Cloud computing has hit a tipping point.
What do I mean by that?
Cloud computing is now established as the default choice for application deployment. More important, the IT disciplines that accompany application design and operation are now cloud-centric.
This means application architects assume infrastructure transience, horizontal scaling, and topology partitioning (microservices). It means operations groups recognize DevOps is table stakes, now that infrastructure availability is measured in seconds or minutes, not weeks or months. And it means that IT groups are using services rather than implementing components, e.g., Redshift rather than Teradata. They want the function, not the support.
In short, cloud has won the hearts and minds of IT users. The significance of this tipping point is profound.
It will destroy the legacy data center-focused vendors.
The cloud giants will generate hundreds of billions of dollars of annual revenue.
And we will see the penetration of IT into every product and service — so much so that information technology will be invisible to us, as it will pervade every aspect of daily life so thoroughly that it will unremarkable.
Everyone is familiar with technology S curves — innovation follows a pattern of slow adoption at introduction, very rapid growth after proof of value, and deceleration when a market is saturated. Here is an example of an S curve mapped onto Geoffrey Moore’s well-known chasm model.
Cloud computing has now entered the steep growth phase of its lifecycle. I recently analyzed the latest quarterly results of the big three providers (AWS, Microsoft Azure, and Google Cloud, aka AAG). The chart below summarizes my revenue estimate:
As to the AAG growth rate, I wrote:
“The blended growth rate of the cloud providers, adjusted for revenue percentages of the individual providers, is on the order of something like 60 percent. This indicates the big three revenues might achieve something around $23 billion of revenues for 2017, $39 billion for 2018, and $62 billion for 2019.”
Some in the industry believe the big providers are nearing a rapid deceleration. One pundit predicted a dramatic drop in AWS’s growth in Q318 when it hits $18 billion in annual revenues. Not sure how he came to that conclusion, since he offered nothing more than an assertion as evidence for his opinion.
Frankly, that’s wishful thinking. There is huge current TAM (Total Addressable Market) for AAG to go after (more on that in the next section). There is no reason to believe that customer adoption is, for some reason, going to slow down.
In fact, it’s just the opposite. Google believes its cloud could run bigger numbers than its ad business. AWS believes that its business could be larger than the e-commerce side of the house. I know from personal conversations with AWS executives that they believe it can be a multi-hundred billion dollar business.
Over the next few years, we can expect to see the big providers grow to huge revenues. More important, the big provider clouds will become the default computing substrate for information technology, with the vast majority of applications deployed into these environments.
The second quarter of 2017 was terrible for the incumbent vendors:
While IBM and HPE both aver that they are in the midst of turnaround plans that will soon see their revenues turn up, one has to be skeptical. There is no evidence of this, and their presentations of their strategies are risible. “Enterprise strong”?
Dell is in a somewhat different position. Michael Dell bought both the eponymous Dell and EMC on the cheap and only has to manage for cash flow to pay off the loans that funded the purchase. A brilliant strategy … for Michael Dell. It’s not clear, however, how well a “grow share in a shrinking market” strategy plays out long-term. Industry observers recognize the horrible state of the incumbents in a tipping point world.
To me, the response of the industry is puzzling, and in this I include both vendors and end users.
Instead of recognizing the obvious, and aggressively planning for a cloud-first world, most seem to be beating a stubborn retreat, clinging on to the rapidly disappearing world of physical kit, and grudgingly acknowledging that “some” workloads will be deployed into cloud environments.
The mantra of the day is “hybrid IT,” meaning a mix of on-premises and cloud-deployed applications. The attitude seems to be “there’s a trillion dollar’s worth of IT equipment sold every year — so there’s a bright outlook for the future of on-premises applications.”
But people who push hybrid IT confuse today’s reality with tomorrow’s expectation. As we’ve just seen, the big vendors are hemorrhaging revenues. So they’re not going to contribute to that trillion dollars.
Others accept that the old hardware approach is dead, but believe the on-premises concept will be saved by hyper-converged infrastructure — in other words, there will still be a trillion dollars spent each year, just on different stuff, and maybe from different vendors.
The reality is that on-premises is in terminal decline and nearing collapse. Their revenue drops will accelerate as users continue to climb the steep part of the cloud S curve and IT spend shifts to AAG. The only question remaining is what the endgame is for these companies.
Looking at the user side of the equation, it’s a muddle. There are some companies all-in on public cloud. There are some that emphatically state that they couldn’t possibly use public cloud.
The rest maintain that, just like the vendors, they are pursuing a hybrid cloud strategy. The only thing is, they’re not. They use public cloud but their on-premises infrastructure is the same old legacy stuff. Private clouds are so rare they might as well be on the endangered species list. Cloudbursting is much talked about, but never seen.
All of this end user hybrid talk makes for better feelings all around. It doesn’t offend the legacy vendors who still need to be talked to about on-premises kit. It makes legacy application-focused employees less anxious about their job security. It probably serves as a talking point for the CIO when he or she is pointedly asked by the CEO about public cloud use and why things aren’t moving faster.
But it doesn’t solve the core problem: directing IT toward the future and focusing effort on the only thing that matters: applications. All of this hybrid talk masks the real issue: how quickly the organization can shift toward delivering business value rather than managing plumbing.
