Cloud Wars

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Cloud Wars

Cloud Wars

How incumbents can respond to cloud disruption

Cloud computing and fast-moving, innovative start-ups seem a natural match. Yet some very large incumbents have been using the cloud to leverage their natural advantages in relationships associated with an existing customer base, capabilities and often considerable assets, and in-house data than can be mashed with information and insights from public sources. The “perfect” cloud organization may be larger than stereotypes would suggest.

Cloud is a top technology trend by many measures—disrupting IT shops and business models with equal force. If it hasn’t already jolted how your company does business, chances are it will. Or as Tom Friedman wrote in the New York Times, “While Wall Street is being rattled by a social revolution, Silicon Valley is being transformed by another technology revolution—one that is taking the world from connected to hyper-connected, and individuals from empowered to superempowered.”1

What’s so special about cloud? In a nutshell, it can reduce the technology trade-off between price and performance. That means small, innovative companies can challenge incumbents that in the past were almost untouchable. Cloud can also enable companies to improve their performance by fundamentally changing how they do business.

Public clouds today give companies access to effectively limitless computing power and data storage, delivered on a pay-as-you-go basis. A business gets the IT resources it needs without investing a lot of time and capital in programs and infrastructure. And in many ways, it entails less risk, as companies can quickly scale resources up or down depending on demand, which shifts the risk-return curve.

Consider Netflix, which streams video on TVs, personal computers and smartphones, using cloud services from Amazon Web Services (AWS). Its model is a direct challenge to many traditional content distributors, who must deal with the limits of physical distribution and network broadcasting. In contrast, Netflix capitalizes on low cost and virtually unlimited cloud capacity to deliver content on demand almost anywhere. In 2011, Netflix’s subscriber base surpassed that of Comcast, the largest cable provider in terms of subscribers, to become one of the largest video content distributors in the nation.2

Cloud-enabled disruptors are generally small and nimble—at least in the beginning. That gives them a perceived edge against incumbents that would otherwise enjoy an overwhelming advantage in size and scale.

Opening salvos

Many incumbents respond to smaller disruptors by taking a defensive posture—hunkering down and hanging on, sometimes with a healthy dose of denial. Others sharpen their customer focus, often ceding the low end of the market to focus on higher-end customers with presumably higher margins. The results of this approach are mixed.

More recently, though, some incumbents have been pushing back hard, behaving a lot like the startups they’re worried about and launching their own cloud initiatives, getting new products and services to market in record time with less risk. They are owning the disruption. And they are rethinking every dimension of their business in order to move the risk-return curve and create more value for stakeholders.

Often only nominal changes in operating models and policies are needed, which makes it easier for incumbents to leverage their natural advantages:

  • Relationships:  Using cloud to create value for the incumbent and its business ecosystem by establishing a shared platform for collaboration, information exchange, commerce and innovation.
  • Capabilities and assets: Using cloud to strengthen or recapture competitive advantage by creating more value from existing capabilities and assets.
  • Data: Using cloud-based analytics to generate insights from in-house data mashed with information and insights from public sources.

Front lines

There is a clear trend of long-established industries being turned upside down by leaner, more nimble cloud-oriented companies. Although the disruption is most acute in industries that rely heavily on computing, data storage, analytics and collaboration, executives in all industries should be examining the potential impact of cloud on their businesses.

  • Jeff Bezos, founder and CEO of Amazon, started using the Internet to sell and distribute books in the mid-1990s. At the time, analysts and competitors believed that, at best, Amazon had found a niche retail market that was uniquely suited to online sales—since customers didn’t need to try a book on or take it for a test drive. But what many people failed to understand was Bezos’ bigger vision of using the Internet and connectivity to fundamentally change the way all products, not just books, are bought and sold.  Amazon began by targeting the long tail of demand: books that had lower demand and were thus too expensive for brick-and-mortar stores to carry. But as incumbents ceded these lower-value customers to Amazon, the company’s awareness and popularity began to grow and it eventually expanded its product portfolio and gained a mass-market following. Today, Amazon is one of the largest retailers in the world, generating $48B in revenue in 2011.4  By enabling Amazon to connect directly with its customers at an affordable cost, the Internet created a paradigm shift in retail.
  • Many business executives are familiar with Salesforce.com, a pioneer in cloud-based customer relationship management (CRM), offered on a subscription basis. The company’s momentum is fueling an acquisition spree as traditional, on-premise ERP vendors race to scoop up software-as-a-service providers. Recent examples include Oracle’s acquisition of Taleo, and SAP’s acquisition of SuccessFactors.
  • In the media and entertainment space, HBO, Apple and Amazon have joined Netflix in using cloud-based architectures to deliver content over the Internet. In response, traditional content providers are attempting to stem subscriber losses by enabling online and mobile access, as long as the customer buys or maintains a subscription to their core service.

Opportunity 1: Leverage relationships

The biggest challenge with any platform is getting people to show up. Incumbents have a major advantage in this area, since they have a captive audience of customers, suppliers and business partners with a vested interest in participating. They also have the market clout and brand recognition to attract others outside of their ecosystem to get in on the action.

