Monthly Archives: October 2014

The Paradox of Cloud Computing Adoption – Part III

 

Previously, I had dealt with some of the complexities of computing as it exists within enterprises today, as well as intrinsic aspects of these workloads. These are important factors that have a great influence upon the decision to migrate them to the Cloud. Earlier posts can be viewed here and here. In addition, there are a number of factors that inhibit rapid Cloud adoption by customers. Some of these are

 

1.  Standards, Standardization, and Interoperability between Cloud providers

Today, we have multiple providers selling *aaS services within their public Clouds, and with products for Private Clouds. Each vendor is attempting to stake out new ground with regard to features and capabilities. There are some basic similarities between these clouds in terms of support for features, but they do not interoperate with each other. Migrating a workload from one Cloud to another is a lengthy and manual process, with multiple steps involved, making it only useful as a one-time migration activity. This process does not permit automation, and significantly increases costs and risks for organizations.

2.  Vendor lock-in

While there are multiple providers offering similar services, each of these vendors is interested in acquiring new customers, and then locking them within their Cloud forever. Amazon makes it easy and inexpensive to migrate in-house workloads to their Cloud, but makes it very difficult and expensive for customers to leave. Other vendors utilize similar strategies through a combination of product features and pricing. Customers have experienced the impact of vendor lock-in on many occasions, with several products and vendors; hence they are wary of this vendor strategy.

3.  The rip-and-replace issue

A large organization has many applications that generate data, communicate, and interoperate with each other via automated workflows. En-masse replacement of all applications is not feasible, and needs to be accomplished one application at a time. Each application migrated to the Cloud needs to be reconfigured to communicate with the desired in-house applications. There is significant expense and risk involved with nearly zero or very low ROI until the entire migration is complete. Even at that point, the potential ROI is unclear.

4.  The scale-up paradox that accompanies growth

We dealt above with the Cloud adoption curve – as a new startup grows, its variable costs increase. The complexity of its applications and the number of providers also increase. At some point, it becomes feasible and necessary to consider investing capital to reduce the variable costs, for at least the most expensive of its providers. This would be contrary to the direction of the industry. In addition, the ROI is quite clear for organizations with large, low-scope applications, and for small startups. When such a startup grows to become a mid-sized company, both scale and scope increase, with the recommendations being unclear over a wide range in the middle. Also, is there a strategic reason to bring it in-house sooner?

5.  Buy vs. rent

The main selling point for a public Cloud service is that large capital costs are instead converted to manageable operational costs. This is attractive and meaningful for small companies, where it is easy to acquire a service without a need to acquire a new skillset in-house. However, Cloud services are rented by the hour, and by the capacity tier. Given a choice, would you buy a car, or rent it on a daily basis when the plan is to use it every day over the next 5 years? What if you needed it only for the next week? The recommendations for these cases appear obvious; what about moderate usage?

Cloud services represent capital costs for the provider, who must recover them by renting this capacity at higher prices to customers. With a relatively stable workload, it might be feasible for organizations to establish in-house systems, using the public Cloud for overflow capacity in a Hybrid model.

6.  Risks of working with startups that could vanish

There are a number of startups that offer Cloud-based services that have the potential to replace in-house legacy applications. Examples include ERP, Databases, (list some more). It is quite likely that they do not offer all the features, or the sophistication of legacy software. Enterprises might consider migrating such applications with the understanding that more features could be added down the road. However, there is an inherent risk of the provider going out of business, which can be very sudden, causing serious impact to its operations. This is one of the reasons that established companies adopt a cautious approach to migrating critical applications.

7.  Performance and network latency considerations

Cloud based providers operate multiple datacenters, which can be local (low-latency) to the enterprise, distributed, for a multi-location organization, or remote to aid Disaster Recovery. Each of these has advantages and disadvantages, and is based on the end customer requirement. Since a single provider is unlikely to be able to fulfill the needs of many mid-size and large organizations, it will be necessary to utilize multiple providers in a Cloud-based operational scenario. A multi-provider scenario would also be recommended to avoid down time resulting from a Cloud provider failure.

Now, there are provider to provider latencies to consider as well; if each provider were to use different telecom providers, then the landscape gets pretty complicated to implement and manage. Given the difficulty enforcing SLAs and OLAs with any single provider, a failure of communication between providers is likely to lead to finger pointing between them; in the meantime, the organization and its customers are faced with sub-par performance.

8.  Long-term normalization of Cloud Costs

Companies such as Amazon, Google, Microsoft, and many others have been racing to establish datacenters and tout these capabilities to attract new customers. They have been continually lowering their internal costs as well, attempting to match each other’s price reductions.  This is a strategic move by large companies generating significant profits from their dominant primary business to squeeze out new entrants within this space (Rackspace?), and also to establish their design as the prevailing standard. While costs for customers are low today, it is primarily due to this factor. We do not think that either of the large providers are realizing commensurate profits based upon their investments towards these infrastructure developments.

