BUSINESS
We might as well call information technology (IT) as business technology (BT), for it is difficult to think of any business without it today. DNA
We might as well call information technology (IT) as business technology (BT), for it is difficult to think of any business without it today. And cloud computing is fast becoming a major trend. So much so, with the complexities growing due to cloud and virtualisation, etc, there is going to be a major round of consolidation in the IT industry, Peter O’Neill, vice-president and principal analyst of Forrester Research, told DNA in an interview in Washington recently. Excerpts:
How is cloud computing panning out?
Cloud is much a bigger trend. It’s a trend that keeps coming up for discussion at every IT event all over the world. Cloud just a metaphor for IT being provided as a service rather utility. This means the customers, the business users or business buyers are taking control and finding the service when they needed. That’s why self-service is proposed as a pre-requisite for cloud. They pay for only what they use and nothing else. So, it is pay per use. Usually, in terms of economics, the cloud provider will provide that service as a standard service and service many different customers from the same infrastructure or a multi-tenant system. The spectrum of cloud applies to an Amazon right through to the IT organisation of a multi-national enterprise, which also needs to think that way. Sometimes, the IT organisations of multi-national enterprises will provide clouds to the IT organisation of the business units.
So it forms a supply chain. It has an impact through the whole market. The most major impact is on the vendors. Every vendor of the software, hardware and service will have to sit back and think hard on what role it would be playing in the cloud supply chain. Some of the vendors today, who still have ambitions to have direct sales forces and sell directly to customers, should not be doing that in the future and should be selling technology to some of the cloud providers. And the cloud providers or service providers should be thinking about the new channels of market to go to market. There is a real sea change going on in the industry and the way IT is used. It’s a big change.
But some IT companies are seen re-strategising on the change in the revenue flow primarily due to a negative impact on licence sales. Is that actually happening?
The business model in cloud is different. The business model has an impact on how you collect money, how you pay your sales people or how you compete. A new customer, who pays per month per use, is paying you in the first year less than when you go out and sell the licence.
But that evens out after about three years since the models are all three-year models. I heard many enterprises say that if they use software as a service for more than three years, they would end up paying more. But they neglect to calculate that when they usually buy upright and if they install on premise, they need people to manage the system and the system itself. So, if you get that number, the revenue would be the same, but it is structured differently. That’s why some of the existing software vendors do have a fear that their business models and their quarterly reports are based on the licence sales and if they moved towards the cloud-based models, their revenue model would change for about six months before it comes to normal again. They need to adjust and they need to make sure the market knows that. They need to hold out for that six months and need financial strength for that. Larger companies might be able to do that. The problem is more for the smaller companies.
Where is the cloud being adopted? Is it taking shape somewhere or is it still at a concept stage?
The adoption is happening in Asia at this moment. In the Asian markets, India and China and other countries face the issue of lack of resources. An enterprise that needs to employ people and run software infrastructure can’t find people. So this makes Asia the right market for cloud. In Europe, there are some emotional inhibitors like security and where should customer data be kept and so on. The law says it should be maintained within the EU. But, you hear German people saying it should be kept in Germany and the French say it should be in France. Usually, IT people being clever, they try to protect their empires or turfs. That will probably go away in a few years’ time. And it is lower in Europe than it is in the US. But the adoption has been quite dramatic.
Within Asia, anything specific?
Within Asia, the adoption is more in China, Japan and South Korea. The reason is lack of resources. It is a good alternative to take the service from a cloud provider than taking in 13 or 14 people.
What are the biggest trends that you notice as the industry comes out of recession?
The market is coming out of recession. Now it looks very different from what it was three years ago. Enterprises have specially learnt that they have understood the investments in IT much better than the financials or business benefits. They will maintain that imperative even in a growing economy. So, technology for technology sake as a trend will go away. The other thing is the users and buyers because of the social media and discussions among themselves are no longer interested in features and benefits in technology differentiation. They think it is more a commodity. So, it is going to be important for the industry and the vendor side to work very hard on their marketing, to present brand, to present value propositions and to understand their customers better. In the way the IT industry has grown up and will grow up, it is still pretty new. The industry is about 30-35 years old. If you take the other industries like automobile, it is all around the marketing and not about the product. If it is a product, it is presented through good marketing and not based on features. That’s what we are learning in IT companies as well.
Apart from virtualisation and cloud, are there any other trends that are visible at this point?
Virtualisation and cloud are actually one story. The other major trend is the focus on mobility as the end device. There is such a variety of end user devices out there, the enterprises will have to deal with them through various applications.
What is there in the cloud to be called as a trend?
In terms of cloud, what the IT organisations of enterprises are doing is addressing their requirements making private clouds so important. So, they address security concerns, service levels and say we provide the same thing through our data centres. Others are looking at a hybrid model of public and private clouds. So, the IT is becoming middle man or service broker in terms of technology services to be provided to the business users.
Is IT still a separate business particularly at a time when every sector of the industry is depending on technology?
We said we need to get away from this idea or stigma that IT is special, magic or a difference. IT stopped being like that. It has become a part of the business. It’s all over the place anyway. So, it is more business technology (BT) than just information technology. Even at Forrester we measure companies on how far they are on moving from IT to BT. Whether they are buyers, users or vendors. So, we push the ‘IT to BT’ story.
Can you elaborate on the IT to BT story?
Let’s think about it in terms of an enterprise. For instance, HP has something called business service management (BSM). The idea in BSM is you no longer to report to business user (about the technology). The server A, B and C are running at 99.99%. The business users do not care and they don’t know what the server A, B and C are all about. The user wants to know the order tracking and the order to cash business process. It is the BSM that takes care of the technology and the order tracking. So, it is more business technology and not IT. The business user has to worry only about order-to-cash process and not IT. But this order-to-cash process might as well involve a dozen different applications.
How is the cloud going to change the business models of the IT companies?
Cloud will change their models. My main fear at this moment is that now that the market has picked up and the established product vendors are going to have growth anyway they have nothing to worry about it. They do business as usual. But in few years they are going to be pushed away by cleverer IT vendors since they would present themselves much differently and have channels the technology vendors would have never thought about.
So, will the changing scenario bring about another round of consolidation in the industry?
There is massive consolidation. I think HP will do many things this year. IBM is also going about it. In fact, there are too many companies in the industry at this moment. So, yes, there will be consolidation and strategic moves will happen as well. One of the major reasons for this to happen is the maturity in the industry. Cloud is demonstrating that. So, people are going to call cloud every time they do something now. It’s the hype word we have now.
But, don’t you think the industry is facing yet another round of recession due to issues in non-US markets?
Sometimes, I see pessimism everywhere only among journalists. When I talked to business people, the Greek episode or currency issues is not seen affecting their businesses. They feel it is funny money going on between the banks and stock markets, etc. So, the situation is little bit apart from the reality. The general feeling in the industry is about a lot of optimism. Everybody has a backlog of things to do. Our own forecast for the IT market is an aggressive 7.6% growth and that has not changed.
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