Two reasons why the Cloud marketplace could destroy technology companies as we know them
We hear a lot about the potential impact of cloud, especially on the IT departments within large enterprises. Over the past few months I worked with many of the world’s leaders in the cloud space. Each of them has an impressive array of slideware, plans and some actually have really exciting progress to report. What I am missing though is their fundamental appreciation and reactions to what I believe are two fundamental paradigm shifts about to hit them and in extension us.
Liquidity of Assets and Brokerage of solutions.
Liquidity of Assets will dramatically alter the business model for many traditional service providers. The way I see it, over the next few years there will be a proliferation of innovative companies offering all sorts of cloud services. Infrastructure, Platforms, Applications and Solutions will all be offered in a very dynamic market place.
That market place is yet to evolve and we all know the logistical, legal and other challenges that are inhibiting that. So while those challenges remain I believe that we will quickly see an intermediate step being filled in through emerging Cloud Exchanges. A new model for this concept is already evolving at SwitchNap in the USA.
Take a look at the Switch Nap Cloud Exchange
As this type of exchange takes hold, all services will potentially be available in a very dynamic model. That means that pricing will be determined by the (immediate) availability of cloud solutions that meet our design requirements. That in turn means that the underlying value of assets are continually marked to market. In a world of liquid assets, no enterprise can afford to own assets. I even wonder whether traditional outsourcers can ever be profitable once this shift has occurred. That in my mind changes everything.
Brokerage of solutions.
Enterprises are best served by Cloud Exchanges as they allow us to retain back-end data in those secure centers and that helps us deal with a lot of our regulatory challenges. If I look at the business models deployed by the leading technology service providers, most still seem to see Cloud as an extension of Co-Lo and Hosting and that is where they threaten to derail. The future of Enterprise IT is as a broker of solutions based on our design criteria. We will be very hesitant to tie ourselves to new locked-in cloud solutions, especially when we have the choice not to.
Clearly, I am fairly convinced of these two trends and that these trends will cause untold upheaval in the technology market. What I obviously don’t know is when this type of exchange will emerge as a real market force. I don’t know how dynamic enterprises will actually be in choosing and switching cloud providers and I don’t know when these brokerage models will develop alongside the requisite matured tool-sets that make it all possible. I do know that we need to prepare our internal IT teams to live in a world where design and brokerage replace many of the more traditional working practices. It will take years of cultural adjustment and skills development, so let’s get started now.
Alan Nance studied Sociology and Business Administration and is a distinguished Fellow of the Institute of IT Service Management.
Alan's Perspective 
Very thought-provoking note, Alan. Thank you for posting it.
What would be the proposition to a large corporate that wants low cost, new capability and low risk? And would that proposition be much more attractive than the less sexy offering from the traditional service provider? (BTW I don’t work for a traditional service provider but have some experience of how large corporates make sourcing decisions).
Dear Alan,
Your post triggered me, as on one hand some people believe the market is on the verge of a new business model (and the first company to reach economies of scale will succeed against the others), and on the other hand you could run an interesting thought experiment. Let’s consider the situation from a risk perspective, not in the sense meant by traditional financial institutions but rather from the point of view of a company wanting to experiment with a new business model by disrupting some of the market rules.
Rule 1: reducing risk; for example by expediting your supply chain, like fashion retailers or fmcg regularly do; if your execution time could be just half than the competition, it’d mean a terrific advantage; even more, companies optimizing their supply chain gain usually much more than a faster time to market but also nice perqs like an engaging and entrepreneurial environment, which leads to innovation and so on; other aspects of risk reduction involves the traditional shift to vendors: why should a company, as you pointed out, owns the asset of their cloud (or hosting) solution; how far can you push the core IP of a company till a provider (or a broker) can fulfill your requests ? An how deep does your partnership have to go ?
Rule 2: adding risk; this is likely strategy for brokers, who could charge by the Watt/Time for example, to push clients optimize their utilization, or by their CO2 footprint; the first broker that can go beyond the pay-as-you-go and successfully re-shuffle the risk distribution will gain very fast clients attention.
Rule 3: transferring risk; beside contract and asset ownership, this could very well include a full array of capacity related issues; what about reverse auction to trade a cloud capacity (like what is done with grid capacities and in the oil industry) ? What about niche intermediaries trading capacity wholesale for a vast array of enterprises ?
Rule 4: exploiting (better) information; like the example service you mentioned, the company who can build smart algorithm to trade extra (even marginal) capacity will get a competitive advantage; the company that can translate the paradigm shift made in another industry into the cloud hype could be the one succeeding. Which paradigm shifts to look at ? From the airline industry to the alternative source of energies to the fashion retailers etc.
It’d be interesting to see how fast could such a new company reshuffle and adapt its business model. And how quickly could clients react into such a market. It could just be a spin off of an established enterprise, that could quickly play with such “market experiments”.
I agree it’ll take years to change enterprises DNA, but new quick players will be able to conquer a sweet spot much sooner and will lead the change that, inevitably, enterprise will come to embrace.
Best,
Andrea
@Andrea: I think you raise some very interesting thoughts on the dynamics of a new model. What is likely is that the development of a new model, especially with extreme elements like rule3/rule 4 is more likely to be a start-up or new substitutive entrant than an incumbant.
@Ernst The proposition for the large enterprise is exactly that which you describe: low cost, new capability and low risk. Today we spend millions developing new competence on our own assets that costs time and increases risk. If switching costs are low then risk is by definition low. If a cloud exchange offers low-risk switching between competences and capabilities then I believe that every enterprise will be interested.