Oracle CEO Larry Ellison mocks cloud computing as typical IT trendiness--nothing more than a new name for processors, storage, databases, operating systems, and other software delivered over the Internet. "What are you talking about?" he shouted during a recent interview at the Churchill Club, captured on YouTube. IT's as bad as the fashion business, he said: "Chanel last year had fuchsia; now it's called puce."
Yet there's a very good reason that Ellison's raising his voice. Something has changed in the attitudes of CIOs, something that starts with cloud computing but ripples beyond, and it's happened just over the past year or so. CIOs are increasingly open to new, alternative IT operating models, which also could mean new vendor relationships.
A grinding recession, paired with new choices in terms of online software, mobile computing, outsourcing, open source, and more, opens the door to this change. In particular, CIOs are rethinking significant parts of their software strategies, considering alternatives to conventional licenses, maintenance, and fee structures, as well as alternatives to lengthy internal development cycles, complex customization, and long global rollouts and upgrades. All that rethinking isn't brand new, but one suspects Ellison knows there's a much greater sense of urgency among customers.
There's no question that licensed, on-premises software, run by internal IT, will remain a mainstay of most organizations, but it will be complemented by alternative models, and in some cases replaced by them. The alternative approaches to software arrive under many names, but they all point toward making software cheaper, simpler, more flexible, and more accessible. Alternative IT models are gaining ground because, in many cases, they make too much sense to ignore. For a glimpse of this new thinking, look to the recent choices of GlaxoSmithKline CIO Bill Louv and Brent Hoag, JohnsonDiversey's senior director of global IT.
Louv bristles at any notion that he's chasing a trend. "The evolution here isn't, 'Gee, let's do something in the cloud or SaaS,'" he says. "Our Lotus Notes platform was getting to end of life. The question came up innocently that, given we'll have to spend a lot of money here, is there something we can do that's smarter?" What he decided is to move all 115,000 employees worldwide to the online, monthly subscription Exchange and SharePoint offerings that Microsoft made available in April.
Here's how smarter looks to Louv: 30% savings on total cost of ownership over five years compared with the comparable licensed software. Part of the savings, he says, comes from not doing e-mail server upgrades, since Microsoft will release those improvements as it finishes them into the Web software that it hosts and runs. What Louv gives up is that his team can't customize Exchange and SharePoint. That's OK, he says, since Exchange and SharePoint have improved to the point that the old reasons for customizing no longer exist. "And here's the rub: When you customize software, it's difficult to implement future upgrades from the vendor," Louv says.
GlaxoSmithKline also spent six months creating a "very different architecture" for online e-mail and collaboration, he says. Instead of the pharma company having replicated databases around world, all that's in Microsoft's data center. "That shifts a lot of heavy lifting toward the network and away from servers," Louv says.
The challenge of cloud apps isn't bandwidth as much as latency. GlaxoSmithKline found that internal e-mails from its Singapore operations had to go through too many switches to reach Microsoft's U.S. data center, causing delays. The company did some split tunneling, sending e-mail from Singapore across the public Internet instead of through a VPN, to get a more direct path. That approach required some "risk management administration," Louv says, and some additional security software spending.
If things don't work out, GlaxoSmithKline has an exit strategy. "It's straightforward: We'd move the same technology into our own data centers." And that's one reason he didn't consider Google Apps. "It's hard to figure out an exit strategy with Gmail," he says.
That didn't stop JohnsonDiversey's Hoag. The $3.4 billion-a-year maker of commercial cleaning products was in a holding pattern for a much-needed e-mail upgrade until last December, when the company signed a contract with Google for its Google Apps suite. For six years after SC Johnson Commercial acquired Unilever's LeverDiversey division to create JohnsonDiversey, it clunked along with two e-mail platforms, IBM Lotus Notes and Microsoft Exchange. An e-discovery system alone priced out at $500 million. The upgrade, says Hoag, "was a difficult business case that never got funded."
Hoag ticks off Gmail's advantages: It's cheaper to implement and maintain, it fits with the company's environmental goals because it didn't require new hardware, and it comes with solid disaster recovery and e-discovery through Google's Postini service. Plus his IT team would never do another e-mail upgrade. On one day, May 18, Gmail went live for every one of the company's 12,000 employees in 70 countries.
It's not perfect. Google's 99.9% uptime guarantee amounts to 43 minutes downtime a month. Though Hoag says it generally has been less, it can be unpredictable, like the 100-minute outage JohnsonDiversey and others experienced Sept. 1, when Google underestimated the impact of its server maintenance. Still, 99.9% uptime, Hoag says, is stable enough for e-mail in his industry.
Another trend that has gained traction in the recession, as it did in the last one, is offshore outsourcing. Since its merger, JohnsonDiversey has used India-based Wipro Technologies extensively for support and systems management, cutting its IT budget in half while delivering better service, Hoag says. The company's IT staff is now just 75 people, who mainly set software and infrastructure strategy, work with the business units on IT strategy, and manage outsourcing contracts. "The lowest-level person I have on my team is a program manager," Hoag says.
