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The Cloud Disruptive Innovation: Managing the Business Transformation

By November 17, 2010Article

Some innovations are evolutionary and bring about incremental improvements—sometimes even transformational improvements—in productivity, quality, competitive positioning, and market share. Other innovations impact—if rarely—an entire industry and business ecosystem with the disastrous potential of dislodging well-managed and successful companies who are leaders in their markets. In his book The Innovator’s Solution, author Clayton Christensen defines a “Disruptive Innovation” as follows:

“An innovation that is disruptive allows a whole new population of consumer’s access to a product or service that was historically only accessible to consumers with a lot of money or a lot of skill.”

We have seen several disruptive innovations in the past 100 years:

Is Cloud Computing a Disruptive Innovation?
Many industry pundits have dubbed Cloud Computing as the biggest IT transformational wave since the client-server and PC revolution. Looking at the evolution (see figure below) of enterprise computing in the past 50 years, we went from centralized mainframe computing in the 1950s and 1960s to client-server computing driven first by RDBMS systems, mini computers and then later by PCs in the 70s and 80s. Then we saw the e-commerce revolution driven by the rise of the Internet in 1990s. At the same time, we saw increasing complexity:

“Everything in computing has become very complex over the last 40 years; the amount of engineering know-how you need to run a modern-day data center has escalated in the last decade to the point where it doesn’t make any sense to try and do it all ourselves. It’s just a large amount of effort and a waste of time deciding what technology to use, what software to buy and so on. Our time is better spent in helping the needs of the business.”– CIO, software vendor

The enterprise software model of the 1990s was broken and dysfunctional. Enterprises were spending six and seven figures on software that cost only a tenth of that five years ago. The industry kept piling on new features—they were innovating incrementally but they were also adding a lot of overhead, complexity, and cost.
Over the past ten years, massively parallel computing and high-bandwidth Internet (both wired and wireless) got commoditized to such a degree that computing resources and applications are today ubiquitously accessible in a variety of ways (propelled by the explosion of powerful mobile devices and applications) to everybody on the street with near instantaneous scalability.
Yes, we are going back to the days of centralized computing, but we never had this level of democratization and commoditization of massive-scale computing resources and high-speed internet access at any time in the history of computing. A perfect storm is thus forming to push cloud computing forward. First, enabling technologies such as virtualization, open-source, massive-scale automation, and multi-tenancy have matured to the point of widespread adoption. Second, successful vendors and their offerings are filling the market with positive customer experiences. Third, the global recession continues to wring funds from IT budgets and prompt CIOs to look for more ways to save money. Pioneering cloud companies such as Google, Amazon, and Salesforce have taken massive scale and automation to unprecedented levels, accelerating the trend towards the industrialization of IT and the utility consumption model.
The change is reverberating in every corner of the technology industry, impacting every layer of the technology stack, and disrupting everything from business models and channel relationships to established cultural norms.
With 5 billion mobile phones and 2 billion internet users on the planet, a whole new generation and population of users on the other side of the digital device now have access to IT infrastructure, platform, and software services that would have been unthinkable just a decade ago. Recently, entrepreneurs in Silicon Valley and some university students in India worked together to build mobile applications on Google App Engine to enable poor artisans in remote Indian villages to sell their folk art (see pictures below) on eBay and other Internet marketplaces. Instances such as this one is a shining example of just how far reaching cloud technology is and how it opens up previously inaccessibly markets.