Before cloud, an incumbent’s existing capabilities and assets provided a competitive advantage that made the business almost unassailable. But in periods of disruption, those advantages can actually become a hindrance, slowing the company down and putting it on the defensive. The trick is to get back on offense—owning the disruption—and generating more value from the capabilities and assets the company already has.

Consider the example of Blue Cross Blue Shield (BCBS), a national association of 38 independent health plans that operate under a common brand (the “Blue” plans). Although the BCBS member companies are separate legal entities, they strive to offer a national health care provider network that Blue customers can access when traveling outside of their local coverage area. They also strive to offer health providers, physicians and other vendors a consistent experience. One of the association’s key goals is to leverage common suppliers and use common tools in order to capitalize on economies of scale and improve information sharing and inter-operability across plans. This has been the goal of BCBS since its inception—and now, leveraging the cloud, they have the tools to help achieve the goal effectively and efficiently.

BCBS recently launched a cloud-based platform designed to bring together BCBS member firms and third-party technology vendors to share knowledge and promote interoperable solutions. Plans can access technology solutions that are largely preconfigured to meet the needs of a Blue plan’s business environment. Also, they can learn what other plans are using and what their experiences have been with various products and services. Through collaboration and information sharing, BCBS’ cloud-based marketplace acts as a hub to spur market innovation among technology vendors, improve interoperability between plans, and accelerate speed-to-market. In all likelihood an independent startup could not have made the platform a success. It was BCBS’ position as an industry incumbent with strong relationships and a broad ecosystem that brought the concept to life.

Takeaway: Cloud can enable a large incumbent to use its relationships and reputation to drive value for all of the companies in its ecosystem. The incumbent becomes the hub for collaboration and innovation.

Opportunity 2: Leverage capabilities and assets

Before cloud, an incumbent’s existing capabilities and assets provided a competitive advantage that made the business almost unassailable. But in periods of disruption, those advantages can actually become a hindrance, slowing the company down and putting it on the defensive. The trick is to get back on offense—owning the disruption—and generating more value from the capabilities and assets the company already has.

One industry well positioned to take advantage of existing capabilities and assets is insurance. For argument’s sake, consider the experience of an insurance company that owes much of its success to methods, expertise and tools for underwriting profitable insurance policies, and to a large sales force of experienced insurance agents.

To improve its underwriting capabilities, the company must collect and organize data from a complex and expanding array of sources—including a full battery of medical tests such as EKGs, treadmill data and blood tests, as well as nontraditional data such as eating habits, purchasing patterns and even magazine subscriptions. It must then apply sophisticated analytics to try and make sense of it all. Cloud can help with both aspects of the underwriting challenge with virtually unlimited accessibility and capacity to collect, organize and store that information instead of downloading everything to an on-premise data center. Moreover, once the information has been captured, cloud computing can drive advanced analytical techniques such as predictive modeling.  That means the company can make more informed underwriting decisions in less time and for less money without having to change its underlying operating processes or business model.

Cloud can also help the insurance company get more value from its network of agents by arming them with tablets and smartphones so they can input and access customer information in real time from wherever they happen to be. It is the beginning of the end of paper-based processing. Agents can be equipped to make better and faster decisions about which customers to pursue and serve.

Finally, cloud allows big incumbents to achieve the agility and flexibility of much smaller organizations, by reducing the upfront IT investments and lead time required to pursue new markets and innovations.  Incumbents can now gauge demand in a particular market before scaling up, or exit quickly should they choose to do so, to manage organizational resources and manage risks.

Takeaway:  Cloud can enable incumbents to improve upon their industry-leading capabilities and assets without disturbing their existing processes or business models. It drives innovation by enabling a company to do things differently—or to do different things—testing new markets and business opportunities without a lot of upfront capital investment or risk.

Opportunity 3: Leverage data

Large incumbents have massive amounts of data—and much of it remains untouched and underused. In the past, mining for insights has been difficult and costly—in terms of software, talent, and time. Cloud services present an interesting alternative. With cloud, companies can have easier access to the specific/required ingredients for advanced data analysis—storage, data organization, and massive computing power—on a scalable, pay-as-you-go basis. Moreover, cloud services have been designed from the get-go to address vast amounts of data, with some having far more capabilities than a single company will likely ever need.

One incumbent that is rapidly embracing the power of cloud is the pharmaceutical company Lilly. The company’s CIO and R&D team are working with internal and external cloud providers to deliver IT services in a way that is similar to a vending machine.6 The company has developed more than 15 use cases where scientists can simply drop their data on an application to run an analysis and then promptly see results. Lilly scientists recently used the cloud’s computing power and storage to run advanced modeling for a bioinformatics sequencing process. This activity required massive computing power and if done in-house would have taken 12 weeks to acquire, install and set up the underlying hardware. Instead, Lilly sourced a 64-machine computer cluster from a cloud vendor and was able to complete the analysis in just 20 minutes at a cost of $6.40—orders of magnitude lower than traditional IT methods.7

Businesses are concerned about security and privacy because the cloud model moves systems and data outside of their walls, reducing the direct control they have over IT assets and creating new opportunities for competitors and hackers to gain access to sensitive data.

