The promise of cloud computing goes far beyond simply providing software updates and dealing with growing server and storage requirements. It has the potential to transform the role of IT within the business.  

 

A huge cloud hangs over the future of IT.

 

After more than a decade of refining the Internet as a marketplace, the business world is grappling with the uneasy reality that companies can run almost every information system they rely on without owning any tech equipment. Thanks to the phenomenon known as cloud computing, businesses can rent access to applications and IT infrastructure that reside on the Internet, pay for them on a subscription or per-use basis and provide employees with access to information from anywhere at any time with nothing more than a connected device.

 

In theory, it sounds great. No more wrangling with software updates or growing storage requirements. And the days of having to expand data centers to make room for additional racks of servers to support a growing business? Gone.

 

Of course, the promise of cloud computing goes far beyond providing solutions to such headaches. It may, in fact, hold promise for transforming the role of IT within the business. The potential to one day subscribe to systems as a service could mean an end to wrangling with infrastructure decisions by letting a service provider sweat issues like server capacity, storage and bandwidth. Cloud computing also may prove to be an ideal strategy for reaping the full benefit of mobile devices by allowing companies to essentially push their IT environment out to employees, rather than employees having to get access to the IT environment.

 

But theory isn’t reality, and just because cloud computing holds promise doesn’t mean that’s going to translate into practical solutions for real business technology challenges—at least, not anytime soon. Cloud computing serves as a reminder that computing models constantly change. As businesses face increasing pressures to be as agile as possible, they’ll be forced to adapt to evolving computing models to remain competitive.

 

Like all technological advances, cloud computing isn’t without risk. For instance, there are security risks related to commingling your data with that of other companies. And reliability concerns arise whenever you depend on a third party’s systems to be up and running 24/7, as companies that rely on Amazon.com’s fledgling Simple Storage Service, or S3, learned when the service went down for two hours last month.

 

Still, IT folks seem willing to put up with the glitches in exchange for the potential benefits, as indicated by one online poster who chimed in on the Wall Street Journal Web site after reading of the Amazon outage. “Cloud computing may be new and may not be at telephone reliability,” wrote the S3 user, “but Internet hosting as a utility is a trend that’s well on its way.”

 

There’s plenty of evidence to back up such statements. On-demand application providers such as Salesforce.com and NetSuite have proven that there’s a market for so-called software as a service, or SaaS. Amazon’s S3 and Elastic Compute Cloud offerings, which provide storage and excess server computing capacity, respectively, as utility services, have been met with great enthusiasm. The tech industry’s old and new guards, IBM and Google, also have made strategic commitments to cloud computing, separately and in tandem.

 

This spring, IBM will roll out Blue Cloud, an initiative that lets IT departments benefit from cloud computing technologies within their own data infrastructure. Eventually, this effort could allow IT departments to build internal clouds that will link to the larger public cloud or to other private clouds. “However, our customers are telling us that’s not what they want today,” says Dennis Quan, chief technology officer for the Blue Cloud initiative. “What they want are the benefits of cloud computing to maximize their infrastructures and control the rapid growth in their data centers.”

 

Google, meanwhile, has been building a head of steam for its Google Apps, a suite of Web-based productivity and collaboration tools, such as e-mail and word processing, designed for use by consumers and small businesses.

 

And last year, IBM and Google announced a research initiative in which they’ll invest $30 million to develop a joint infrastructure cloud for universities that want to provide remote programming and research capabilities for their students.

 

Predicting the Weather

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What does cloud computing mean for the future of large-scale corporate IT? Will cloud computing evolve into a big, fluffy cumulus, allowing IT to transform from a perceived technology cost center into a strategic business asset? Or will it become a dark, stormy mass signaling the end of corporate IT as we know it?

 

The truth probably lies somewhere in-between, with large companies likely to apply a hybrid model in which they use cloud computing for noncritical systems and applications, while keeping sensitive apps and data on in-house networks. Before that can happen, they must be convinced that cloud computing holds value for them, and, to date, CIOs at large companies have been reluctant to venture too far into the cloud.

