Competition Against Cloud Computing

Published Date: 02 Nov 2017

Before fully concentrate on the aspects of human resource management related to the adoption of cloud computing by enterprises, the impacts of a transition towards cloud computing are shown related to IT organizations’ strategic positioning. The organizational changes needed to move from on-premise IT to cloud computing are explained through the use of the value chain analysis academic framework.

Cloud Computing Impacts on Organizational Behaviour

With its occurrence, pervading acceptance and adoption, cloud computing is about to transform the role IT plays in enterprises and the way enterprises should handle it going forward. In most cases, information technology (IT) has been an activity aimed at supporting the core business of the firms; but IT is now triggering mutations in the business model of the firms. Cloud computing is serving enterprises to stay cost-effective, efficient and flexible to changes by refurbishing their IT design model. This second phase starts by presenting what changes cloud computing has brought, and how it changes the role of the IT decision-makers and of their organization in the enterprises.

Competition against Cloud Computing

The technological era we are experiencing primarily offers the following 3 options regarding the choice of an IT infrastructure.

Internal IT infrastructure and support

Outsourcing to managed services

Cloud computing solutions

Therefore, the cloud computing competes against the two others that have been quoted instantly.

If a firm owns the equipments, then it has a managed IT infrastructure in-house, even if they are installed in a rack in another data center that belongs to someone else. Internal IT infrastructure and support is a model in which a firm owns the equipment and pay people, whether employees or contract staffs, to maintain these boxes. When a box is faulty, the organization incurs this cost, and it very likely does not have a replacement excepting perhaps basics such as a cold spare disk for some critical servers.

Managed services outsourcing has similar advantages to those of the cloud in that the firm pays a fixed price for someone else to own their equipments and make sure they remain up and running. If a box fails, then it is the responsibility of the managed services company to replace it immediately, or within the conditions that have been defined in a service level agreement. The managed services company provides the expertise to ensure that the boxes are secured and maintained up to date, and also to manage the network infrastructure in which servers are running.

When a company plans to migrate all or part of their IT infrastructure to the cloud, it is wise to understand the key elements that differentiate the three models that are internal IT, outsourcing to managed services, and cloud.

It is necessary for setting up "the scene" of this second part to proceed with a comparative analysis between the three options, which highlights the fundamental key elements to appreciate judiciously each of them. The Table comparison of options for an IT infrastructure delivers a comparison between the three options with respect to some dimensions of IT infrastructure.

The dimensions analysed and briefly discussed are the five followings: capital investment, ongoing costs, provisioning time, flexibility, staff expertise requirements, reliability.

 

Internal IT

Managed services

Cloud Computing

Capital investment

Significant

Moderate

Negligible

Here the question is: how much money does an organization or enterprise has to invest to set up his infrastructure or to bring changes to it?

With internal IT, it will have to pay for its IT infrastructure software and hardware before it even need and use it.

Under outsourcing to managed services, the organizations or enterprises are generally required to pay a moderate installation and setup fee.

In the cloud, they usually have no up-front costs, and thus they are not committed with some kind of obligations somehow.

Ongoing costs

Moderate

Significant

Based on usage

For internal IT, the enterprises’ ongoing costs are the cost of staff, plus some contract resources to manage the infrastructure, as well as real estate and utilities costs (square meters for their data center, HVAC systems, electricity, etc.), or alternatively space at their hosting provider. The variances in the ongoing costs can be significant, especially with contract resources, as when emergencies occur and other kind of issues happen.

With managed services, although they are often quite expensive, organizations usually know quite precisely what they are going to pay at the end of the month. And the price rarely varies.

On the other hand, the cloud can be either pricey or cheap. It all depends on the needs. Nevertheless, the enterprises pay for exactly what they use - it is clearly a key advantage. Finally, the enterprises’ staff costs are likely to be greater than with a managed services provider, but most probably lesser compared with an internal IT model approach.

Provisioning time

Significant

Moderate

None

Here the question is: how long does it take to enterprises to provision a new component into their infrastructure?

With both the internal IT and the outsourcing managed services models, they are required to plan ahead of time. It usually takes time as organizations have to first place and order, then wait on the shipping of the component, and finally integrate and set it up in the data center. Although, this waiting time is significantly shorter usually with a managed service, since the providers make purchases ahead of time in bulk.

With the cloud, enterprises can request access to additional storage capacity or have a new server instance provisioned and operational within minutes.

