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Can Cloud Live Up to Its Promise?

As the cloud becomes an increasingly popular business tool, CEOs need to separate the reality from the hype. There are many reasons for which the cloud can increase a company’s security and and accessibility to information. But there are also some risks. Read more to find out if the cloud is right for your business.

As CEO of a $5.4 billion company with expensive information technology systems, Pitney Bowes CEO Murray Martin is in a hurry to move many of those functions to the “cloud,” meaning into the hands of vendors that have built huge farms of computer servers. So far, the Stamford, Conn.-based company has moved its email, sales forecasting and some human resources functions. Now, Martin is pushing his Chief Information Officer, Gregory E. Buoncontri, to move even faster in the belief that cloud computing is not only cheaper, but also makes his company more secure and more resilient. Roughly 10 to 20 percent of the company’s IT functions are in the cloud now, and Martin sees that number headed toward 50 percent over the next five years. “If Google can do it, I can do it,” he says.

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Jeff Janer approaches cloud computing from a different vantage point. He is the CEO of a Boston-based start-up called Springpad, which allows customers to download their personal notes from the web no matter where they are and what device they use. The company has relied on Amazon’s “cloud” to host its website, the heart of its business, but Amazon’s data center in Northern Virginia suffered a still-unexplained shut-down this spring, knocking Janer’s company out of business for days.

The company’s website was relegated to proclaiming, “Oh no! Springpad is down.” Yet Janer still believes in the cloud. “I absolutely think this is a speed bump in an inevitable path toward the cloud,” Janer says. “Ultimately, we all can do better to guard against these kinds of disasters.”

Reality vs. Hype

Some degree of skepticism about cloud computing is understandable. The marketing hype surrounding it smacks of previous campaigns by consultants and technology companies to lure corporate investment. To wit: Y2K paranoia, dot.com hysteria and fiber optic mania.

But cloud computing is real, and CEOs of companies large and small, of both “brick and mortar” and Internet-centered businesses, are embracing it. Larger companies face trickier management challenges because many have CIOs and large IT staffs and budgets, not to mention millions of dollars worth of old legacy equipment. Smaller and medium-sized companies often have an advantage in using the cloud because it allows them to ramp up more quickly and cheaply than if they had to build their own systems.

Defining “cloud” isn’t easy. The term does not refer to a pie in- the-sky IT heaven open to all. The cloud is distinctly proprietary. Traditional suppliers such as IBM and Microsoft, as well as would-be usurpers such as Amazon, Google and Dell, are allowing customers to use software that the providers maintain and to store large amounts of data in the provider’s server farms. Cloud computing bears resemblance to the old concept of pay-as-you-go utility computing, but is more sweeping in scale and usability. “There’s hardly an article you can read that doesn’t mention ‘cloud’,” says Mal Postings, chief technology officer of Ernst & Young’s IT Advisory Services Group in New York. “You see hype and buzzwords, but in three to four years it will be the modus operandi.”

Smart CEOs appear to be taking advantage of the cloud hype to subject their companies’ entire IT budgets and systems to a new kind of tough-minded scrutiny. “It is allowing companies to take a fresh look at all their IT applications inventory,” Postings explains. “Basically, they’re asking, ‘if we have 600 or 800 applications, how many applications do I really need to run my business? How many are commoditized? How many are aligned with the business’ competitive advantage?’”

Surprising as it may seem, many CEOs have not made a complete analysis of how their IT dollars have been spent, but the advent of cloud computing is providing them with a lever to benchmark the cost of everything they do internally versus the cost of farming it out. “IT has always been a black box—no one understood what they were getting,” says Chris Pick, chief marketing and strategy officer at Apptio, an on-demand technology business management software company in Bellevue, Wash., that counts Expedia, Facebook and eBay as customers. The privately held company, itself a provider of cloud services, seeks to help CEOs and their CIOs make more informed decisions about IT functions.

Do the Math

The first step is to understand the true fully loaded cost of an IT function, Pick says. That includes how much it costs to use the company’s network and all the devices that operate the underlying software. “When they look at cloud, many CEOs don’t look at the fully burdened cost,” he argues. But once a company has an accurate handle on the cost of each function, the CEO and leaders of individual business units have the power to compare how much an IT service costs internally versus how much it might cost if it were located in the cloud. Those gains can range from 20 percent to 80 percent, says Pitney’s Martin. No capital expenditures are required because cloud providers charge on the basis of service “pay as you go.”

CEOs love to squeeze out these savings from functions that have been commoditized because it allows them to concentrate on areas where they can truly innovate and create a differentiated product or service for their customers. “You can take people working on maintenance of an IT infrastructure and put them on things that represent strategic opportunity, not just making the trains run on time,” says Tim O’Brien, senior director at Microsoft and one of the company’s “evangelists” for cloud computing. Microsoft is the largest provider of cloud computing services.

This is a sweet spot for many CEOs—using savings from their IT budgets to streamline their workforces and transform their businesses. “Those with a strategy that’s clearly integrated with the business needs will benefit the most from the flexibility and scale that cloud computing can provide,” says Phil Garland, a partner at PricewaterhouseCooper’s advisory practice.

Risky Business?

Of course, CEOs must tread carefully in the cloud and not take wild plunges into unknown territory. “The tension in the industry today is between all the benefits and goodness of the cloud versus all the unknowns associated with a new model of computing,” says Microsoft’s O’Brien. “The things that keep CEOs and CIOs up at night are security, privacy and availability.”

CEOs who have embraced the cloud argue that their data may be more secure in the cloud than in their own hands. The major risk to a company’s data comes from its own employees who may innocently make the data available by transmitting it from the office to their home computers. And companies themselves are not necessarily as sophisticated in defending their data as cloud service providers are. Sony, Epsilon, RSA and NASDAQ all have suffered embarrassing hacking attacks on their systems in recent months, far greater setbacks than reported from any cloud services provider. Sony, in particular, made a beginner’s error—it failed to encrypt its customers’ data.

Even though his company’s service was knocked out by Amazon’s failure, Smartpad’s Janer argues that CEOs can take steps to avoid that. One would have been to use another Amazon data center to “mirror” the Smartpad data and applications in Northern Virginia. Some companies build in a layer of redundancy by asking a cloud provider to maintain a separate set of back-up servers to operate their business in the same data center, a practice known as “co-location.” “From a risk mitigation perspective, you have to weigh the costs versus the benefits,” says Janer.

Ultimately, cloud computing represents a new model in how companies manage their IT systems and indeed their overall businesses. Like all the models before it, cloud computing has strengths and weaknesses. But smart CEOs are using it to strip out costs and give their businesses a competitive shot in the arm—and conducting tough analyses to make sure it delivers on its promise.

Key Takeaways

  1. View cloud computing as an opportunity to rethink IT infrastructure.
  2. Calculate the real cost of performing functions internally versus locating them in the cloud.
  3. CEOs of smaller companies can use cloud computing to rapidly scale up and enter new markets.
  4. Encrypt data and build in other safeguards rather than pursue

About William J. Holstein

William J. Holstein
William J. Holstein is a journalist, consultant and speaker. He is the author of, "The Next American Economy: Blueprint For A Sustainable Recovery." For more of his work, visit www.williamjholstein.com.