Cloud computing in businesses

By Richard Waters in San Francisco

Published: November 1 2010 00:15 | Last updated: November 1 2010 00:15

Cloud computing may be one on the most talked-about IT trends of recent years, but it has yet to make much of a mark inside big business. Like many new tech trends, the hype has far outweighed the business realities.

If that is to change, then it could well be projects such as recently undertaken by the tax division of ADP, the big US payroll processing company, that explain why.

Extracting data from its customers’ individual systems to prepare employee tax returns has been an expensive proposition, requiring separate engineering in the case of each customer to create the interface with ADP’s own systems.

As a result, it has only been economic to sell the tax filing service to large companies, typically with more than 1,000 employees, says Lori Schreiber, general manager of ADPs tax services division. But inserting a computing service delivered from the "cloud" into the middle of this process has now changed the economics of the business.

In ADP's case, the cloud service in question, from IBM, is a standardised way of "mapping" information from client systems so that it can be "read" by ADP's own systems.

As a result, says Ms Schreiber, ADP can now sell the tax filing service to medium-sized companies it could not profitably reach before. It has also been able to change the way it prices its service, potentially making it more attractive.

"It allowed us to promote it as more of a standard model, rather than charging for it as a professional service where we bill by the hour," Ms Schreiber says.

If cloud computing is to become more than an empty promise, it is this type of new business potential that will account for the shift.

IBM, which has just revamped its cloud computing strategy to base it around services like the one sold to ADP, says this highlights the way the new technology is likely to be felt in the day-to-day business world.

"Taking the operating cost out of service delivery" is one of the big opportunities for companies in many industries, says Mike Daniels, head of IBM's services division. The key, adds Erich Clementi, head of strategy for the company's cloud business, is the "extreme standardisation" made possible by the central delivery of a service. By streamlining Individual processes like this, businesses will be able to create more flexible services, and at a lower standard cost, he says.

As the ADP case suggests, this could open up new business opportunities. For companies in industries like telecommunications, financial services and media and entertainment, pushing some parts of their processes into the cloud will make it possible to "reach markets that weren't reachable before," says Frank Gens, an analyst at IDC. "It will become a fundamental part of the model for all companies trying to reach emerging markets."

Until now, most of the attention in cloud computing has been on the so-called "public clouds" run by companies like Amazon.com and Salesforce.com - centralised services where companies can buy computing resources in much the way they buy electricity.

Services like these have mainly appealed to start-up companies or those looking to create new businesses from scratch. Starting with a blank sheet of paper, designing a company's processes with no "on-premise" systems can be highly appealing.

But for most companies - with large sunk investments in IT systems and an understandable aversion to handing over control of their most important corporate data - this is too big a step to take.

Much of the focus of the big tech companies is now on refining these services to make them appeal to established companies. Mr Daniels compares it to the emergence of e-business in the early days of the internet: after a brief flurry of excitement over the potential of pure-play dotcoms to topple business leaders in many industries, the new technology was applied to enhance the operations of established businesses. It was Walmart, not Pets.com, that won the day, he says.

"The belief is, the money will really be in the enterprise loads, and no one has really untapped that yet," adds Paul Maritz, chief executive officer of VMware, which makes some of the key software for data centres that deliver cloud services.

The key to unlocking this potential are what the tech industry calls "hybrid clouds" - combinations of on-premise and remote, third-party systems that can be combined to create a service, much as ADP found with its tax-filing service.

To make this work, companies need to isolate individual processes that they can outsource, and accept a much higher level of standardisation in these areas, Mr Daniels says. He compares it to the standardisation that has already been imposed on many service functions inside companies, like human resources.

The same constraints are now being placed on the IT departments’ application programmers, he says. They will lose some choice in the platforms they build on and will have to choose from a narrower "catalogue" of IT services, but with significant benefits to their companies in terms of operating flexibility and cost.

These standardised services, in turn, will evolve to suit the needs of particular industries, bringing what IBM says will be a new addition to the IT lexicon: "industry clouds."

This is all a long way from the model of fully-outsourced, "public clouds that first drove interest of the new technology architecture. To the tech purists, it will smack of compromise, surrendering some of the scale benefits promised by fully centralised computing.

There's no question, you lose a lot of the economies of the public cloud," says Mr Gens. "As soon as you say ‘private', you're talking a higher price point."

Long term, that makes the full cloud computing model an appealing one. But for the foreseeable future, the gains seen by most businesses will come from more modest and achievable goals.

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