Yet online software will change how CIOs look at outsourcing. When signed on for Gmail and Postini, it dropped e-mail server support from its Wipro contract; it goes directly to Google with any problems. Wipro still provides help-desk support for other applications, including Microsoft Office, which remains the company's standard suite.
At Avago Technologies, the only choices CIO Bob Rudy is considering for a new human resources system is to totally outsource it or buy an online application. The electronic components manufacturer uses an old PeopleSoft version Rudy doesn't want to upgrade. He's looking at business process outsourcing to provide broad HR services, including running any apps required. If not, he'll look to subscription online options, such as Workday. "I'm not a believer in buying software anymore," says Rudy. Rudy also moved Avago to Gmail and Google's Apps and Sites. Still, he'll keep buying licensed CAD software, since that development and engineering innovation is core to the business.
To Julian Koski, CEO of Transparent Value, an asset management unit of Guggenheim Partners, cloud computing is just low-cost IT outsourcing. "The more we can outsource and have someone else do the heavy lifting, the better," Koski says. The company's using an online app from Navatar Group, built on Salesforce.com's Force.com platform, for managing mutual fund investments for its customers. "Most of my life I've dealt with custom on-site apps," Koski says. "These ready-made apps from Navatar made a huge difference. I didn't have to sit down and write specifications." It pays monthly per-seat fees to Salesforce and Navatar.
And while financial services companies are seen as unlikely users of cloud-based applications, given industry security and other regulations, Koski considers the physical location of his mutual fund customers' data a nonissue because Navatar and Salesforce have solid security technology and policies.
Koski's and Hoag's decisions show how cloud computing could replace some of the app support and development work that offshore outsourcing --a disruptive model itself earlier this decade--had captured. The pressure increasingly will be on outsourcers to work even more closely with customers. Infosys, for example, says more than half of its deals carry some element of "outcome-based" pricing.
The increasing use of smartphones as an alternative to desktops and laptops will fuel more interest in Web-based options. Hoag notes that, with Google's Web-based mail, JohnsonDiversey no longer needs to buy and maintain Research In Motion's BlackBerry server for BlackBerry users to download e-mail; most smartphones can access Gmail. "We have lots of increased flexibility for people to work anywhere," he says.
Not all alternative IT models look like surefire winners. Consider the alternatives to paying annual software maintenance fees. Some CIOs we talk with say they're unhappy with the traditional model, whereby they pay annual fees, typically 22% of the up-front license cost, for maintenance and upgrades. SaaS is one option, and while providers such as RightNow, Salesforce, SuccessFactors, and Workday have momentum and have landed marquee enterprise customers for their subscription-based CRM, HR, and other apps, their revenues remain a small fraction of Microsoft's, Oracle's, and SAP's.
Another option is lower-cost support from third parties such as Rimini Street, which claims to charge half of what SAP and Oracle do. Rimini Street has won some big names such as trucking company J.B. Hunt, and its bookings will double this year to around $150 million, but it's still a tiny fish in a huge pond. Ray Wang, an analyst with Altimeter Group, says some third-party maintenance startups have failed because traditional integrators consider them too controversial to work with.
So make no mistake, the likes of Microsoft, Oracle, and SAP still dominate apps, bringing value from integrated suites to decades of enterprise and industry insight. With core ERP, there's scant enterprise interest in the cloud, where latency can cause problems for transaction-intensive apps.
But if there's a common thread to the adoption of alternative IT models, it's that the down economy made it easier to swallow the trade-offs that kept IT from new models in the past.
Sony Pictures Entertainment is in the process of implementing subscription-based HR, applicant tracking, travel and expense, and payroll software services from Workday. "We tried, for over a year and a half, to put together a project to implement HR," says Andy Schlei, the company's VP of IT. "And each time we got to the approval point, given our current situation, we were told we had to find a less-expensive way to do it." The IT team estimated Workday would take seven months to implement--half the time it would take to do on-site HR apps--at a third of the cost. "It's the first time we're taking a major, global platform and putting it in the cloud," Schlei says.
There's still plenty of work for Sony Pictures' IT team to do, like integrating Workday's online software with Sony Pictures' on-site identity management system. And as Sony Pictures looks to more cloud options, including using the Amazon Elastic Compute Cloud for on-demand IT infrastructure, it wants to avoid creating a new kind of complexity. "We've worked over the last 10 years or so to untangle a spaghetti of siloed apps and have been very successful at delivering lower costs," Schlei says. "We don't want to create a new spaghetti tangle of this software-as-a-service thing."
Sony Pictures also solved the "exit strategy" concern. Its contract calls for Workday to periodically send copies of any code it implements for Sony Pictures, and all the data it holds for the company, to an escrow company. Should Sony Pictures ever decide it needs to part company with Workday, or if Workday goes out of business, it will get that data and code from the escrow company.