Also, many of these infrastructure projects have been generously subsidized by governments, and take advantage of low costs for land, electricity, and manpower in the locations of these datacenters. These incentives will run out and other costs will rise over time. In addition, these providers could come under pressure (either due to a focus upon generating ROI for their Cloud investments, or due to reduced profits within their primary business), and will need to pass on some of the costs to customers. Such price increases could create significant uncertainty about the expected ROI for companies that are planning to migrate to the Cloud.

9.  Outdated Business Models

The world of economy and business has evolved drastically over the past decades. Some examples of this include globalization, use of the Internet, functional (instead of hierarchical) organizations within a flatter structure, greater integration with partners, leverage from social media, and much more. However, the IT systems reflect the vestiges of older business models, and constrain the business processes from change. While Cloud-based services reflect today’s business models, they represent drastic change for many organizations. Established organization within the manufacturing, financial, or government sectors are highly prone to this issue, while it is of much lesser consequence for newer companies in other sectors.

In this context, updating business models is imperative in order to effectively leverage cloud services. It is to be noted here that piecemeal adoption will provide lesser benefits until the business models are updated. This is a significant opportunity for established organizations and companies that successfully transform could represent a serious threat to the holdouts. In any case, newer and agile companies within this space will reap the initial benefits from Cloud services merely from the absence of legacy systems.

 

Conclusions

Cloud Computing consists of a relatively simple set of tools and technologies, and are expected to make rapid progress towards the Plateau of Productivity within Gartner’s Hype Cycle shown below.

 

HC_ET_2014

Hype Cycle for Emerging Technologies, 2014 (Gartner, August 2014)

However, both the timing and ultimate scope of Cloud Computing are subject to a number of factors. A failure to achieve these could extend these time frames and/or reduce the viability and adoption of Cloud Computing. These factors include

  •  Modularity

Vendors need to offer modular services that permit customers to select features that they need, without having to pay for those that they do not. In addition, these should work with legacy protocols that customers already use for in-house systems. This will permit incremental replacement of legacy in-house modules with Cloud-based replacements and will not need extensive customization or integration. Once customers are comfortable with the concept and ease of module replacement, this process would accelerate.

  •  Interoperability

Any effort to address the disjointed landscape of Cloud-based services will increase the comfort level of customers. At present, customers hesitate to even consider deploying systems that utilize multiple Cloud vendors’ services, solely due to the hurdles involved with integration, as well as the time and effort involved. The technology workforce and consulting companies have expertise with multiple vendor services today; yet they lack the skills to effectively integrate these services seamlessly. This is a significant barrier to companies that wish to better utilize compelling services from competitors within their application environments. Companies may also wish to arbitrage their costs of Cloud-based services by utilizing multiple vendors, with changes being static or dynamic. Providers offer dynamic pricing based upon their current resource utilization, and it would make sense for customers to leverage this.

  • Reduction of Cloud and Network Costs

While the cost of Cloud services are on the decline today, much of this is due to the large vendors staking out positions to establish themselves as the market leader, and to deter new entrants into this space by temporarily reducing market profitability. Long term costs of these services should therefore rise to match economic costs; some of this would be offset by progressive reduction in technology costs. Unless customers see a permanent reduction in costs, with a falling trend steeper than that of their current technology costs, it would be difficult to get medium to large-sized customers to adopt for mainly cost-based reasons.

Network costs are an important part of this mix as outlined above; in case network charges drop steeply due to technology improvements, or from an increase in competition within this space, customers that move large amounts of information would have a greater appetite to adopt Cloud-based services. This is likely to be attractive to them, since they are cost-neutral at worst, and provide additional benefits.

 

Recommendations

Customer-centric Cloud offerings

Today, we have vendors that offer services that represent hardware systems, technology platforms, databases, or other services, all of which represent technology services. On the other hand, customers utilize and need financial, logistic, manufacturing, engineering, and other similar services, which can be categorized as operational services. It is almost as if customers and vendors exist in their own universe. This is probably one of the most critical factors that currently restrains adoption. Unless the industry offers services that are focused to customer needs, adoption is likely to be muted at best. Notable exceptions here are the offerings from companies such as SalesForce and ServiceNow.

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The Paradox of Cloud Computing Adoption – Part II

In Part I of this post, I discussed the overview of Cloud Computing adoption and the importance of the primary factors, scale and scope. What are other considerations that dictate Cloud strategy and have a bearing upon customer adoption? Some of these are listed below.

1. Variability of Workload

Workloads are assumed to be fixed or variable; in reality, they are almost always variable. They can vary at low or high rates, and this variability can be predictable or unpredictable (H&R Block during tax season vs. social media spikes during major events). It is difficult to accommodate a highly variable workload in-house or in a private cloud – the two available options are to either overbuild at a large cost or suffer degraded performance during workload spikes. A public Cloud capitalizes upon the fact that workload spikes between its customers are not correlated; if they were, the public Cloud could be susceptible to similar performance issues as well.

