Pinning Down the Cloud

By MICHELLE PRICE

The world of information technology is stuffed with bewildering acronyms and new-fangled fads, but cloud computing is one technology phenomenon not to be dismissed.

Likened by some technophiles to the Industrial Revolution, cloud computing is already transforming the world around us and it promises to shape our future world too. Despite its growing importance, however, many companies are struggling to pin down exactly how this technological miracle can truly benefit their balance sheets.

The practice of cloud computing is something with which consumers all over the world are already relatively familiar, even if the term itself leaves the lay technophobe scratching their head. Sending an email using a third-party Web-based email service provider, such as Google Mail, for example, is a basic form of cloud computing.

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IBM

Christian Klezl, vice president and cloud leader at IBM in Northeast Europe

In this example, a user accesses a Web-based application maintained by a third-party via his or her Internet connection and browser. The email application itself and all the data it stores exists not on the user's own computer but is delivered as a service via "the cloud" of the Internet. "Cloud computing represents a paradigm shift in how IT infrastructure and software are delivered and consumed," says Christian Klezl, vice president and cloud leader, for International Business Machines Corp. in Northeast Europe.

This shift is most pronounced when viewed within the context of corporate IT. Companies have traditionally purchased or developed software application products and maintained that software themselves. Most large companies, for example, operate and maintain their own corporate email systems.

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John Weber

The cloud-computing model represents the "natural evolution" from this proprietary approach to software provision, says Mr. Klezl, by enabling IT products to be consumed as services. These services are provided by a third party over the Internet and can be consumed on-demand and on a pay-as-you-go basis.

"Cloud computing is built on the concept that you have a distributed spectrum of users who can source data or services from a centralized pool of resources, at any time in any place, when they need it," he says.

Power provision is a commonly used analogy. Most homes and companies do not build and run their own onsite power generation but instead source electricity from the grid when they need it. This model allows consumers and companies with varying power requirements to scale their power consumption up and down at their convenience, and to pay only for what they use.

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Jason Butcher

Simon Wardley, a researcher at CSC's Leading Edge Forum, a global research and advisory program for CIOs

Cloud-computing advocates envisage the IT phenomenon in the same terms: "With cloud computing we're seeing a shift from an IT product-led world into an IT service or utility world," says Simon Wardley, a researcher at CSC's Leading Edge Forum, a global research and advisory program for chief information officers.

The building blocks of cloud computing have existed for nearly a decade, but the IT model has only gained major traction in recent years as its enabling technologies, such as broadband, have developed, and as business processes and attitudes have matured.

Together, these developments have conspired to promote cloud computing as a major force in the global IT market, from NATO to manufacturing giants such as Siemens AG. By 2015 some 50% of Global 1000 enterprises are expected to use cloud computing for their top 10 revenue-generating processes, according to Gartner Inc.

For such institutions, cloud services offer many benefits, not the least of which is cheaper IT. "Cloud gives you economies of scale and allows companies to establish a closer link between what they use and what they pay," says Mr. Wardley.

By allowing companies to mobilize IT resources quickly, cloud computing also improves business agility. "From an institutional standpoint, the benefits of cloud computing are concrete," says Alan Goldstein, chief information officer for BNY Mellon Asset Management. "You're able to more rapidly deploy infrastructure and applications and to scale-up horizontally. That ability to be able to rapidly provision is really meaningful in terms of expediting speed to market."

Because cloud-computing is a Web-enabled phenomenon, the model also allows companies to access their IT services and the data stored in it from anywhere in the world. "The key for us is to be able to run our business and access our business data anywhere in the world," says Dominic Shine, chief information officer for Reed Exhibitions, a conference company that uses around 10 different types of cloud-based services.

But while improved cost-efficiency and greater business agility are attractive, what really excites cloud enthusiasts are the macro-economic possibilities.

Many cloud evangelists believe that the phenomenon enables companies to boost overall productivity by allowing them to satisfy what Mr. Wardley describes as the "long tail" of unmet demand for IT resources found within most firms. This has led some experts to liken cloud computing to the Industrial Revolution.

Far-fetched though this may sound, research published by the London-based Centre for Economics and Business Research in December seems partly to reinforce this view. It predicts that the increased productivity, job creation, business development and competitive advantage brought about by cloud computing will generate an additional €763 billion ($1.04 trillion) in economic value and will create some 2.4 million jobs in Europe during the next five years.

But not everyone will benefit equally. Cloud-computing—like the Internet it is enabled by—is a disruptive technology. By making IT cheap and accessible, cloud services threaten to lower the barriers to entry in a number of industries and in some instances may undermine the prevailing operating model.

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Eric Millette

George Hu, executive vice president for platform and marketing at Salesforce.com

"One of the unique things about cloud computing is that it's a very democratic technology," says George Hu, executive vice president for platform and marketing at Salesforce.com, the 10-year old enterprise cloud-computing company that is widely regarded as a poster-child of the phenomenon. "It's the first technology that can service companies of all sizes."

Reed Exhibitions' Mr. Shine agrees: "Years ago, if you were a small company, you had access to a small number of vendors because that's all you could afford. But today, small companies can access the powerful IT of their larger rivals. If I were setting up a start-up, I would run the whole thing from the cloud."

Barriers are also set to be pulled down in the consumer world where cloud computing promises to make software increasingly accessible and easy to use. Take Google Inc., another icon of the cloud-computing age. In December, the IT services giant launched a prototype laptop that requires no software to be installed whatsoever: All applications and data are stored and delivered by Google via the Internet.

The Google prototype provides a glimpse of a future in which users are not required to pay up-front for software, or negotiate painful software installations, upgrades and anti-virus programs. Instead, all applications and data will be stored in the cloud, which consumers will be able to access from any location.

Mobile technologies are rapidly making this a reality. The emergence of the super-functional smartphone and tablets, such as the iPhone and iPad, are bringing cloud-based applications, such as the hyper-successful social networking application Facebook and the micro-blogging application Twitter, onto mobile devices—along with a wide range of other applications. By moving onto mobile devices, applications guarantee their own ubiquity and relevance.

In time, more and more cloud-led IT services will follow suit, including business applications, says Mr. Hu. "The Facebook model is now the new model for the future: Why can't business applications be like Facebook? That is, inherently social, in the cloud, and accessed more and more through mobile devices."

Cloud computing is still an evolving IT model, however, and some IT chiefs believe it will take time for all companies, particularly highly regulated industries such as financial services, to embrace it.

"The cloud will be important in people's IT strategy: The prize is pretty considerable," says Michael Fahy, global head of IT infrastructure at investment bank Nomura. "But the commercial model is not yet sufficiently developed to operate on the scale we want to operate on, and there are still questions around data security."

The European Union shares these concerns; last year it recommended the creation of standards and a regulatory framework for cloud computing. But this is unlikely to impede the technology's advance, believes Mr. Wardley: "Do you have a choice when it comes to the advance of cloud computing? Not really."

Ms. Price is the Trading and Technology Editor at Financial News in London. She can be reached at michelle.price@dowjones.com.