In a sense, the future of IT has never been brighter. Driven by the ongoing shift from atoms to bits (aka digitization), IT is moving from a role of cost center support organization to one of core product/service functionality provider.
But to succeed in this world, IT needs to become cloud-centric and drop the hybrid cloud subterfuge.
IT leaders need to make the following changes:
Cloud computing is the future. Any decision you make that does not take that as a given is a mistake. AAG will come to dominate the infrastructure world, and it’s crucial you recognize that and orient your strategy around it.
The cloud tipping point is a nexus between the past and the future just like the PC, X86, and tcp/ip were. They became the foundation upon which IT operated. Cloud is the next one, and it will be just as dominant as they were.
If every part of every application design, deployment, and operation isn’t centered around using cloud, you’re doing it wrong.
They invest $30 billion a year in data centers. They use machine learning to run them more efficiently. They have a history of cutting prices against competitors, who invariably lose, go out of business, or spiral into desperate financial conditions: Borders, Circuit City, Macy’s, et al.
Now you’re the competitor. Think you’re smarter than Macy’s? Have deeper pockets than Walmart? Understand your customers better than Borders? You’re fooling yourself.
And when someone in the organization comes to you and “proves” they can operate an application cheaper on-premises than in the cloud? Keep in mind that your job is overall cost management and that’s very different than comparing the purchase of a single server versus running a virtual machine on AWS.
Let me share an anecdote to illustrate the difference. During the period I worked at Dell (after it acquired the company I was with), I attended the inaugural Technology Business Management conference, which focuses on how IT organizations can operate like a, well, like a business.
I attended a session featuring a speaker from Dell discussing their adoption of Apptio, which sponsors TBM. He described how they started an initiative to track costs. The initial step was performing an inventory. They found 5,000 servers — 5,000 servers — no one would claim. That CIO was paying to depreciate the machines, power them, place them in a rack and connect them to a network, use a maintenance contract for break/fix, back them up, and monitor them.
All of that went into the IT budget. At Dell. A $50 billion revenues company. So don’t fool yourself you can run infrastructure better than AAG. You can’t. Don’t even try.
Yes, of course you have existing applications and infrastructure. Of course you can’t move everything right away. Some applications may never be moved because of constraints like contracts, licenses, security, or compliance.
But I see way too many IT organizations trotting out these issues like a security blanket to justify a go-slow approach. Hybrid is a constraint, not an ideal. Your job is to figure out how to reduce the on-premises legacy portion of the hybrid as much as possible, as fast as possible.
Then make it more aggressive. Your company will be fighting for its survival in the brave new digital world. The cliche of the day is to avoid being Uber-ed. The truth in that statement is that new competitors can pop up at any time and from unexpected directions.
Are you planning to have speed, agility, scale, and flexibility in your bag of tricks? Or are you going to be mired in the need to upgrade the network switch, or discussions of why it’s not possible to create a production mirror for testing purposes, or all of the thousands of details associated with running your own infrastructure?
You only have so much time to run your organization. Where do you want to focus it?
There’s a fair amount of discussion in the cloud world about the critical need for skills (and in fact that’s why I work in partnership with Simplilearn). Without advanced skills in cloud architecture and operation, you’ll just end up building the same old inflexible systems and placing them in the whiz-bango cloud for no net benefit.
The question is how to obtain those skills. One school of thought, which can be summed up as the Gartner Bi-modal IT school, advocates hiring incremental staff with needed skills. Another school advocates building skills internally, with a strong emphasis on maintaining morale — after all, if existing staff sees new employees brought in to work on new systems, won’t they feel bad?
The challenge is to build skills as quickly as possible. It makes sense to train existing staff because they have valuable system, organization, and company knowledge.
But make sure they’re willing to learn new skills. Another anecdote: I gave a presentation at a customer workshop on moving to a cloud-forward, DevOps-based development lifecycle. One attendee raised his hand and made the observation that his current job consisted of manually installing WebSphere, he was happy doing it, and he had no plans to make any changes in his tasks going forward, thank you very much.
You can’t live with that. The entire organization needs to move at the pace of the digital economy. And if existing staff can’t or won’t make the shift, they need to go.
That sounds harsh. But it’s your job as a leader. If you can’t make hard decisions about skills and staffing, you’ll deserve the pink slip that eventually lands on your desk.
Cloud computing has arrived at a tipping point. Technology tipping points are nothing new for IT. IT organizations have weathered technology transitions many times before: mainframes to PCs, LANs to the internet, RISC to X86.
The difference this time is what’s at stake. Previous transitions were internal to IT. If it took a couple of extra years to get off of the mainframe, well, maybe there were some budget hits, but it was not a big deal.
Cloud computing is very different, because IT is different now. Today IT is the core of a company’s products or services, along with how it markets and sells them. Not to mention how it engages with customers and partners.
In other words, IT is the most critical resource within companies. And missing the cloud tipping point isn’t an inconvenience. It means death in the marketplace for the company.
Any IT leader worth his or her salt that hasn’t got a high-priority all-in cloud plan, who is satisfied with a go-slow hybrid approach, who lets keeping a happy workforce take priority over moving faster, is a failure. Don’t let that failure be you.
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