2. Data Intensity

Enterprises have different characteristics in terms of data generation, based primarily upon the nature of their business. Some organizations generate a large amount of data (Social Media, Insurance companies, Pharmaceutical companies, and Manufacturing companies). Others generate relatively lesser amounts of data (early-stage startups, mobile app companies). It is relatively easier to migrate low data intensity applications to Cloud providers, and such migrations are likely to involve lower operational costs as well.

3. Externally generated data vs. internal

Companies also differ by where their data is generated. Social media companies experience externally generated data, whereas Pharmaceutical or Manufacturing companies generate their data in-house via test or manufacturing equipment. It is not easy to migrate these to the Cloud due to the data volumes involved, and if there are Compliance and IP considerations involved (see #5 below).

4. Interoperations between applications, and data movement within the enterprise

Companies could have several standalone applications with relatively limited interaction. For example, Twitter’s Operations, internal email, and financial systems minimally interact with each other, if at all. On the other hand, an insurance company’s Claims applications, Data Warehouse, Marketing applications, and email systems (workflow) are all linked with well-defined data flows. Here it would be a significant task to replace any of these components to a Cloud-based service.

Another hurdle with high interoperability of applications is large scale data movement within the organization. Various functions and locations within an organization access data created by each other; internal network connections are created to implement and optimize these data flows, which is a complex task to accomplish across locations and service providers.

5. Legacy issues and IP considerations

Cloud service providers support most modern protocols, such as SOAP and REST within their PaaS offerings. However, they do not have support for legacy protocols that are in use at enterprises. This constitutes a significant hurdle that cannot be easily overcome. This is not an issue for new companies, but a rather significant issue for established companies that have been in business for many years. Organizations will continue to replace such applications with new services where feasible, but this is a slow process.

6. SLAs and OLAs required by the business

Corporations are increasingly required to provide SLAs and OLAs to their customers for all operational aspects of their business. These flow back to the Business Applications and IT Operations as corresponding SLAs/OLAs. In case an application or a set of applications are migrated to Cloud providers, corresponding SLAs/OLAs need to be established with the Cloud providers. This may or may not be possible based upon options that the provider offers, may be financially prohibitive, or difficult to enforce. Amazon offers a 99.9999% availability for its EC2 infrastructure, yet we have had several outages that violate such an SLA. However, the contract would have been written in the provider’s favor, insulating them from serious financial impact, and usually limited to the amount paid for the service feature that failed. However, the damage to the customer’s reputation and financials is immense.

For example, a provider that offers a 99.9% SLA would remain in compliance with a single 8 hour outage during an entire calendar year. Would EBay or Amazon tolerate this one week before Thanksgiving?

7. Regulatory and Compliance limitations

Regulatory and compliance issues are little understood by most players in the Cloud business; even industry experts can be misled by some of the provider certifications. The reality for companies is that they are responsible to their customers, shareholders, and to regulatory authorities for enforcement of privacy, security, and integrity of their customer data. Cloud provider certifications mean that these providers follow best practices; however, in case customer data is lost or compromised, it is hard to see that the Cloud provider would step up to take financial responsibility. Even worse, smaller providers might simply close their doors, leaving all their customers in an extremely difficult situation.

8. Impact of network costs

Network costs are a major source of expense for organizations in the present situation, representing significant chunks of IT/Telecom budgets for most. The reasons that these are exceedingly high are due to the nature of large capital projects for network capacity, and the small number of providers operating as an effective oligopoly.

With migration to the Cloud, there is an increase in network traffic, and a corresponding increase in costs for companies on multiple accounts.

  • All client access will move data to external providers.
  • Movement of data occurs between multiple applications/providers
  • Data communication to/from in-house legacy applications
  • Movement of internally generated data to external providers

Each of the above items represents data that was being moved within the organization’s Local Area Network (LAN), and will now be routed over the Wide Area Network (WAN) of a telecom provider. LAN costs are relatively very low, and provide a stable and high performance network path, whereas WAN costs are quite high, even at much lower bandwidths. In addition, usage of WANs introduces significant latencies that applications may or may not be able to tolerate. WANs are also more susceptible to failure than LANs as well. This represents a reduction in the reliability of network and application infrastructure.

Let us examine the impact of these factors on a few types of companies. Dark colors below indicate strong impact based on this dimension and lighter colors imply lesser impact due to any given factor.

Cloud Computing - Secondary Factor Impact

 

It is clear that each of these types of companies have distinct profiles based upon the combination of these eight dimensions. Existing companies have operations and IT systems that reflect these profiles, and look for these requirements to be met by Cloud services. In case these requirements are not adequately met, it constitutes a barrier to migration. These profiles are likely to be similar for companies within a particular domain, irrespective of size.

In addition, there are a number of factors that inhibit rapid Cloud adoption by customers. I will explore these, and identify conditions that would speed up this process, and offer some recommendations for Cloud providers in the concluding part of this paper.

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