’s will transform businesses?

 

  • Business and IT Alignment Focusing on alignment of IT priorities to business priorities
  • Operational Excellence – Determining what architectures will enable effective IT Services.
  • Reduce Complexity and Simplify – Implement/eliminate IT solutions that allows for reduction of unnecessary cost overruns
  • Reduction of Cost per Solution per User – Bring solutions and services to customers at a lower cost
  • Risk Management and Security Controls – Ensures proper controls are in place

The Transformer

Mike Walker's Blog: What kind of CIO’s will transform businesses?

 

  • Business Partner Advancing the business relationship to a true partnership.
  • Trusted Partner – The business will look at the CIO as an enabler and trusted with fundamental IT services.
  • Expert of Industry Solutions– Understand, rationalize and recommend industry solutions that meet the demands of the business.
  • Optimize Business Processes & Value Chain– Transform the business through optimizing the business process through the lens of the needs to the customer.

The Innovator

Mike Walker's Blog: What kind of CIO’s will transform businesses?

 

  • Innovation Center of Excellence Incubate, recommend and deliver innovative solutions to real business problems.
  • Understand Business Models – Understand how competition affects the company and find new sources of revenue through an innovative IT lens.
  • Strategic Big Bets – Understand, rationalize and recommend solutions based on emerging technologies that are directly in line with the business goals.
  • Transform Business Products & Services – Taking existing products & services innovate.

 

Looking at the Bigger Picture

So with the rapid evolution of traditional CIO roles to include more all-up business strategy, what kind of CIOs will make their marks in transforming businesses in the future? By nature, a CIO brings a specific set of skills to the boardroom, and to ensure that the high-level business decisions they are now fueling are the in the best interest of the overall strategy, a CIO must broaden their scope. But how best to accomplish this?

The challenge for CIOs that fit within the Optimizer profile is that it's very much business as usual. It's all about operational efficiency of the servers, networks, and applications. While this is still very important to all parties, the evidence shows that this isn't enough.

CIOs can only drive real change by thinking very differently in terms of overall strategic goals and business value. Moving forward, the CIOs that will make the most impact, which I call the Transformers, will be the ones who actively adapt the mindset of a CEO.

Building on being a Transformer, the next stage is the Innovator. This is the natural next stage after a successful partnership—actually being able to own key aspects of a company's strategy. Technology is only getting more ingrained into the daily lives of consumers and enterprises, and the need for strategies to be built by experts in this space will be critical for differentiation.

Does this mean that the CIO will replace the CEO? No. It does mean, however, that there is more opportunity for the CIO to be a pivotal role for companies in the digital information age. And after all, who else would be better to do it? Certainly not the CFO or CMO!

This will, of course, mean some fundamental changes in the hardwiring of the CIO. It means looking beyond the existing business relationship, and advancing it to a true partnership. With this model, the CIO must understand their new role as a business enabler, and be able to understand, rationalize, and promote solutions that meet the strategic goals of the business.


Key things to consider

Another critical shift for the CIO will be to transfer the focus from implementation to agility and time-to-market. While the traditional CIO is primarily interested in solutions that are “built to last”; the Transformative CIO must focus on establishing a business foundation that is able to scale and flex. This concept of “designed to change” will enable the Transformative CIO to see beyond static resources, and explore the outcomes that would be possible if these resources were deployed in alternative ways.

Finally, the CIO will also need to become more customer-centric, re-orienting business process to provide better value to the customer. This involves more than just optimizing customer service; Transformative CIOs must think about tailoring all business streams, from supply chain to demand generation, to focus on the cost, benefits, and value for the customer.

 

 

A Change in Headspace

There are a couple of primary ways that CIOs can start to get their heads into the CEO mindset:

 

#1 By redefining how they think about IT

· A complete overhaul of the IT strategy may be an overwhelming thought, but in the near-term, a number of incremental shifts can ease the transition for a Transformative CIO:

Embracing enterprise architecture – EA is one of the most important and effective tools a CIO can leverage to provide a business-centric, efficient environment

Basing IT operations on a utility model – By simplifying processes and streamlining costs, IT can better meet organizational expectations

Investing in cloud/mobile computing – Demand for availability, access, and interactivity with customers is high, and growing steadily; being prepared with strategies for virtualization, app development, and hand-held and tablet devices is critical

 

#2 By aligning with the CEO

A recent Gartner survey found that innovation and organizational flexibility are big concerns for today’s CEOs, and securing a seat in the boardroom will require literacy in a number of issues:

  • Maintaining existing customers, and attracting new ones
  • Drawing and retaining highly-skilled employees
  • Building a responsive, flexible, and efficient organization
  • Streamlining costs
  • Fostering innovation
  • Promoting collaboration and interactivity with customers
  • Designing both long-and short-term strategies

 

As I stated earlier, the opportunity here for the CIO is significant. Once the agenda of the CIO becomes better aligned with that of the CEO, the advances in innovation, growth, and strategy will be undeniable.

By revolutionizing the role of the CIO, we focus on closing the gap between IT and business strategy. Given the expanded role and responsibilities of this new breed of CIO, we have to wonder about how business priorities will shift as a result, Next up, I’ll examine the outlook for IT and business strategy in the coming years under the watch of the Transformative CIO.

 

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