I have almost taken it as an article of faith that small- and medium-sized business are leading the way in cloud adoption. The seemingly unassailable logic was that these firms tend to be unburdened by investments in legacy systems, and are therefore free to take advantage of the low-barrier-to-entry computing capabilities offered by the now robust cloud market.
So when I saw Computer Economics come out with a report that challenged my preconceived notions, I was jarred. Here specifically was the observation:
“Half of the large organizations surveyed have adopted SaaS technology, compared with 32% of midsize organizations and 34% of small organizations…Likewise, the larger the organization, the more likely it is to be making new investments in SaaS.”
My next call was to Frank Scavo, the president of Computer Economics, to have him explain what I felt was a counter-intuitive finding. He patiently shared his take. In the end, his facts trumped my opinions. Below, more specifically, is what he had to say:
BTR: Frank I don’t know how many times I’ve stated…and worse…written…in public forums that SaaS adoption is led by the nimble mid- and small-segments of the market, suggesting that large firms are lagging behind. Your research seems to debunk my point of view. Can you tell us a little bit about how you came to your conclusions…and did the findings surprise you?
Well, I came to this conclusion because that’s what our survey indicated. And this is not the first time that we’ve had this result. We have had surveys in the past that have found larger percentages of large organizations adopting software-as-a-service offerings compared to mid-sized and small organizations.
It is counter-intuitive because IT professionals generally assume that smaller companies without significant IT staff or IT skills in-house would be more likely to go outside for application systems. But as it turns out, large companies have the same types of constraints. While large organizations may have larger IT staffs…and they have large infrastructures in-house, the same organizations are in situations where they are completely consumed with maintaining their existing systems. As a result, when a business leader wants to do something new, he or she goes into the queue of “system requests” that may take a year, two years, three years or longer before it is addressed.
So rather than be dependent on the resource constraints of the IT department, business leaders in large organizations often find that it’s faster and more efficient to simply go with a cloud service.
BTR: So this phenomenon – the one you just described – has often been labeled the new “shadow IT” — the new workaround for unresponsive internal technology service organizations. It sounds like you are suggesting that cloud adoption by large organizations is happening outside of the IT organization’s control…is that right?
I have a little bit different view than the conventional wisdom concerning Shadow IT. My observation working with large companies is that much of what is referred to as shadow IT is actually not in the shadows – it’s very much in the daylight and openly known.
So if the CIO or the IT director knows about a cloud system being procured and deployed and he or she approves that decision, then you can hardly refer to that as shadow IT. While business leaders may be pursuing cloud resources, increasingly, it done with the CIO’s blessing and approval. You’re seeing much more of a situation now in large companies where the CIO is a part of the decision to allow the business unit to procure that system directly. The IT organization will even be involved in the deployment from the standpoint of firewalls and access…as well as take care of any integration that may be required to connect [the cloud service] to existing systems.
But the system decision and selection and the funding of that system will largely be done through the business units directly. So I see it more as a cooperation between the IT organization and the line of business rather than an either/or type of decision.
BTR: Some people see the trend you are describing, and then suggest that the CIO role is being transformed into a “Chief Integration Officer” role. Do you see this happening…and is it something that the IT profession is embracing?
I see it as an evolving best practice. It was true in the past that IT leaders — very many of them — were highly opposed to business leaders going out and procuring their own cloud services. But IT leaders themselves have become more mature and understand that this is an excellent deployment option for many systems.
For instance, today, I estimate that there are more cloud-based CRM systems being deployed than on-premise systems. And IT leaders know that those are very good solutions and they need to get behind them. And as the process matures, we are learning that cloud systems are not only convenient for business leaders; they’re also convenient for the IT organization because it does take demand off the internal IT staff and allows the organization to fulfill its IT mission more efficiently. So enlightened CIOs realize that cloud systems can be a good thing for them as well.
BTR: One of the compelling observations in your report is that SMBs might be even less likely to make the same range of cloud investments as larger organizations. Is part of the reason why they’re slower…or adopting fewer cloud services per capita…because they have fewer needs? In other words, have they already made their cloud decisions, and because their needs are simpler, their cloud portfolio is simply less robust?
Well, my observation of smaller organizations — and here we’re talking about organizations with revenues in the $50 million to $350 million range — is that many of these are actually slow growth and even mature companies. As a result, they probably already have an existing set of systems that are — for better or for worse — already working within the company.