 

The way Marc West, CIO of H&R Block, sees it, cloud computing at its best offers corporate IT executives the perfect opportunity to break out of their technology shackles and raise their boardroom profile by allowing them to shift their attention from mundane technology matters to issues more strategic to the business. “CIOs are always talking about why we’re never at the table, why we’re never invited,” West says. “If you’re waiting to be invited, you’ll never be there. Figure out how to spur growth, not just deploy software.”

 

In other words, CIOs need to do whatever is necessary to avoid being considered a commodity. As IT becomes less of a market differentiator, it’s not enough for CIOs to oversee effective rollouts, integrations and development projects. Instead, they need to focus their efforts on articulating how to extract the most business value from each new technology. By turning to cloud computing, they can begin to shed themselves of some of the technological burdens that weigh them down.

 

Others believe that regardless of where the technology resides, businesses will continue to need technologists. The difference will be that IT departments will place higher value on skills like project management, quality assurance testing and business analysis rather than on traditional coding and development skills.

 

“You still need IT for acceptance testing, configuration and communication with the IT service provider,” says Sue Powers, CIO of Travelport, which runs one of several reservations systems used by airlines, hotels and car rental companies. “IT still needs to be involved.”

 

In any case, you’ll be hard-pressed to find a CIO who shares the views of Nicholas Carr, the former Harvard Business Review executive editor and current roughtype.com blogger who earned fame—and generated controversy—with his 2004 book, Does IT Matter? Information Technology and the Corrosion of Competitive Advantage. In his follow-up book, The Big Switch: Rewiring the World, From Edison to Google (W.W. Norton, 2008), Carr all but declares the pending death of IT.

 

“In the long run, the IT department is unlikely to survive, at least in its familiar form,” he writes. “It will have little left to do once the bulk of business computing shifts out of private data centers and into ‘the cloud.’ Business units and even individual employees will be able to control the processing of information directly, without the need for legions of technical specialists.”

 

Carr admits, however, that a time when IT departments no longer exist as they do today is probably 20 years off. Of more concern to IT executives is what to expect over the next five to 10 years. At the very least, they can expect cloud computing providers to beef up the main areas of concern: security and reliability.

 

Even as his firm contends with those issues, Marc Benioff, the CEO of Salesforce.com who built his company on the slogan “No software,” says the distress over the perceived lack of security of the “multitenant” model—in which multiple companies’ application instances are stored on the same servers—is overblown. Granted, Benioff has reason to promote such a mindset, but the analogy he uses, comparing cloud computing service providers to the banking industry, has merit.

 

“If you met a CFO who insisted on keeping the company treasury in a safe in the basement, you’d think that he or she were nuts,” Benioff said in an e-mail interview. “Why isn’t that money in a secure, internationally accessible system that’s reliable and highly available? I think we aren’t far away from a similar view toward data and applications.”

 

Looking for the Personal Touch

H&R Block’s West goes against the grain by not mentioning security or reliability among his primary misgivings about cloud computing. He believes there’s a more critical element missing from cloud computing software offerings that he’d like to see added: professional services supplied by a person rather than a machine.

 

West’s company has subscriptions to Salesforce.com’s on-demand customer relationship management app for isolated groups within H&R Block and has integrated it with an on-demand analytics tool from British software firm Datapoint. But the CIO would be more gung-ho about cloud software if Salesforce.com were packaged with, say, access to a marketing expert who could help organize sales initiatives and provide advice on how to get the most out of the software.

 

“The problem with the SaaS model is that it still isn’t helping the buyer get the value out of the technology,” West says. “It’s just a different way of paying for it.”

 

That’s why West suggests that on-demand application providers cut deals with professional services firms, allowing them to offer premium subscriptions that would include access to real-time expert advice. H&R Block took precisely that approach in designing Tango, its consumer online tax-preparation service, which, for $70, includes unlimited round-the-clock access to tax experts.

 

In the case of NetSuite’s on-demand accounting application, for example, West believes that bundling it with 24/7 access to 5,000 H&R Block accounting professionals would make it immensely more compelling for larger companies that need to do more than reduce their software costs in order to justify the switch from a client-server application to a cloud-style alternative. “That, to me, is the cloud,” West says. “It’s called ‘Do it with me.’ If I give someone the toolbox, that’s one thing. But customers want true self-service.”

