How can and should banks go into the cloud ?

Technology is not a proper subject for businessmen to study. However every few years something comes along that changes the landscape and businessmen need to re-examine the role of technology within the enterprise. These “disruptive” technologies are coming thick and fast in 2011, so here is a primer on the first of the three disruptive technologies you should be thinking about:-

• The Cloud
• Mobile
• Social Networks

The Cloud

First what is the Cloud and why should you care?

The Cloud is a new way of deploying IT capacity, at its most radical it is a new way of deploying business applications. Unfortunately at the moment the IT vendors are confusing everyone with acronyms (SAAS, PAAS, DAAS, and every other variant on As A Service, I will mainly be talking about SAAS – Software as a Service) but the concept is simple. Instead of having to buy your own computers and staffing your own data centres you simple provide the end users with a device (PC, laptop) that supports a web browser and a connection to the web and all the functionality he needs is provided to him wherever he is.

So far so simple but why is this disruptive? The answer is what flows from this new capability. Starting at the Balance Sheet, imagine if you could avoid having to use any capital on IT? All the Cloud Vendors have a business model based on you subscribing (renting) the capacity you need, so magically your Balance Sheet capital expenditure is transformed to P&L Expenses.

Since it is now a P&L item, how does the cost compare to traditional IT infrastructure costs? While every business is different, the value proposition of the Cloud is based upon the fact that the Cloud vendors have an economy of scale that is greater than any individual company, further they can provide exactly the amount of computing power when and where you need it. A simple example might help. Last time you signed off on an IT project that needed new hardware, look at the hardware configuration and see how much capacity for “growth” was included in the quote.

Typically every server is at least 20% larger than the next 3 years forecast demand; sometimes due to the packaging of the computers (“if you need x amount of memory, you have to buy the model with y processors”) you end up with much larger servers than you need. Then you buy exactly the same configuration for your disaster recovery and Development and Testing environments. With the Cloud you buy exactly the infrastructure capacity you need now, and rent more (or less) as you require.

Most Cloud vendors will increase your capacity with only a days notice. By the way, with Cloud Applications you are renting the entire IT stack. In the examples I know well, the Cloud vendors price their software to compete with other traditional software vendors; in true apples to apples comparison you are often getting Data Centres (hardware and people) for very small incremental costs to the traditional software you would have to purchase. These elements, economy of scale, being able to buy only what you need when you need it, and the competitive pricing strategies of Cloud Application vendors are estimated to reduce your costs by up to 30%.

So a more flexible way of delivering applications at significantly reduced cost. Seems compelling, but today there are issues, not least of which if you are a bank is that the customer data is “in the cloud” which usually means in the US, so not acceptable to the regulators. However various government agencies including the IDA in Singapore are looking at the Cloud and developing guidelines. Further, as the usage of the Cloud scales up globally the various vendors are opening new data centre sites around the world, so this issue will eventually go away.

In fact globally it is governments that are leading the change. In the US the Obama administration has a “Cloud First” policy that requires federal agencies to use Cloud if at all possible. In Australia the federal CIO Vivek Kundra set a target of shifting 25% of the government's $80 billion in annual IT spending to cloud computing. In the commercial sector, Gartner recently surveyed CIOs and nearly half of them expected that 50% of their infrastructure and applications would be delivered out of the Cloud by 2015, other surveys forecast that many SMEs will have no IT infrastructure inhouse at all in a similar timeframe.

One last note which is very important; as the Cloud Application vendors have to provide data and business processes to thousands of customers, they have focused on making their applications flexible enough to support widely different business processes without needing to customise. Too technical? What does that mean to a businessman? The business issue is time to market. A new Cloud Application can deliver value to end users in 2-4 months. Some large, traditional ERP or CRM projects it can take 2-4 years to deliver the project.

What should you do about the Cloud today and tomorrow?

First you should ask your IT department what their plans are for the Cloud. Their response will tell you much about their attitude towards innovation and their role as value creators for the company. Whatever their response I would suggest you ask for a Roadmap to move a proportion of IT capacity to the Cloud within a defined period of time. There will be either IT hardware capacity or non-core applications that can be moved to the Cloud in the next 12 months and the sooner IT gets used to evaluating it as an option the better.

Next time you have to implement a new application for your enterprise, insist that Cloud delivery is in the RFP as a strongly preferred option. The vendor market is already moving fast, the CRM market is highly concentrated with only three or four significant players and all of them (Salesforce.com; Oracle CRM On Demand; and Microsoft) have Cloud options; Commercial ERP vendors are also rushing to move to the Cloud, SAP having recently announced their offering.

Banking software is lagging with only Temenos announcing availability of Cloud delivery so far. The most interesting announcement for someone with a longer term perspective (OK, I am just old) is that IBM have announced a “Smart Cloud” offering where they will host their customers applications. While IBM may not have the grip on Enterprise Computing they had 20 or 30 years ago, it has always been true that IBM’s entry into a technology market marks the end of the early adopter phase and the beginning of the Mainstream adoption of a technology. IBM legitimizes the Cloud in the same way they legitimized PCs in the ‘80s and Minicomputers in the ‘70s.

Leave the detail to your CIOs but minimally set Roadmap targets for IT to move 10% of your infrastructure and application portfolio a year for the next three years to the Cloud and show cost savings in doing it. Insist that all new requirements either use the Cloud, or justify why they are not using the Cloud. Nothing like challenging KPIs to get creativity flowing!

All three disruptive technologies, Cloud, Mobile, Social will inevitably affect your business over the next three years but with the Cloud it is really only a matter of planning and timing of the migration.