So for these companies, there’s no need to make a change. Small- and medium-sized companies very rarely throw out an existing legacy system that works satisfactorily just because it’s an on-premise system. So smaller organizations simply have fewer opportunities for swapping out systems,
Larger companies, by contrast, have a lot of moving parts. Their complexity creates more opportunities to deploy new systems. So in this context, cloud becomes an option.
I wouldn’t say that small or mid-sized companies are less likely to go to cloud solutions. I would say that when there is an opportunity to buy a new system, they are highly likely these days to go with a cloud deployment. It’s just that they make changes to their applications portfolio less frequently than large companies do just because they tend to have fewer systems.
BTR: What about the flip side of that with the high-growth SMBs?
Well that’s different. High-growth SMBs these days are very likely to be looking at cloud deployment because they are looking at limiting their investment in IT infrastructure, which is a fixed cost.
They’re looking at the ability to rapidly scale systems to support company growth, they’re looking at faster time to value. This is something that cloud systems offer versus on-premise solutions. So there are a whole bunch of reasons why cloud is very attractive for high-growth SMBs. In fact, I would say that is a very attractive segment for the cloud providers to be going after.
BTR: So it is important to understand that not all SMBs are alike. Indeed, it may well even be the case that there are fewer high-growth SMBs than mature SMBs. It is an interesting point. However, either way, between high-growth SMBs and large companies that are leveraging cloud solutions to solve a growing portfolio of problems, those who adopt these services are probably investing in several cloud environments at once. How do you see the issue of cloud complexity — or cloud sprawl — being addressed? Doesn’t this make it more difficult to control, manage and protect your corporate information?
The cloud providers realize this is a key issue. I would say that, so far, they’ve done a good job of providing application programming interfaces — APIs — and web services that make this data available between clouds and between on-premise systems and cloud systems.
So I would disagree that cloud deployment makes it more difficult to get hold of your own information. I would say that modern cloud architectures, in fact, are very open and allow for both data integration as well as import and export to be done in a much more friendly way.
A lot of the leading cloud vendors — like Workday — have introduced their own Big Data initiatives that allow you to access the many terabytes of information within Workday but will allow you to import other data from your existing systems or from public sources and integrate the information into a full-blown business intelligence and reporting system within the Workday architecture. So I would say the whole business intelligence area, as well, is being disrupted by cloud deployment.
BTR: Fair enough. As the adoption trend continues, what is your view on the cost/benefit analysis for cloud adoption? How much money can SaaS – for instance – save organizations? Does it actually produce savings, or is this really part of a more complex discussion about shifting from a CAPEX-oriented IT funding model to an OPEX one? Or more simply, what is your take on the financial or business value that SaaS brings to the equation?
FS: As you know, the name of our research firm is Computer Economics, so we’re highly interested in the economic characteristics of information systems including cloud systems. We’ve just run a separate survey on this very issue and we’re still analyzing the results on the basic question: “Does cloud save money?”
And the short answer, right now, appears to be…yes.
Cloud, when fully implemented within an organization, does provide significant cost savings over an on-premise infrastructure. The separate question on whether moving from CAPEX to OPEX is a major driver behind cloud systems, really varies by organization.
Some companies would actually prefer to have CAPEX investments because it allows them to make large investments that don’t have to hit their income statement over the short term. So it helps them from that standpoint. Other organizations prefer OPEX because they’re looking for ways to accelerate expenses into the current period and are looking from a tax standpoint to maximize their operating expenses.
So it really depends on where the organization is from a financial standpoint. But either way, I would not say that the CAPEX/OPEX discussion is the main driver to cloud systems.
From an economic standpoint, the main benefit is that you now have flexibility so the attribute of cloud systems called elasticity — which means I can scale up or scale back usage of a system depending on actual business volume — is a very important characteristic.
If a company is in high-growth mode or in a highly cyclical environment — where their need for the volume of business transactions varies from period to period –cloud systems are scalable and elastic. It allows you to vary the cost of those systems according to your actual usage.
This is in contrast to on-premise systems where you make a fixed-cost investment in a system, both in terms of the infrastructure and perhaps the number of users that have access to that system. Those costs are going to be fixed over a longer term basis. So cloud systems have an advantage really in terms of elasticity of costs and flexibility for changes in business volume.