Field Insight #1: Is Public Cloud the Dinosaur extinction event for IT organizations and CIOs?

This is the first in a series of "Field Insights" - insight from conversations I am having with executives at some of the largest global organizations in the world.


The genesis of this article comes from a conversation with the IT and development leadership of a Fortune 100 company: specifically the enterprise architects in the centralized IT organization and engineering/development management in one of its business units.  The company's centralized IT organization is building an internal private cloud for deployment of PHP applications to be leveraged by all its various business units.  However, the business units are comparing the internal cloud offering against the cloud offerings of Amazon, Rackspace and other public cloud providers - time to market, flexibility, speed of ramp-up, etc. being the selection criteria.  


In fact, one of the business units deployed one of their largest applications (especially from a brand perspective) on Amazon's EC2 infrastructure (and their goal is to eventually move all their applications to the cloud - internal or public - within the next 18 months).  This one application gets about 60 million hits on a certain day every week:  amazon's cloud infrastructure is perfect for them since the flexibility of being able to provision 100+ additional servers that day, and then bring them down gives them the most efficient cost structure aligned with their variable need.


A couple interesting implications of this deployment into the public cloud by the development organization:

• The development organization deployed the application into the public cloud, without needing approval from the centralized IT organization.  This means, centralized IT lost the ability to enforce their architecture/security policies on the business unit.
• Payment to Amazon is being done directly by the development organization.  This means, centralized IT lost the budget they used to charge-back to the business units.

This example demonstrates that CIOs and Internal IT organizations now have a new competitor in the public cloud providers.  In order to effectively compete, and stay relevant to the business units, they need to deliver platform as a service capabilities such as rapid provisioning of completely built development environments, standardized deployment, auto scaling of production environments and metering of usage to create the appropriate chargebacks.

There are also significant implications for vendors:

• The procurement and legal approval process for vendors to sell to this company are extremely stringent (3-6 month process with significant concessions needing to be made by the vendor). Vendors can now significantly reduce the effort and time to get approval to sell into company, by creating AMI instances with their software pre-provisioned, and allowing Amazon to become their reseller.  The development organization when procuring the additional 100 AMI instances can easily add the vendor's version of the AMI instance to their cart.  They pay Amazon (which has already been approved by their procurement/legal team) and the vendor gets paid by Amazon.  
• A key benefit for the development organization is that they pay for the vendor's software in the same way they pay for amazon AWS usage - based on utilization.  This means that the vendor has to create pricing to align with utilization.  If you are selling annual subscriptions, you can set the per hour pricing to be slightly higher than the cost of an annual subscription ((subscription price)/(365*24)), or if you sell perpetual licenses you could set your pricing to be amortized over the 3-5 year amortization schedule of a perpetual license. 
• A vendor's cost of sale declines significantly since they just need to focus on helping the development organization understand the value of their software.  The marketing is done by Amazon, the procurement/legal costs are almost completely avoided, and you do not leave money on the table for excess utilization.

Here are some cloud statistics from the eweek article, IT Cloud Services Spending to Reach $72.9 Billion in 2015: IDC Report. Cloud computing will continue to reshape the IT landscape over the next five years as spending on public IT cloud services expands at a compound annual growth rate (CAGR) of 27.6 percent from $21.5 billion in 2010 to $72.9 billion in 2015. But the impact of cloud services will extend well beyond IT spending, according to research from IT analytics firm IDC. Cloud services are a critical component in a much larger transformation that IDC expects will drive IT industry growth for the next 25 years, the report said.


In 2015, public cloud services will account for 46 percent of net new growth in overall IT spending in five key product categories – applications, application development and deployment, systems infrastructure software, basic storage, and servers, according to the report. 


Definitions

Instances: These are the virtual machine instances that have been launched from an AMI. They can be in different states such as 'starting', 'running', and 'terminated'.

AMIs: These are the virtual machine images that you use to launch instances. They will have an OS and typically some software stack pre-installed for your convenience (Ubuntu 9, Zend Server -> pre-installed and running ready to serve your PHP apps when an instance is launched).