Making money as a Cloud Provider

The percentage of IT budgets allocated to Cloud services continues to increase as the use of as a Service" becomes a mainstream strategy for enabling the full spectrum of business activities.
The now famous "Capacity-utilization" cloud business model adopted by Amazon (http://aws.amazon.com/economics/ ) highlights the revenue potential of moving consumers from a fixed to variable usage-based cost model. However, though Cloud revenues are increasing, the profit margins for lower value-add services such as commodity cloud storage are shrinking. Fortunately for new market entrants selling commodity capacity is just one way to make money as a provider of Cloud services or as a supplier to those providers.
Providers who consciously and deliberately identify which combination of business model elements to adopt in support of their Cloud service offerings, and who have a clear strategy for making the necessary business model transformations, have a much higher probability of successfully exploiting the potential of cloud. {"reaping the benefits" is an option; you had "exploiting the benefits"} However, this transition to cloud, an on-demand business model, can be very rough for a provider used to selling custom, high-end services to established large enterprises, or for a hardware or software vendor used to getting paid up front (one-time charges). Taking on cloud characteristics means learning to support a one-to-many paradigm; changing cost allocations from an engagement to a service offering (product) basis; and getting used to an annuity revenue stream.
In this session we will present the following cloud business model elements that cloud computing and service providers can adopt to build greater ROI.
* Seek buyers with complementary consumption profiles to drive higher asset utilization (yield curves)
* Over-provision and commoditize resources to drive higher returns
* Develop operational efficiencies to improve price and/or service level objectives
* Enable better access to market choices to optimize license costs
* Offer aggregation and integration solutions (which help customers build customer market share and maintain coherent IT architectures) to expand the revenue opportunities
* Shift to "Appstores" and self-service (sales) channels to reduce sales costs and to expand the addressable market
* Build services for adjacent markets and/or build service options and add-ons (service variations) to expand the market opportunity horizontally and/or vertically
* Manage risk to increase outcome revenue and margin
* Use creative pricing and charging mechanisms to increase outcome return

Why insight and intelligence will matter to you and your business

While business and technology environments shape events, developments also shape what these environments mean and change seems to be faster then ever. So insight and knowledge of the environment and behaviours will be essential in being able to better understand how best to respond and position you and your business.

The word "transformation" is a description of the alteration in a state of a system. But while transformations have been going on for as long as recorded history, transformation of the developments and behaviours have become more intertwined.

Lessons learnt from AI and the computer gaming industry

The development of artificial intelligence AI has long been a goal since the 1950s and the developing of computer programs for chess gaming. Not until the 1980s did computing seriously start to challenge and beat human Grandmasters. But these are arguably not real world problems as the conditions and game play are within strict rules and simple predefined pieces.

The lessons learnt are very similar to the current challenges and emerging changes that we see in the business world.

One may well ask why should this be relevant to cloud computing when the story of services and implementation may follow traditional lines of infrastructure and services. The answer is that positioning the right cloud solutions as a cloud provider or seller is affected by the level of understanding and insight of the industry and value propositions. But more importantly, from the consumer and buyers side; the level if information and insight to needs and buying behaviour is becoming increasingly more digital across a range of online channels, devices and services.

Events, data and transactions are more than ever interactive and follow patterns of choice and relationships in a marketplace. Understanding these will bring new competitive advantage and new emergent opportunities.

Note on Risk Management and the Cloud

Think of it as a quadrant of conscious and unconscious competence and incompetence.

- Unconscious incompetence

- Conscious incompetence

- Unconscious competence

- Conscious competence.

We move from unawareness to awareness of problems, from unconscious incompetence, to conscious competence. It makes me laugh that unconscious competence exists because you are doing the right thing but you don't know it (!). We can see a lion in a room and know it’s a risk. It we are looking the other way it is still in the room but we are unaware of it.

The assertion of some risk experts is that there is no such thing as an unmanageable risk - we just need to plan contingency for this. Arguably the Oil leak in the gulf could have been planned and resolved but the risk threshold and the nature of risk changed over time. (Risk status is not static it can change over time - another lion enters the room which may either fight the first Lion or you have two Lions coming for you. One lowers the risk outcome the other increasing it.) It’s about risk tradeoffs. If you have a gun to mitigate the lion then you have lowered the risk. A Crash helmet is a risk mitigating device but it you travel too fast it can still not protect you and kill you etc...

In risk management there are planned risks and unplanned risks which you can atribute risk factors and weighting to. Unplanned risks can still be conscious events unplanned or worse unplanned events that you were not expecting (the oil rig issue)

In cloud computing there are known risks but there can also be unknown risks as it’s a new technology and we simply don’t have a priori knowledge of the risk or the technology to know everything.

Just moving the risk to a 3rd party does not change the existence of the threat or risk - it’s still there but it’s someone else’s problem - but we assume they ca consciously plan for it. We have examples of cloud vendors not doing this- they fail and the knock on effect is that their tenants are affected too - a classic example of devolved risk but not resolved - it’s still there.