Big Vendors Turn The Corner
It's not just we here at InformationWeek who see a major shift in CIOs' openness to new IT operating models. Established IT vendors do as well, shown by the attention they're giving to them.
Look at what Microsoft has done the past year. It plans to offer Microsoft Office--one of the most successful and widely installed software programs in business--as an online app, with a free scaled-down consumer version. After saying in January it would slow data center investments, it shifted gears and this summer opened two $500 million facilities, in Chicago and Dublin. Both are aimed at delivering apps online, either as multitenant versions on shared servers and upgraded along with everyone else's, or as single-tenant versions in the traditional hosting model.
IBM just announced it will sell a Web-based version of Lotus Notes--called Lotus Live iNotes--to businesses for $3 per user a month based on an annual contract, or $3.75 month to month. That service comes with 1 GB of storage, mobile device support, and antispam and antivirus functions.
While CIOs are taking Google more seriously as an e-mail alternative, Google Apps has been a tough sell to big business so far, says Richard Payling, VP of global outsourcing at Capgemini, which Google tapped in 2007 to provide enterprise customers with consulting, migration, and help-desk services. Capgemini has closed more than $100 million in contracts for Google Apps service in Europe but not one deal in the United States. Payling blames the slow economy in part, as U.S. companies put off changes of any sort. Google doesn't have a big sales force, so Dave Girouard, VP of enterprise, holds about 10 CIO meetings a quarter, typically with a CIO customer. Google says 1 million businesses use its apps, though only a few are in the league of JohnsonDiversey or Avago.
Oracle and SAP are building their own online models around ERP.
Oracle is offering Oracle Database and enterprise Linux hosting through Amazon's EC2, and its application team gradually has been adapting some software to subscription services. It offers Oracle On Demand CRM and Oracle Beehive, its collaboration software, as a service. Executives are considering offering many of its apps designed for midsize companies, including JD Edwards, as hosted subscription services. Those details are being worked out, says Oracle VP Mark Keever.
SAP is developing software services as an option for some apps that tie into its core ERP system. It has acquired SaaS companies including Frictionless Commerce, for sourcing of suppliers and contractors; Clear Standards, for compliance management; and SkyData Systems, a maker of SaaS CRM applications for mobile phones. And SAP recently was showing off a prototype of a business process modeling application, called Gravity, for use with Google's Wave, an online, open source platform for collaboration and document sharing. The demo showed how people could use Gravity online to craft how business processes would look after a merger, then shift the models to SAP on-premises business process modeling software for refinement.
We Energies uses the Frictionless software service to source contract workers. When it upgrades to the next version, in October, that will happen over a weekend. We Energies, which subscribed to Frictionless before the SAP acquisition, would like more data flowing between the e-sourcing system and its SAP ERP, and it has considered bringing Frictionless on premises to mitigate some of that pain. "But now we're thinking, maybe not," says Gail DeVeau, the company's director of supply chain. "If we do that, then we'll have all that IT maintenance. It's very important right now to keep costs down."
A Strategy, Not A Tactic
What's most striking about the alternative models is where they're driving IT teams to think differently about their role and the value they provide.
U.S. federal CIO Vivek Kundra is among the leaders pushing that kind of rethinking today. Government IT needs to "get away from a model of investing heavily in infrastructure where it doesn't yield value," Kundra said during a presentation at the InformationWeek 500 conference in September. A day after that conference, Kundra announced the launch of Apps.gov, a government Web site that agencies can use to buy and deploy cloud computing applications. "Why should the government pay for and build infrastructure that is available for free?" Kundra said.
Google, meanwhile, is creating a cloud to provide government agencies with access to Google Apps in an environment that abides by government security and policy requirements. Kundra's test will be whether he can move such a massive organization--$76 billion in IT spending, across myriad missions--toward a new way of provisioning IT. The goal, he says, is to start "thinking more horizontally rather than vertically across all these silos." Of that government IT budget, $19 billion goes to infrastructure maintenance.
Hoag, the top IT official at JohnsonDiversey, dares to use that overused phrase "paradigm shift" to describe the changes happening in the software industry and how they're helping IT organizations let go of the tactical issues of technology. "We want to become more strategic and transformational as an IT organization and focus on our internal business and customers," he says.
While Hoag is open to alternative options, he's not a zealot one way or another. JohnsonDiversey is using Oracle CRM On Demand, but that's integrated with the company's on-premises ERP systems from Oracle and JD Edwards. Its HR system is hosted but on dedicated servers, not in a multitenant cloud. While he has embraced Gmail on desktops and smartphones, the company keeps Office software on employee PCs and Lotus QuickPlace for its official document storage. By comparison, the functionality of Google Apps and Sites is limited. However, Hoag is eager to replicate the best elements of its Gmail experience--particularly upgrading the entire company in one day.