Flexibility

Limited

Moderate

Flexible

How easily can an organization’s infrastructure adapt to unexpected changes in resource demands such as computing power, storage capacity, bandwidth or whatever? For instance, what are the consequences for the business if an organization suddenly reaches or approaches storage capacity limit?

Under the internal IT, organizations typically have a fixed capacity. As a consequence, they usually are restricted to answer to increased resource demands through further capital investment.

With outsourcing managed services, generally the provider is able to offer access to temporary capacity by unlocking their bandwidth capacity, or delivering them short-term access to alternative storage facilities, and so on.

With the cloud, the beauty of it is that it can be set up to automatically handle their capacity requirements. And this not only when an enterprise or organization needs further more capacity, but also when its infrastructure does not need it anymore - then the cloud lets go off that capacity which is no longer used and required to the organization.

Staff expertise requirements

Significant

Limited

Moderate

What is the level of expertise enterprises need in-house to support their IT infrastructure environment, and into which specific areas?

Under the internal IT model, they obviously need resources who know the ins and outs of their environment. These resources might be staff or contractors, or both. Those resources must have skills covering typically many different technological areas.

With the managed services infrastructure, the benefit is that it enables them to be largely ignorant, if not of all, of IT things.

With the cloud, the staff expertise requirement may vary. It depends strongly on how organizations use the cloud. They might need very little or a lot of skill. Many cloud providers offer the possibility to contract for a cloud infrastructure manager to manage your cloud infrastructure; nevertheless enterprises still must have internal expertise for provisioning their virtual machine images for instance.

Reliability

Varies

High

Moderate to high

To what extend are organizations certain that their services will be up and running 24/7?

With internal IT, their ability to guarantee a high-availability infrastructure relies on the expertise level of their IT staff and the amount of money cough up in their infrastructure.

An outsourcing managed service is most probably the safest, most proven and reliable alternative.

Under the cloud, there are significant locational redundancies possibilities available, but enterprises may still have some concerns towards a lack of proven track record of stability.

Table comparison of options for an IT infrastructure [1] 

Out of this analysis derives an obvious fact which any IT decision-maker should have in mind. Undertake the construction of an IT infrastructure from scratch makes no sense for a company today. The only companies that are expected to have internal IT are the ones with a significant already existing IT infrastructure in which they have invested significantly, or organizations faced with regulatory requirements that prevent them strictly from storing data in third-party environments.

Arguments in favor of a reduction of the infrastructure to a minimum are numerous. Modern information technology is constantly evolving. To stay updated, enterprises must constantly adapt entire platform – hardware, operating systems or applications, for example. A study by Forrester Research has recently shown that many managers are reluctant to update the ICT applications, because the costs of upgrading and operation are difficult to assess. Only 5-10% of them use the latest version. ICTs can hardly meet the dynamic requirements of the market, because the structures are expensive to purchase and maintain. Choosing a rental model allows companies to avoid capital-intensive investments. For sure, the cloud provider faces the same challenges. This is certainly true, but they can control them better. On one hand, highly standardized infrastructure allows obtaining economies of scale. On the other hand, it has industrialized process for the acquisition and installation of hardware, migration to new platforms, performing backups and version control, applying bug fixes, managing licenses, and to address the compliance and security requirements increasingly stringent. Unlike corporate enterprises, it is its core business. It manages the entire technology lifecycle.

It can be said that all companies or organizations should use to date managed services provider solutions or services in the cloud. The agility and flexibility of the cloud computing technology is altering significantly the dynamics of outsourcing agreements. The speeds at which services can be provisioned within clouds are going to foster CIOs to consider them increasingly. In parallel, because of this, they will also have to examine to what extent their internal IT organization is capable to act as a cloud service broker. Typically, understanding how the cloud computing ecosystem develops will be a fundamental component of sourcing IT services, and crucial to IT strategies.

Impact of Cloud Computing on IT Organizations

From a purely technical perspective, cloud computing is not a new technology in itself. Cloud computing comes from the culmination of several previously existing technologies: those are mainly Internet and virtualization, all supported on a reliable network and broadband. Virtualization being the pooling of IT infrastructure means; a single physical machine can run multiple virtual machines, so multiple operating systems and multiple applications. This virtualization allows deporting an organization's internal IT on a servers’ virtual grid accessible via the Internet.

It may also be recalled that the cloud computing allows to access the data from any device no matter where it is located, allowing the user mobility in a fascinating manner.