By Christensen’s definition then cloud computing is—beyond any shadow of doubt—a major disruptive force in the technology industry.
The Case for Business Transformation
A disruptive innovation is at once a massive opportunity and a potential disaster in the making depending on whether and how companies embrace it. Companies that failed to acknowledge and/or aggressively ride the disruptive innovations of the past have either disappeared completely (Digital, Wang, anyone?) or have been playing living dead, slumbering along, and playing second fiddle to leaders who took the bull by the horns.
The current technology leaders—IBM, Microsoft, HP, Oracle, EMC, and others—all recognize this industry transformation and are investing billions of dollars to position themselves to take advantage of this wave.
In particular, Microsoft is well on its way to transform itself from a PC-centric company to the new cloud-driven market reality. In addition to releasing their Windows 7 phone, Microsoft also unveiled some compelling Windows Azure enhancements at their recent Partner Development Conference. Bob Muglia, Microsoft’s president of the Server and Tools Business Unit, went deep into the Azure offerings and showed demos of the latest features with real customer use cases.
One of the most interesting demos was around how Pixar Animation Studios is leveraging Windows Azure for its Renderman application. Renderman is an animating-rendering service that Pixar uses internally and also provides to its customers. With more 3D animation and visual effects on the rise over the years, the infrastructure requirements associated with it have increased exponentially. With Windows Azure, Pixar can more efficiently manage its application’s massive compute cycles and allow it to scale up and down as needed to meet demand, improve project performance, and eliminate the need for costly back-end infrastructure to process data.
Windows Azure delivers general purpose platform as a service (PaaS), which gives developers the breadth of services they need to free them up to focus only on their applications and not the underlying infrastructure. Imagine having all the IT infrastructure, hardware, operating systems and tools you need to support an application just a few mouse clicks away. It opens up a lot of possibilities for developers.
Bob Muglia’s key takeaway for customers from this slew of PDC’s announcements is this:

“Our most important goal is to give our customers choice and flexibility, whether they are looking at a private cloud, working with our technologies in the public cloud, or both. Business requirements are unique, but one thing is certain: The cloud provides efficiency and cost-saving benefits that can be achieved by all companies regardless of size, location and industry. And Microsoft is the only vendor that provides cloud solutions across all these areas today.”

See also my interview with Microsoft’s Matt Thompson on the evolution of Platform-as-a-Service and how Azure plays into that evolution.
IBM is another shining example of a large company that, despite its size, has successfully ridden previous transformation waves—and at one point even pulled itself out from the edge of a precipice of a near fatal fall. IBM, of course, has embraced cloud computing in full gusto and has been offering some compelling cloud solutions lately. IBM has taken the approach of workload-based cloud offerings.
The four workloads we believe are ripe for the cloud aligns exactly with the IBM offerings today:

  1. Development and Test: We also found in our research this is one of the most common use cases for the public cloud today.
  2. Analytics, Storage, and Archiving: Another perfect use case to take advantage of what the cloud offers today.
  3. Collaboration: Email, CRM, Collaboration, Talent Management, Office Productivity
  4. Desktops in the Cloud: We believe this is the next wave in the cloud. Although VDI’s haven’t taken off as anticipated in the past 3-4 years, companies are beginning to explot the newer cloud technologies to deliver compelling desktop solutions.
  5. Disaster Recovery, Backup, and Continuity:
    Another popular use case for the cloud.

While the vendors are jostling for their position in the future of this IT transformation wave, they have to deal with the inevitable dynamics of “Crossing the Chasm.” At this stage of evolution for this wave, the cloud is still an early adopter play. These early adopters have experienced some ground-breaking business value from their investment in cloud solutions. The CIO of a media company outlined how they transformed their business using cloud solutions:

“When we started our journey to the cloud two and a half years ago, 95 percent of the IT budget and headcount was allocated to the operations side of our business. Only 5 percent was funneled to change management, project management and the “new” side. By moving to the cloud, every penny and headcount we saved on the traditional side we were able to reinvest in the change-the-business side. By the end of last year, we were able to move the dial down from 95 percent operational to 50 percent, so we released 45 percent of our budget into the new areas of the business where we were going digital and generating new revenue streams. By the end of this year, we want to get that figure to about 30 percent, so we can get 70 percent in the transformational budget.” – CIO, media company

However, the majority of enterprises are too invested into their current IT strategy and status quo. Unfortunately, burying ones head in the sand and hanging on to the old status quo model is a sure-fire recipe of failure. The most dangerous reaction is one of denial and the inability or unwillingness to recognize the significance of the paradigm shift. Change is sometimes viewed as dangerous and you get the inevitable defensive and protective reactions. An architect at an energy company had this to say about the reactions of the “old guard”:

“Many IT managers have a vested interest in the current IT strategy. The cloud represents a fundamental change for a lot of organizations. During this transitional phase, people are looking out for their jobs, and wondering ‘What’s my role?’ The truth is that you may not get an objective analysis for people who will be affected by the change. You are not going to recommend something that will make you look bad.”