Hope this makes sense - it’s all just risk management theory - Warwick Business School, that I have some associations with in the UK have this covered very well and as you can imagine it’s a big topic particularly with the recent finance industry failures - like Goldman Sachs - they had some serious issues of course in this area of perceived and managed risk - they arguable had institutional denial - the halo effect of assuming the best etc.

I advocate that it’s a matter of weighing up different risk scenarios - private or public or other and to get one group of people to see that it’s a lower risk better option than the other - life is rarely that straight forward but I think many technology adoption curves and transformation programs is in effective moving people across different risk weighting - consciously or subconsciously, cooperatively or coersively...

The importance of a Business Perspective on Cloud Computing

The following is a working extract a soon to be published paper for The Open Group for the CBA Project team.

The extract here covers the business value and the financial metrics of cloud. This and other aspects are planned to be in the Cloud ROI white paper to be published in The Open Group Rome in April 2010 Conference.

The importance of a Business Perspective of the Cloud

From a business perspective, the way an organization operates critical business processes and their quality of service QoS is key to business operating success. Identifying competitive business processes as well as standard commodity operations will improve the focus of innovative market growth and cost of service optimization activities made possible by cloud opportunities.

Just focusing on infrastructure improvements may result in cost rationalization but may miss the impact and value of applications and business processes to the end customer. Quality of Service QoS is an essential ingredient in evaluating the business effectiveness. The elements of QoS are made up of infrastructure, resources, activities and services spanning the whole life cycle of business.

In cloud computing the operating challenges experienced from one customer can be proactively fixed for all the other customers of the cloud service through using a shared platform. So value can be leveraged from amortizing economic economies of scale across the collective membership potential of a service ecosystem created by the cloud.

Just looking at cloud computing from a technical infrastructure point of view is potentially missing the wider picture of the impact of technology on the business.

Overall what matters is defining the Value to business. Value can be defined in many ways, not just financial value of the total cost of ownership and return on investment but can also mean customer value, seller provider value, broker value, market brand value, corporate value as well as technical value of the investment.

What is important is to take a portfolio management viewpoint such that all these value factors consider the impact and value to business.

The work of the CBA Project in The Open Group is seeking to identify the key cloud buyer questions and a Meta data lexicon that is in a language business can understand and use to target solutions to meet real business requirements.

In search of Cloud Business Value : Moving from Capex to Opex and Pay-as-you-go, a financial viewpoint

Software as a Service SaaS, utility computing and cloud computing are recent themes in information technology that seek to change the provisioning and utilization of IT.

Key to this is the change in cashflow and cost of capital investment.

Moving to a pay-as-you-go model means the cashflow of your business is changing. Sources of revenue and outgoing cash expenditure are on a usage basis. Cash flow (Cash Flow after Taxes CFAT) is a financial measure of a business ability to generate cash flow through its operations. Moving to an Opex model drives revenue increases, cash and working capital changes. Adopting the cloud computing paradigm seeks to make more money (increase revenues) while driving capital costs down through greater efficiencies of working capital. Net present value (NPV) of investments often need to consider the discounted cash flows of the cost of capital to assess the value of the investment return.

Moving from Capex to Opex is a change in the basis of capital investment usage as upfront and ongoing costs are changed by the cloud computing business model. The focus is on the ability to maximize the leverage of that capital while minimizing the risk to the business in Capital used for initial investment and ongoing maintenance charges. Using an Opex model can potentially remove and release capital that would otherwise be used for initial investment and ownership of IT assets. Alternatively investment in a cloud computing platform may require capital investment and changes to the payment and funding of the service as it is amortized over a wider shared service model for economies of scale. The cost of capital from sources of equity and cost of debt point of view can change for private and public federal companies sources of funding. The overall goal is to maximize the use of capital by best use of the debt and equity funds. In cloud computing the use of Opex moves the funding towards a an Opex model for leverage and risk management.

This white paper examines some of the metrics and performance indicators that drive business towards the cloud computing value model.

A finance viewpoint

What matters is defining Value

Weighted Average Cost of Capital WACC

The issue between the use of capital investment and the weighted average cost of capital (WACC) outlines the issue around debt and equity funding in private companies(. Public federal companies also have sources of funding that are from government sources of funding.

WACC describes the company cost of capital from a equity and debt view point. The cost of equity and the cost of the debt to the organization can be examined through the weighting of how the financing of equity and financing the debt are managed over time.

Ref: http://www.investopedia.com/terms/w/wacc.asp

Cash flow after Taxes CFAT

Focusing on the uses of the investment funds is the flows of inbound and outbound cash.

Cash flow (Cash Flow after Taxes CFAT) is a financial measure of a business ability to generate cash flow through its operations.

Net present value (NPV) of investments often need to consider the discounted cash flows of the cost of capital to assess the value of the investment return.

Ref: http://www.investopedia.com/terms/c/cfat.asp