All these technologies put together have given birth to cloud computing. After the mainframe and the client/server architectures, cloud computing is gaining ground as a new model. IT era changes and becomes a consumable service like electricity. Indeed, we already made ​​the analogy that everyone uses electricity as a service without knowing precisely its origin and its implementation.

Cloud computing thus leads to an era of computer service where each one would draw the functions or materials of interest whether for personal or business needs. Before addressing the professional workplace area, some cloud computing players have also conquered many private users who have adopted their technologies; this include for instance Gmail for messaging offered by Google and Microsoft Windows Live.

Over the last decades, there have been huge IT investments made in setting up IT organizations and installing hardware and software.

The large amount of cash and the complexity of these investments, along with the unstructured way in which IT organizations have grown sometimes, makes that the prevalent mentality amongst CIOs and CTOs is still at the stage of technologies implementation and ensuring they are running as expected, rather than looking to be a factor of change by combining services leveraging information and technology.

The cloud computing will transform the nature of IT management. It will shift the focus from in-house operational maintenance towards service provisioning, relationship management, and IT visioning; with both the business and the external parties. Thus, it will need to be associated with a mind shift within IT departments to be successful, as businesses needs to conciliate rapid moving needs and an increasing amount of more abstracted vendor solutions.

Put differently, the internal control of changes will decrease as the rate of change increases. Consequently, additional constraints will appear and take place on most levels of integration and coherency of solutions. Therefore, a flexible internal architecture capable of maintaining an overall coherence will increasingly be necessary.

This mind shift implies mainly three aspects:

The focus on new skillsets

The development of service management capabilities in domains like service continuity, services portfolio management, demand management and request management

The downsizing of internal IT organizations, along with the establishment of an increased dependency on the adaptability and maturity of IT governance

The responsibilities of an IT organization may be represented through four main dimensions which are: manage, define, deliver, and align. Figure the cloud computing impact on IT organization draws the direction of change that IT departments must prepare with the growing presence of cloud computing in businesses.

Figure the cloud computing impact on IT organization [2] 

So far, with on-premise infrastructure, the essential responsibility of the IT organizations was basically focusing on delivering IT services to the rest of the enterprise, possibly with high quality and ongoing services. Thus, the roles of the IT organization were mostly oriented towards solution delivery, infrastructure maintenance, asset and infrastructure readiness (networks, hardware, software, etc.), transaction processing, and process improvement. Surveys and researches by Forrester and Gartner show that typical IT organization spends more than two-thirds of its human and capital resources (an overwhelming majority) for the maintenance of a growing number of applications and supporting infrastructure. As a result, this translates into a lack of IT resources available for focusing on innovative and strategic initiatives that drive business growth.

With cloud computing, the "align dimension" will clearly gain importance, and is likely to become the prevalent sector of activities IT organizations must be prepared for. As a key element, this dimension encompass the alignment of IT capabilities with the needs and priorities of the business. IT departments within firms are likely going to mutate into organizations that will act as a broker of cloud-based services in the upcoming years. Thus with this new role, the IT departments are probably going to take the role of a far more prominent and relevant entity, as it will make the IT organization better and more centrally positioned to drive value for the overall company.

The Figure IT capabilities and business needs alignment depicts some other of those new focuses part of this increasingly important dimension.

Figure IT capabilities and business needs alignment [3] 

In every challenge there are opportunities. Despite possible initial resistance encountered because of perceived loss of power for IT leaders, cloud computing is an opportunity for managers to shape more flexible, innovative, agile and focused IT organizations, able to deal with the increasing pace of IT evolution.

Addressing the challenge will likely not be easy, but the rewards will be there to harvest for IT organizations that will be capable to:

Fulfil the role of industry-driven information and technology advisers supporting, or even leading, innovation within the business

Focus on the strategic IT decisions and undertake the outsourcing of the maintenance and delivery of cumbersome solutions outside their core competencies

Design and manage truly innovative and flexible architectures

Cloud computing allows to consider an era where IT organizations are visionary rather than followers.

Impact of Cloud Computing on Firm’s Value Chain

Porter developed the concept of the generic value chain. This concept represents the activities an organization performs to design, produce, deliver, market and supports its products. The Porter’s value chain model is shown in Figure Porter’s generic value chain.

Porter distinguishes between two types of activities: primary activities and support activities. Primary activities are directly linked with the conception or delivery of a product or service. Those activities can be classified into five main areas: marketing and sales, inbound logistics, operations, outbound logistics, and service. Each of these primary activities is bound to the support activities which assist to ameliorate their efficiency and effectiveness. Porter distinguishes also four main support activities areas: procurement, R&D and technology development, human resource management, and infrastructure (systems for planning, finance, information management etc.).

