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How Cloud Computing is Changing Corporate Strategy

When it comes to outsourcing, you ain't seen nothing yet. Coming up is not just more outsourcing, although that will happen. As the industry evolves, and as new technology comes into play--based in the cloud--IT services will become different in kind. They will have a lot to do with strategy; and the changes may fundamentally change the economics of some industries, resulting in new winners and losers.

That's the message I heard in Mumbai earlier this month at the annual leadership forum of the IT-services trade association.

NASSCOM, the National Association of Software & Services Companies, brings together the stars of Indian and global outsourcing-companies like Accenture, Cognizant, Infosys, GENPACT, Tata Consultancy Services, Wipro, WNS, and Zensar. (Amazing how many of these have become recognizable brands.) The crowd in Mumbai was happy: They sense economic recovery in the short-term and momentum in the long. NASSCOM predicts the industry will triple by 2020, with sales jumping to $225 billion from $75 billion today. (They were less than $1 billion in 1996.) Only some of that increase is taken out of the paychecks of workers now in America or Europe. A lot comes from the sheer growth of emerging-market economies: If India and China continue to grow 8% or more a year, their GDPs will have doubled by 2020, with demand for IT services keeping pace. Some presumably will come from rising prices: India's still cheap-I got a shoe repaired for under $5--but the gap is closing especially for high-end work.

The big deal, though, is the growth of cloud computing. The cloud will rain money on the industry. Why?

It's a new toy, a big service offering just coming into its own, growing faster than 16% a year, according to Gartner. Companies have only begun to migrate vast amounts of data to cloud-computing service providers, with plenty more to go.

It'll shake up the software industry. All the big business software companies-SAP, Oracle, HP, Microsoft, you-name-it-are trying to get out of the glass house and into the cloud. As in any effort to achieve dematerialize, they are meeting with varying degrees of success. They are also meeting new competitors-not just the Infosyses and TCSs of the world, nor just the Googles, but rivals like Amazon and cloud-native companies like Salesforce.com. Already thousands of merchants pay Amazon Web Services an estimated three quarters of a billion dollars. Anybody want to bet on the win-rate of incumbents vs. insurgents when confronting a disruptive innovation?

It'll spawn lucrative intermediary businesses, like data security. While the keynote speakers at any conference intone great thoughts, down among the booths in the expo you see who's paying for the canapés and wine at the reception. On that basis I can tell you that security in the cloud is a big deal; protection will become even bigger as more outfits hang the family jewels up there. Meantime, the outsourcing companies are moving up-market, which is why they call their industry IT services these days. This isn't just re-labeling. Reflecting the change, the CEO of one mid-sized company told me he just totally reorganized its sales force to separate hunters (who seek new targets) from farmers(who cultivate long-term relationships). In addition, all kinds of specialists are bound to emerge-even broker/market-makers that switch your stuff from vendor to vendor during the day.

It'll redefine--maybe--the very idea of the corporation. To see how, consider the implications of cloud computing for small and medium-sized businesses, who can now get world-class IT on a global scale without spending a dime in capital expenses, as BNET has written about. Futurist Paul Saffo once called the Internet "a full-employment act for entrepreneurs." It just got better-and the little Davids of business have another slingshot to use against the Goliaths. If Quicken put an accountant in a box for small business, imagine what it can mean to have customer relationship management, enterprise resource planning, real-time financials, analytics, and much, much more.

But the cloud also allows big companies to sharpen how they seek a strategic edge. As the economist and writer John Kay points out, there are two broad schools of "the theory of the firm"--i.e., why companies come into being and what gives them the right to win. One has to do with transaction costs; the other with capabilities. The first builds from the fact that sometimes it's easier and cheaper to perform an activity within a hierarchy--the economic logic of vertical integration--while at other times it's better to go out to the market. To Ronald Coase and disciples like Oliver Williamson, the sum of these make-or-buy decisions defines the boundaries of a company and shapes the struggle for competitive advantage. You can do smarter, more things in the cloud than you could with Outsourcing 1.0. That significantly widens the domain in which make-or-buy decisions can come up, and hence will lead to another round of re-slicing, re-dicing, re-sewing, and reassembling the component activities of an enterprise.

As that happens, companies will pare down to a handful of differentiated, interconnected capabilities--a few things they do better than anyone that customers care about. That's the second broad theory of the firm: A company is essentially a bundled fasces of capabilities and access to capabilities. The strategic value of capabilities is going up, relative of the advantages of mere scale, geographic reach, or the ability to get a cost advantage from operations that customers don't much care about. Indeed, just about the only remaining advantage to scale these days is the ability to tap into a broad knowledge base and leverage it over a large customer base-in other words, even economies of scale and scope are becoming capabilities-driven.

The cloud is ready for you. Are you ready for the cloud?

Image courtesy flickr user Mamjodh

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