Even for companies without Lilly’s analytical know-how, using the cloud for data analysis can still be a game changer. The social review company Yelp has experienced rapid growth over the past few years and was thus forced to move its logs from internally hosted databases to a public cloud service. Making sense of the roughly 100GB of log data that Yelp generates each day required cloud’s ability to split unstructured data into many smaller pieces, distribute it across the cloud, and then gather it back to support business decisions and provide customers with a more context-relevant experience. Yelp also uses the cloud to power many of the core operations of its website and to organize the data it receives into a format that can be used to drive decision-making. In addition to these benefits, Yelp was able to save on upfront hardware costs and create a working system in days, not months.8

In both examples, cloud enabled a company to unearth valuable nuggets of insight from its massive data stores without a large capital investment. Using the cloud to analyze existing data can help a company better understand its business and complete projects more efficiently while paying only for the storage and computing power it actually needs.

Takeaway: Cloud can enable companies to expose and analyze their data in ways that were previously impossible, creating new engines for growth. Data becomes not only an asset to improve the performance of an existing business but also a valuable source of new revenue.

Concerns about cloud

Although cloud’s disruptive potential has been demonstrated, the opportunities are not without risk. Major concerns involve (1) security and privacy, and (2) worries that cloud adoption will be a distraction to the organization.

Businesses are concerned about security and privacy because the cloud model moves systems and data outside of their walls, reducing the direct control they have over IT assets and creating new opportunities for competitors and hackers to gain access to sensitive data. Fortunately, cloud infrastructure and services are being delivered by some companies that are implementing world-class security, policies and procedures to confirm data is kept secure and private. In addition, cloud is attracting some of the best IT security talent in the market, thanks to its fresh challenges, growth opportunities and increasing acceptance as the technology model of the future. Although security breaches are and likely always will be a threat, their likelihood is waning as cloud’s security underpinnings improve and providers gain experience.9 In situations where security and privacy are absolutely essential, companies have the option of deploying private clouds or using a single-tenancy environment to reduce their risk exposure.

The other major concern—that cloud will be a distraction—is rooted in the experience companies had with large, multi-year technology implementations such as ERP.  But cloud is actually the opposite. Unlike major technologies of the past, cloud can be purchased and implemented relatively quickly and without significant disruption to the business. Say a marketing organization wants to run a channel analysis for a new promotion and needs more advanced software to do the job. In a traditional IT environment, the approval process for such a software purchase—let alone the actual implementation—might take months. But with cloud, the organization can gain access to cloud-based analytics software and computing resources in days, often at lower cost. It’s a win-win situation; the marketing organization achieves its goals, and the rest of the enterprise goes about its business undisturbed.

Although a small number of IT departments are dragging their feet on cloud, many are thrilled that they can now focus more time and energy on innovation and less on infrastructure maintenance.

Fighting fire with fire

A hypercompetitive business environment demands invention and innovation, and cloud seems well-suited to those needs. Contrary to popular wisdom, its benefits accrue not just for startups and companies in technology and media. Incumbents in many industries can unleash the potential of cloud by focusing on their existing competitive advantages:  relationships, capabilities and assets, and data. Simply put, cloud could move the business performance frontier of companies and hence the value for all stakeholders. It’s time for incumbents to rethink how they do business.

     

Endnotes

View all endnotes
  1. <http://www.nytimes.com/2011/10/23/opinion/sunday/friedman-one-country-two-revolutions.html?_r=1>
  2. As measured by video subscribers from Netflix and Comcast’s 2012 10K filings
  3. Kiplinger’s Personal Finance, “Amazon.com’s Latest Saga Becomes a Page Turner”, August 1999
  4. <http://investing.businessweek.com/research/stocks/earnings/earnings.asp?ticker=AMZN:US>
  5. “The Power of One Voice” presentation by Andrea Marks, BCBS Chief Informatics Executive, IMS Symposium
  6. Eli Lilly Ties Future To Cloud, Information Week, September 2010, <http://www.informationweek.com/news/healthcare/clinical-systems/227400374>, Q&A: Eli Lilly On Cloud Computing Reality, Information Week, November 2010, http://www.informationweek.com/news/hardware/data_centers/228200755>
  7. <http://pubs.acs.org/cen/coverstory/87/8721cover.html>
  8. <https://aws.amazon.com/solutions/case-studies/yelp/>
  9. <http://www.wired.com/cloudline/2012/03/cloud-security/>

About The Authors

Ragu Gurumurthy

Ragu Gurumurthy is a principal with Deloitte Consulting LLP.

John Hagel III

John Hagel III, a director with Deloitte Consulting LLP, is the co-chairman of the Deloitte Center for the Edge.

Hem Desai

Hem Desai is a senior manager with Deloitte Consulting LLP.

Acknowledgements

The authors would like to acknowledge the contributions of Michael Raynor, Deloitte Services LP, Michael Bhandarkar and Ross Galloway from Deloitte Consulting LLP.

Cloud wars: How incumbents can respond to cloud disruption
Cover Image by Dongyun Lee