 

To be fair, Salesforce and NetSuite have been tackling this area in varied ways. Salesforce’s Successforce services let customers add a professional services element that allows them to connect with either a Salesforce consultant or one of the company’s partners, such as Accenture or Deloitte.

 

NetSuite, for its part, allows partners to build their expertise into a complimentary offering by turning their services into software. This allows NetSuite to maintain more control over the level of service being offered. “Otherwise, it could become a bit of a crapshoot when it comes to the quality of those services,” says CEO Zack Nelson.

 

Minding the Store

It probably won’t be long before West, who supports more than 100,000 tax professionals, gets his wish, but his company’s needs are quite different from those of small and medium businesses. SMBs are more likely to want to put their IT operations in someone else’s hands so they can focus on their core business.

 

“We’re running our whole company on cloud computing,” says Brian Leffler, vice president of TTI Instruments, a 30-person firm in Williston, Vt., that sells industrial instrumentation. “It works great for us, and it’s a tremendous competitive advantage. It lets us concentrate on the most important things.”

 

Leffler’s experience underscores just how great a match cloud computing and small business are: TTI had been running its operation on Microsoft’s Great Plains enterprise resource planning software for small business, but the cost of licensing the software, provisioning servers and acquiring complementary software for niche tasks such as lead management became excessive. Leffler opted to switch to NetSuite’s integrated on-demand applications, committing to a five-year $100,000 contract to run the entire business.

 

In comparison, Great Plains would have cost TTI about $110,000 over the same period, plus the cost of the staff resources needed to administer the servers, back them up, install updates and handle any other maintenance tasks. Today, all 30 TTI employees spend pretty much all day accessing their NetSuite environment using nothing more than a Web browser. As a result, Leffler has become a believer in the promise of the cloud. “It saves us money every day we use it,” he says.

 

Leffler expects one of the traditional assumptions of IT—that having an IT department is a detriment to small businesses while larger companies need internal IT units—to face serious challenges in the future. “Over time, that line will be blurred, and even big companies will be embracing cloud computing,” he says.

 

That’s not to say traditional IT will disappear. Rather, as big companies become more willing to bring cloud computing into the mix, their IT departments will be able to focus on matching application functionality to business processes, rather than on upgrading and patching applications, or writing custom code.

 

Leffler sees the IT staff at General Electric, one of his biggest customers, struggle to make use of new technologies because of the sheer scale of any upgrades. “When you’re running IT for a 300,000-person organization, you’ve got a lot of constraints,” he says.

 

Among the constraints holding back big companies are incredibly complex business processes that have taken years to refine and often require highly customized applications to support them. As a result, one of the biggest benefits of cloud applications—the ability to exploit best practices without having to wrestle with customization—is also one of its biggest limitations. Larger companies that have been willing to try on-demand applications delivered via the cloud generally have limited their use to systems that aren’t core to their businesses, keeping highly customized apps in-house.

 

Travelport falls into that group, and CIO Powers says categorizing the company’s apps along those lines was a critical part of the on-demand strategy it embarked on a little more than a year ago. She settled on a list of vanilla, cloud-friendly applications that include customer relationship management, expense reporting, payroll processing, human resources and financials. These apps don’t provide a competitive advantage and don’t represent things that Powers feels are distractions from more core activities.

 

“When we made the decision, what it boiled down to was, What is the application we’re talking about?” recalls Powers. “If it’s something that’s highly customizable, that you have to use your way, then cloud software won’t work for you.”

 

Powers wasn’t about to cede control of Travelport’s core reservations system. However, she believes that over time, the ability of cloud software providers to make their products more configurable—meaning IT folks can tweak the functionality to match their business processes—will fuel growth in cloud computing.

 

In fact, Salesforce.com and NetSuite have been steadily adding customization capabilities into their products over the past year or two. Last fall, Salesforce added a service called Visual Force, which provides customers with a programmable user interface they can use to tweak the look and feel of a Salesforce app. And early this year, NetSuite introduced a business operating system to its on-demand lineup, giving customers tools that let them ensure their own custom code is compatible with the NetSuite framework.

