Skip to Content

Businesses rely no less on electricity than on IT. Yet corporations don’t need a “Chief Electricity Officer” and a staff of highly trained professionals to manage and integrate electricity into their businesses.  Does the historical adoption of electricity offer a useful analogy for today’s innovations in cloud computing?  

 

While the utility model offers some insights, we must go beyond this simple analogy to understand cloud computing’s real challenges and opportunities. In a CACM Viewpoint paper we (Erik Brynjolfsson from MIT Sloan, John Jordan from Penn State and I) give six reasons why IT won’t be like electricity as Nicholas Carr claims in his book The Big Switch.

Technical Weaknesses of the Electricity Model
  1. The Limits of Scale
  2. Pace of Innovation
  3. Latency: Distance is not Dead
The Business Model of the Cloud Goes Beyond Electricity
  1. Synergies and Co-Invention
  2. Lock-In & Interoperability – the flip side of innovation
  3. Security

 

Limits of Scale RDBMS – the middleware for every ERP system (also for Salesforce CRM) – doesn’t scale; a scalable storage with an API as rich as SQL is still an unsolved research problem. PIQL by RAD Lab at UC Berkeley is a promising attempt to solve this problem by machine learning. PIQL offers the query (SQL) programmer predictive performance on distributed data storage, e.g. an upper bound for queries.

Further, cloud providers don’t offer yet SLAs (service level agreements) with predictable performance like electricity providers do. Stress tests conducted by Sydney-based researchers have revealed that the infrastructure-on-demand services offered by Amazon, Google and Microsoft suffer from regular performance and availability issues. Performance increases or decreases with load and there are huge variations in the measured standard deviation between the different providers of data storage in the cloud; see SIGMOD benchmarking paper by Donald Kossmann et al. The benchmarked cloud services (AppEngine, MS Azure, AWS RDS, etc) didn’t scale linearly as electricity would.

Composition of SLAs – What is the overall performance if provider A offers performance X and provider B offers performance Y? – is yet another unsolved research question.

 

The Pace of Innovation in electricity generation and distribution happens on the scale of decades or centuries.  In contrast, Moore’s Law is measured in months. In 1976 the basic computational power of a $200 iPod would have cost one billion dollars. IT reinvents itself regularly. Cloud data centers are big investments which may be rendered obsolete after one or two cycles of Moore’s Law (18 to 24 month). A SaaS provider with a twice as fast HW may push incumbent providers using last generation HW fast out of business. The reason why we don’t see this replacement process yet at a large scale is that existing cloud providers are small compared to corporate IT and cloud computing is still in its hyper growth phase. For Example, a typical ERP installation for a Fortune 500 company is bigger than all of Salesforce together. Chevron’s IT is more than three times as big as for example AWS (Amazon Web Service). Google uses very cheap commodity HW to mitigate as good as possible the fast pace of innovation. IDC predicts that by 2012 less than 10% of world wide IT spending will be for cloud computing.

 

Distance is not Dead One of the few immutable laws of physics is the speed of light. As a result, latency remains a formidable challenge.  In the network realm, the demands for nearly instantaneous execution of machine-to-machine stock trades has led financial services firms to locate their data centers as physically close to stock exchanges as possible. Typically, the data needed for approval of a drug by FDA is not send over the network but the computers involved are trucked to the FDA.

For many classes of applications, performance, convenience, and security considerations will dictate that computing be local. Moving data centers away from their customers may save on electricity costs, but those savings are often outweighed by the costs of latency.

 

Important as the technical differences are between electricity and cloud computing, the business model differences are even more profound.

 

Complementarities and Co-invention Like electricity, IT is a general-purpose technology.  This means that critical benefits come from the co-inventions that the basic technology makes possible.  It took 30 to 40 years for the full benefits of electricity to redound to America’s factories. Initially, assembly lines and production processes were not redesigned to take advantages of electricity: large central steam engines were simply replaced with large electric motors, and then hooked up to the same old crankshafts and cogs.  Only with the reinvention of the production process was the potential of electrification realized. Firms that simply replace corporate resources with cloud computing, while changing nothing else, are doomed to miss the full benefits of the new technology.    

The opportunities, and risks, from IT-enabled business model innovation and organizational redesigns are reshaping entire industries as Erik Brynjolfsson and Adam Saunders point out in Wired for Innovation:  How IT is Reshaping the Economy. For instance, Apple’s transition from a perpetual license model to the pay-per-use iTunes store helped it quadruple revenues in four years. The tight integration between Apple’s ERP system and the billing engine handling some 10 million sales per day would have been difficult, if not impossible, in the cloud. Remember, in the cloud all companies would use the same ERP instance; extensibility and customization are very restricted for cloud apps.

 

Lock-in and Interoperability Lock-in issues with electricity were addressed long ago by regulation of monopolies, then later by legal separation of generation from transmission and the creation of market structures. Markets work because electrons are fungible. The rotary converter that enabled interconnection of different generating technologies in the 1890s has no analog for the customer of multiple cloud vendors, and won’t anytime soon. The essence of the cost advantage for cloud computing is statistical multiplexing which gets lost when moving data between cloud providers.

 

The security concerns with cloud computing have no electricity analog.  No regulatory or law enforcement body will audit a company’s electrons, but processes related to customer data, trade secrets, and classified government information are all subject to stringent requirements and standards of auditability.

The typically shared and dynamic resources of cloud computing (CPU, networking, etc.) reduce control for the user and pose severe new security issues not encountered byon-premise computing behind firewalls.

