The Cloud Part I: What it is, what it isn't, and how it affects the IT sector
The Cloud Part II: How it affects the customer
If we consider IT spending today, then we can break it simply down into 2 categories- CAPEX and OPEX. CAPEX is the money customers invest in their IT systems which enhances the value of the asset, and can be depreciated over time. OPEX is the money that they spend to keep their IT up and running - maintenance rather than investment.
Let's assume the typical customer spends a bit more on investment each year than it does in maintenance:
Next, let's attempt to understand how that OPEX and CAPEX is broken down. To do this in the context of what Cloud-based services might mean, I find it useful to allocate IT into 3 groups:
The Three Tier Landscape
Commodity IT: Apps and infrastructure where users and IT don't care about the origin - it's a utility function where cost is the only factor
Vanilla Enterprise IT: Business-critical apps and infrastructure where cost is not the only consideration. But the business doesn't differentiate itself on these processes - they can be vanilla processes
The Corporate USP: Business-critical apps that support the processes that make the business unique. What can this business be the best in the world at? This IT supports those processes
Impact on Corporate IT Spending
Let's go back to the graph at the start, and break down the spending:
Clearly, for companies that embrace the Cloud whole-heartedly, any candidate for Cloud-based services is going to require no CAPEX at all, and in an ideal world, they would also require less OPEX:
So what are companies going to do with the spare cash? Broadly speaking, one or all of the following:
Return the cash to shareholders: Increased dividends, share buy backs and so on
Lower prices: As competitive pressures increase as everybody else takes advantage of the Cloud, there will inevitably be pressure to reduce prices - which passes on the savings to customers
Invest in the Corporate USP: If you have spare cash to invest in the business, then you'll invest it in the USP of the business
Impact on Vendors
To borrow from Richard Holway, customers will be getting even more for even less. And for IT services vendors, there will be a shift away from vanilla, me-too services, to focus on delivering more innovation into the Corporate USP - the things that make each business special. This means increasing capability in 2 areas in particular:
Custom development: If it's not vanilla, its probably bespoke. So customers may end up spending more cash on investing in custom code, rather than leveraging the vanilla functionality in packaged applications
Customer-Centric Business Consulting: To know how to get a decent return on any investment in the Corporate USP, you have to know that company's USP inside and out. Which takes a high level of experienced business consulting. Furthermore, it will mean that companies which focus on long term engagements with customers will be at an advantage, as they will be closer - and will be seen by the customer to be closer - to knowing what makes them special
In the short to medium term, there will also be a need to help customers understand how to transition their landscape into the new world - whether, where, when and how to use the Cloud.
SAP's Cloud Ambitions
Much has been said in the IT press about SAP's 'By Design' SaaS offering, including speculation that some of the recent high-profile departures are due in no small part to the delays in releasing a competitive product.
Having recently spent time with SAP on their plans for 'By Design', it appears that although they're behind the curve, they are investing in it, and should broadly speaking hit the following high-level milestones:
2010: Release of a better-performing multi-tenant offering, with Partner Development Kit
2011: Release of Industry-specific By Design offerings
My opinion is that the next 2 to 3 years will see SAP seek to stabilize and cement their offering in the SME space. Then in 3 to 5 years time, SAP will look to ramp up heavily into the rest of the SME space, and perhaps upwards into appropriate parts of their traditional Large Enterprise heartland. For example, offering easily-deployable, highly scalable 'out-of-the-box' applications for new subsidiaries within a large Group that already runs SAP on-premise.