IT as a Service and cloud computing is often described as disruptive (examples here and here), a paradigm shift (examples here and here) or some other term with similarly deteriorating meaning. However, beyond the buzz words, I guess one can make out a consensus around IT as a Service potentially having an impact on how enterprises use IT and on the IT industry. At the moment, cloud computing is technologically diverse and legally uncertain, but from a strategic point of view it is quite straight forward to see the implications and broad strokes of the future trajectory.
In essence, IT as a Service boils down to :
- Commoditization
- Vertical integration and disintegration
At first, these two might seem to mean the same thing and they are surely interconnected, but it is a mistake to think they are interchangeable. In this case, the technology itself implies vertical integration and disintegration (moving computing resources into the cloud), and commoditization is in part a result of that. Nicholas Carr have very convincingly described the commoditization of computing through cloud computing and the similarities it bears to developments a century ago. However, computing resources becoming a commodity triggers further rearranging of the value chain, which makes it practical to separate commoditization and vertical integration (and disintegration).
Continuing the analysis, the effects of the two factors above are:
- On the supply side – Changed industry structure
- On the demand side – Changed ways in which firms use IT to compete
Industry structure
The IT industry structure will change in two ways. Firstly, the commoditization means that profitability is likely to move or decrease (see Christensen on value migration – “Skate to where the money will be”). Secondly, migrating hardware and the software stack into the cloud and integrating it into a single offering will render some intermediaries redundant. However, the opposite is also enabled since the stack can be layered with actors buying the computing resources of the stack below them “aaS”, adding some functionality and selling the integrated hardware and software stack as a service (current examples includes Rightscale and Heroku etc.). As seen in the table below, this means that the three previously distinctly separated groups of actors; software supplier (e.g. salesforce.com), “web firms” (e.g. Google and Amazon) and hosting providers (e.g. Rackspace), will in part compete head to head.
At the moment, it is still uncertain “where the money will be”. When PCs became commodities, the value migrated down the stack to core components such as the processor, and up the stack to e.g. the operating system. For IT as a Service and cloud computing, Microsofts Ray Ozzie and others have predicted that value will migrate upwards. Additionally, Amazon’s Jeff Bezos have noted that Amazon’s accustomedness to low margins is key for competing in the IaaS space. It is also worth noting that several of the major players in IaaS and PaaS (Amazon, Google and Salesforce) leverage scale and technology developed for their original business areas (retail, search and enterprise SaaS).
The scale and consolidation of ITaaS will bring overall efficiency and increased value (through elasticity, diffusion of best practice etc.). However, it is still unclear who will capture that value. This question will be explored later on when the cost and price structure of cloud computing is looked into.
Firms Using IT to compete
Previously, firms would draw advantages from infrastructure and advanced proprietary software that would give capabilities and efficiency superior to its competitors. In a commoditized ITaaS setting, however, the best practice is available to all competitors as a utility. Instead, advantages will be drawn from an organisation’s ability to use IT.
This is a fundamental difference since the three-letter acronyms developed over the last two decades have increased control over users and entailed large investments. The type of collaborative and participation tools associated with web 2.0, on the other hand, emphasise users driving the development and creating the value. In this way, the advantages of IT are more tightly connected to the organizational capabilities of a firm. Since many collaborative tools benefit from centralised data (as is the case of cloud computing), there is an interesting connection between ITaaS and increasing marginal value – web 2.0.
To summarize, ITaaS brings the possibility of substantial changes. The sweet-spot of the IT industry will eventually emerge, although the best guess seems to be the top layers of the application stack: SaaS and PaaS (and the lower virtualization and hypervisor layer at the core of the cloud, constituted by VMware and Citrix’s Xen). On the demand side, ITaaS will bring scale and IT best practice to all competitors, turning IT resources and capabilities into threshold requirements and instead make effective IT usage a core competency.