 

If the utility model were adequate, the challenges to cloud computing could be solved with electricity-like solutions — but they cannot.  The reality is that cloud computing cannot achieve the plug-and-play simplicity of electricity, at least, not as long as the pace of innovation, both within cloud computing itself, and in the myriad applications and business models it enables, continues at such a rapid pace.

The real strength of cloud computing is that it is a catalyst for more innovation. In fact, as cloud computing continues to become cheaper and more ubiquitous, the opportunities for combinatorial innovation will only grow.  It is true that this  inevitably requires more creativity and skill from IT and business executives.  In the end, this not something to be avoided.  It should be welcomed and embraced.

To report this post you need to login first.

4 Comments

You must be Logged on to comment or reply to a post.

  1. Sergio Ferrari
    For sure Cloud is different from Electricity but I after reading the this very interesting blog I have the feeling that, as from the SAPPHIRENOW 2010 mantra, you’re saying OnPremise is better then OnDemand. But I’m sure you’re too expert to say that.
    IMO there are so many options that it’s simple impossible to summarize all in a short blog but let me add some comments from my own personal experience.

    Gmail is an excellent example of cloud and IMO it is much better then any other eMail system run by enterprises. I know some very large companies that adopted and are adopting it in this months. Availability, Performance and Security? Everything already solved.

    Amazon ES2 is a fantastic option, I heard that SAP is already running more than one thousands test systems and in Techedge we are very happy about that. After each installation, first action I perform is to run Simple ABAP Benchmark (Simple ABAP Benchmark) and the results are always excellent. To be honest, after the heavy use of virtualization I experienced that also the systems operated by large enterprise suffer from regular performance issues that seem to be too difficult to be understood. Setting the right priority to the different hosted systems is still so complex (CPU/RAM/DISK/NETWORKING/…).

    The Cloud (IaaS) helps so much to manage the complexity of typical SAP Landscapes that to includes ERP/CRM/SRM/Portal and now several other relevant BOBJ instances and last but not least Sybase SUP.

    What about SAP Business byDesign? It’s goal is to provide a complete Business Suite on the Cloud, isn’t it? Probably some of the problem you reported do not have any solution and it will not be possible to integrate super fast shop floor systems or to  manage thousands of new sales orders per hour but how many corporations are really stressing SAP systems in such a way?

    At the end, what I always say to colleagues is to specify if with Cloud they mean IaaS, PaaS or SaaS or what else, than it’s always a pleasure to discuss about it and to image what will think in ten years. IMO much less OnPremise and more OnDemand and the choice will not done to reduce costs but to take advantage of better and faster solutions.
    Take a note, July 2010 I’ll offer a pizza to you to see were we’ll be…

    Sergio

    (0) 
    1. Paul Hofmann Post author
      I have tried to answer the question, “Will there be no more CIOs in 10 years?” (as Nicholas Carr claims) or “Will there be as many CIOs as now?” I bet you a pizza and a bottle of Champaign, the number of CIOs will be stable.

      If cloud computing were like electricity, all companies will use in the near future (10 years) ERP systems exclusively run in the cloud. I guess we all agree that small and midsized businesses will start with on demands solutions. The advantages are too obvious – no need for their own IT, fast onboarding, scalability, etc.

      But, why should a CIO move his ERP system into the cloud? You have said it, better start with emails, development and test systems, etc.. Next step would be to establish a so called private cloud; consolidate tens of data centers to a few. For example, IBM has saved 1.5 B dollars by consolidating its 115 data centers to 5. Some of their machines have over 50% server utilization; this is a typical cloud providers server utilization.  Intel and many other big corporations are on to the same endeavor of establishing private clouds. Read the quoted articles and the article Why Cloud Computing Will Never Be Free by Dave Durkee to have proof points that cloud performance is not yet predictable and as reliable as on premise; therefore many companies will continue to run their own IT.

      I won’t repeat the arguments of the blog here, but the strongest argument against moving a strategic ERP into the cloud is, the competitive advantage is lost if all peers did run the same ERP instance. Examples for strategic apps are, online billing integrated with the ERP (Apple, Verizon, Bertelsmann, T-Mobile and most utility companies), or running a business network of maintenance companies, airlines, etc.  in order to offer pay per use jet engines like Rolls Royce does.

      The cloud is ideal for analytics, for embarrassingly parallel apps (map reduce) and for startups that can scale up in days or weeks without cap ex; thus saving venture capital.

      SAP offers very cool and highly scalable cloud apps like our first social networking app StreamWork ; StreamWork is like a Facebook for the enterprise. There are many more cloud apps the making at SAP, stay tuned…

      (0) 
  2. Thorsten Claus
    I also can start an IT company in my garage and sell stuff perfectly safe (unless it’s hardware that goes up in flames). Regulation, legislation, security requirements, and the investment amounts necessary to tackle these problems prevent new players of providing and managing electricity in a new way (other than IT innovations and portals to do so). This is not the case in the IT industry.

    Disruptive innovation becomes very difficult – the few existing non-served, under-served, or ill-served markets and customers are hard to address. Targeting niche markets is difficult.

    In effect, there is very little “horizontalization” in the electricity market that is *not* IT-based: there is no ServiceCo and SalesCo for electricity, no dedicated aggregator or service innovator for different electricity providers, no pure sales organization.

    It comes back to John Hagel’s and Marc Singer’s 1999 article in the Harvard Business Review called ‘Unbundling the Corporation’. In the electricity market (and again: I’m not talking about the energy market) interaction costs within and between businesses are not rapidly declining for the three core processes CRM, product innovation, and infrastructure management. In the ICT sector they are, and the Cloud business model is a result thereof.

    (0) 

Leave a Reply