Managing the Business Transformation using Cloud Solutions
In my earlier three-part blog post series (Part I, Part II, Part III), I offered some concrete steps to develop a cloud strategy including the business and technical aspects of managing the business transformation. The bigger challenge with the transformation will be around changing mind-sets, cultural patterns, process patterns, and hearts of people so that they willingly adapt to new approaches and technologies. Some of us who have spearheaded disruptive change in organizations know this (sometimes painfully) to be the most difficult part of the journey. Even if companies have a good business case and understand the cloud’s power and potential, they may not be mentally ready to take the plunge. The underlying reasons, perceived or real, are many: fear of the unknown, fear of loss of control, fear of job loss, risk aversion, or lack of tolerance to change.
The change efforts in bigger and more diverse organization tend to be that much more challenging and frustrating, often degrading into political maneuvering and turf fighting. You may find that many of your current organizational processes including basic things like budgeting, planning, contracting, vendor management, bidding, or even the processes you use to develop your software applications can all come in the way of moving forward with adopting the cloud paradigm.
When it comes to execution, you might want to consider carefully balancing two parallel approaches: top-down strategic approach that defines overall enterprise architecture (along with a phased approach to long-term implementations) combined with a bottom-up approach focused on solving local, tactical, and short-term problems. The bottom-up approach can potentially lead to early wins while helping you understand the risks and benefits of the technology.
In the rank-and-file, IT managers face layoffs, outsourcing, skill set gaps, and instability during the transition. One CIO described cloud computing’s move into the enterprise as a “generational change.”
The new generation is more likely to embrace the cloud much faster than the Baby Boomers, for example. Many CIOs who are near the middle or end of their careers are Baby Boomers who are not necessarily looking for a major paradigm shift to shake them out their retirement dreams. The Gen X group grew up with the cloud and when they become CIOs, they will accelerate the move to the cloud.
Microsoft’s white paper on “The Economics of the Cloud” published this week urges CIO’s to get on with the program. (See also Tim Negris’s insightful analysis of this whitepaper.)

“Many prior technology transitions were led not by CIOs but by departments, business decision makers, developers, and end users – often in spite of the objections of CIOs. For example, both PCs and servers were initially adopted by end users and departments before they were officially embraced by corporate IT policies. […] “We’re seeing a similar pattern in the cloud: developers and departments have started using cloud services, often without the knowledge of the IT group (hence the name -rogue clouds‖). Many business users will not wait for their IT group to provide them with a private cloud; for these users, productivity and convenience often trump policy. […] “CIOs should acknowledge that these behaviors are commonplace early in a disruption and either rapidly develop and implement a private cloud with the same capabilities or adopt policies which incorporate some of this behavior, where appropriate, in IT standards.”

We found in our research that progressive CIOs (Yes, there are quite a few out there!) are taking a proactive role and realizing the full benefits the cloud.
The SandHill Group, Cloud Technology Partners (CloudTP), and Microsoft are hosting a Webinar titled “How to Use the Cloud Today?” on Dec 2, 2010 at 1:00 pm.
Learn about the state of the cloud, including the forces driving cloud adoption, the cloud value proposition, the profile of cloud users, and the challenges they face, from Sand Hill analyst and cloud blogger Kamesh Pemmaraju.
Hear cloudTP founder and chief architect Erik Sebesta address how to transform your business using cloud solutions. Listen as Microsoft Azure expert Mark Eisenberg describes Azure use cases. Register today.
Kamesh Pemmaraju heads cloud research at Sand Hill Group and he helps companies—enterprises and technology vendors—accelerate their transition to the cloud. His blog has been recognized in the top 50 bloggers on cloud computing and also in CloudTP’s best cloud computing blogs list. He welcomes your comments, opinions, and questions. Drop in a line to For updates on news, views, interviews, webcasts, events, and blog posts, follow me on twitter @kpemmaraju.

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