Margin represents the difference between the entire value and the aggregate costs of performing these primary and support activities.

According to Porter, an organization’s value chain and the way it performs individual activities reflect its history, its strategy, and the underlying economics of the activities themselves [4] . Porter also argues that the ability to perform particular activities and to manage the linkages between these activities is a source of competitive advantage.

The linkages are flows of information, goods and services, as well as systems and processes to get activities acting together. Seamless cooperation and information flow throughout the value chain activities relies on these linkages. They are crucial for corporate success.

Figure Porter’s generic value chain [5] 

Individual value chain depends on the industry, company size, competition and strategic positioning, to name a few among the most important. The differences between those value chains among the competitors are key sources of competitive advantage. In the today’s competitive environment, the organization’s strategy should not anymore simply include a matter of arranging a fixed portfolio of activities along a value chain. Indeed, it can be observed that the most successful organizations do not simply add value, but they truly reinvent it. These companies think and set up their value chain and strategy in a way that allow them to innovate and consider a perpetual design and redesign of complex business structures.

It has been shown earlier in this paper that the primary driving factors for cloud adoption are principally:

Reduce overall IT costs through greater efficiency of assets and reducing operating costs

Simplify IT operations and improved efficiency through consolidation, virtualization and orchestration

Improved pace and consistency of business application rollouts

Adoption of IT models that reflect today’s public and private usage demands

All of these are going to impact the value chain in many industries, and it will therefore require that many companies redraw their value chain in order to get the most out of their adoption of cloud computing. This does not necessarily mean that drastic changes will be required in all cases, but for sure some will be unavoidable in order to align the business needs with their internal structure.

Cloud computing is very likely a candidate with the potential to inspire and influence the value chain of many enterprises. The adoption of cloud computing has clearly a major impingement on the primary and supporting activities of many organizations across almost all industries, and is also an available source of unique value proposition creation.

Figure cloud’s impacts in the value chain to provide flexibility and quick T2M shows some typical effects of cloud computing on the companies’ value chain. Today more than ever, companies recognize that their competitive advantage depends on the ability to be more flexible, agile, and cost effective than their competitors. The too large amount of tools and too many steps to perform common administrative tasks increases costs and time-to-market. Cloud computing enables IT organizations to be more effective by significantly reducing the time spent on maintenance tasks and operational activities.

Figure cloud’s impacts in the value chain to provide flexibility and quick T2M [6] 

Before cloud computing and its available end-to-end automation, the IT department had to face a series of problems such as manual provisioning, hard to control utilization, high provisioning and operational costs, extended provisioning time, and configuration risk. In other words, they have learnt to live with the fact that their enabling IT requires them having to put up with a host of cumbersome necessities.

Time to market is a critical measure. It is the time required to go to market with a new service, a new product or to develop a new application. It determines an organization’s capability to execute. Bringing a product to market quickly allows the generation of revenues faster. Time to market is an important KPI for an IT department as it highlights his ability to support business quickly.

Considering the overall IT supply chain, we also talk sometimes about the bullwhip effect. The bullwhip effect is a supply chain phenomenon where incomplete or inaccurate information results in high variability in production outputs and typically increased costs and waste. The bullwhip effect can significantly increase the time to market, and therefore increasing the costs. Indeed, the human factor associated with IT processes and functions contributes to the bullwhip effect.

For instance, considering the deployment of an application requiring storage, network access, and specific programming, and if each step of the IT supply chain lengthens the TTM, then the overall time to market increases. This in turn results in a real disadvantage against competitors that are able to provision such applications within a lower TTM. Altogether with the cost increasing because of delays, customer loss is also a risk that increases.

Inefficiency in the IT supply chain results in an increased time to market that can be translated in revenues and opportunity costs that are put at risk.

The power of cloud computing becomes clear when we imagine not having to invest the time and resources to accomplish many of the tasks we now take for granted. Figure cloud automation value chain analysis7 illustrates the cloud computing automation phenomena and its obvious benefits as how it can improve provisioning of IT services and products.