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The fact that Travelport must maintain a sophisticated, well-stocked data center to support its reservations service has Powers thinking about turning Travelport into a cloud infrastructure provider. She’s looking at whether it will eventually make sense to rent out Travelport’s excess data center capacity during off-peak hours to IT departments seeking temporary access to computing power for short-term projects.

 

Jockeying for Position

This kind of service has been offered by companies with excess data center capacity over the past decade, but the maturation of the Internet, the standardization of infrastructure technologies, and the ascension of Linux and open-source software has made it much more doable and much more in demand.

 

In fact, the field for providing cloud computing infrastructure is likely to become a bit crowded, as companies like Amazon and IBM jockey for position.

 

In addition to Amazon’s S3 service, which essentially lets small businesses rent out unused space on the company’s vast storage network, the online retail giant is beta testing a product it calls the Elastic Compute Cloud. EC2 operates like S3, except that instead of storage space, companies rent out server capacity, adjusting it up or down depending on their needs.

 

Instead of sweating over the costs of infrastructure investments and server deployments, companies using EC2 get an invoice that looks strikingly similar to an electric bill, with charges based on minutes of server access and quantities of data moved and stored. Adding to the potential for the service, Linux software distributor Red Hat is beta testing a version of its enterprise Linux operating system that can be purchased as a subscription service in conjunction with EC2.

 

The idea, according to Brian Stevens, Red Hat’s chief technology officer, is to provide systems as a service, which he describes as a layer down from SaaS offerings like Salesforce.com. That could position just about any company not just to benefit from cloud computing, but also to contribute to it. “It could be used to offer SaaS to your clients or to have a remote data center,” he says.

 

Red Hat also is exploring ways in which its own IT department can put the Amazon cloud to work, namely by tapping it for software development projects that need server capacity beyond what’s available on the company’s internal network. That’s an ideal reflection of the potential cloud computing holds for corporate IT departments. “We believe in the cloud model,” Stevens says. “We don’t think it’s where everything goes, but we’re going to learn from it.”

 

Whereas Amazon evolved into a cloud computing provider as a way to maximize the value of its own IT resources, IBM committed to rolling out a series of cloud computing components under the handle Blue Cloud. The first of these products, expected to be available this spring, includes a package of blade servers and IBM’s Tivoli management software, and is designed to allow companies to essentially build their own clouds, running in their own data centers.

 

Eventually, IBM intends to offer an integrated stack of software, hardware and management capabilities packaged in a self-service Web 2.0 portal, says Blue Cloud CTO Quan. That would allow companies to book computing resources the way consumers book hotel rooms on the Internet. A CIO could reserve server time, automatically provision needed software, and provide “keys” that would allow employees to log in and do their work with only a Web browser.

 

Driving the need for such flexible computing resources are challenges such as escalating energy costs and scarce data center space. These challenges are getting in the way of innovation, as companies have to wait on—or completely forego—adding IT resources.

 

“It’s about business agility,” Quan says. “In order to get new projects off the ground quickly, with virtualization and automated provisioning, we can get that up and running in a matter of minutes. That’s a huge enabler of innovation.”

 

If the proponents of cloud computing are to be believed, that’s where the greatest promise of the technology lies: in spurring innovation. “Cloud computing will completely change the role of IT departments,” Salesforce.com’s Benioff says. “The IT department is evolving from being information technology to being innovation technology.”

 

The irony is that evolution has been occurring as the ability of IT departments to innovate has been shrinking.

 

As IT budgets have been challenged by the economic tightening of the past couple of years, development projects have been hardest hit, with CIOs having to commit the lion’s share of their resources to software updates, server provisioning, data center expansions and general maintenance of IT resources.

 

Cloud computing could change all that by making those IT budget mainstays an afterthought, allowing CIOs to subscribe to on-demand IT offerings and letting service providers take on those headaches. That would allow CIOs to commit funds to new development projects and even tap those on-demand resources as temporary development environments.

 

Given such potential, it’s no wonder that growing numbers of CIOs have their heads in the cloud.