Figure cloud automation value chain analysis [7] 

The cloud computing and its automation possibilities also presages the dissolution of many causes of poor customer experiences and unnecessary effort caused in servicing customers’ needs. Such causes could be for instance:

Processes that do not make sense for the client

Customer interactions that do not generate value added

Organizational and work structures that prevent the timely resolution of problems

Practices that frustrate and hinder employees and reduce their engagement

Ineffectiveness of performance measurement metrics

Technological barriers and gaps

Too complex menu and routing systems

Management bogged down in bureaucracy and admin

Self-service that is difficult to use or unavailable

In the end, executives would prefer their IT resources are focusing on innovation and strategic initiatives that drive business growth. The value irritant matrix can support in discovering how the cloud computing automation and orchestration can enable them to ascertain resources are spending time on high-value applications.

The framework named the "value irritant matrix" classifies how valuable or irritating each type of activity or inter-action is to the customers and the business, as well as its frequency. The aim being to maximize, minimize or eliminate these activities and inter-actions according to their value. The value irritant matrix can be used to uncover in a comprehensive way where the issues are along the value chain, and to benchmark and recommend the priority steps for investment in cloud computing based on quantified benefits. It can also be of great help to target where it makes the most sense to implement a greater degree of automation, and with what degree of urgency.

Figure value irritant matrix – service champion [8] 

Put together with corporate initiatives like Total Quality Management (TQM), Six Sigma or Kaizen, all of them being quality initiatives that can be utilized as KPIs to benchmark the organization’s critical processes and increase its performance, the potential of cloud automation might give birth to some tremendous dreams around efficiency possible within IT organization, or even at a firm’s scale.

Six Sigma and its included DMAIC (define, measure, analyse, improve, and control) methodology is particularly useful to solve poorly performing IT processes.

Figure six sigma DMAIC roadmap [9] 

The term Six Sigma originated from terminology associated with manufacturing, specifically terms associated with statistical modelling of manufacturing processes. The maturity of a manufacturing process can be described by a sigma rating indicating its yield or the percentage of defect-free products it creates. A six sigma process is one in which 99.99966% of the products manufactured are statistically expected to be free of defects (3.4 defects per million) [10] .

Six Sigma, Kaizen and TQM are tools that support operation excellence and a "Right First Time" strategy that is essential components of strategies to ensure continue to meet customer's needs. Operative excellence has a direct impact on business performance. The goal is to reduce variation in processes and make them stable and responsive to be further optimized.

An example is of good use to illustrate this theory; simply consider a critical function in the IT supply chain: storage. Without storage capacity, applications cannot run, and therefore capacity planning is extremely important. Thus it can be imagined a quality initiative to reduce the number of storage cases opened due to running out of storage capacity. A KPI for an IT storage team might be the mean time to repair (MTTR) for provisioning of new storage requests.

Six Sigma could be applied to a wide range of problem statements along an IT supply chain to enhance customer satisfaction by simplifying purchasing or reducing downtime for instance, as well as reducing batch record errors and ensuring better compliance.

An operation model can be defined as a way to deal with the activities and procedures involved in the day-to-day processes of developing goods and products. According Nigel Slack and Michael Lewis, an operating model is defined as "the pattern of strategic decisions and actions which set the role, objectives and activities of operations" [11] .

Almost any operating model can be evaluated through the following five performance targets:

Quality – refers to how closely the goods or products meet the requirement

Speed – refers to the time interval between the customer request for a service or product and the delivery of that service or product; providing quick, even instant, response to customer desires is of significant value

Dependability – defined as how systematically the promised delivery time is constant for a service or product

Flexibility – refers to the ability of an organization to quickly adapt and change

Cost – refers to how much money is needed to obtain inputs and carry on the transformation process that make that final service or product

Those performance objectives can be combined in exclusive ways to meet strategic goals.

Automated configuration can change an IT organization’s approach from reactive to proactive. Also, it emanates more time for innovation and strategic initiatives, less time spent on maintenance and faster response time. These savings also provide a better quality of life for IT staff, which means higher morale and better staff retention potentially; both are critical elements for long-term efficiency.

Hence, it becomes obvious that all of these will also have consequences on the value chain within many enterprises and organizations beyond the single IT-related scope. The characteristics of cloud computing-based services are well established, including the potential for lower capital and operational costs, increased flexibility, the ability to scale solutions up and down and to access cloud-based resources from any location. But other attributes, often forgotten and too little considered will also see the day and will have to be treated by organizations following the trend of cloud computing.

Indeed, we can guess without too much difficulty that the embracement of cloud computing technology by companies and organizations will also have a significant impact on their human resource management support activities and roles. These aspects are going to be discussed throughout the remainder of this paper.