The Hazards of Joining the "Cloud Provider" Bandwagon

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Once again, ‘the more things change, the more they remain the same’.

This old adage came to mind recently when I was approached by a series of major corporations and non-profit institutions who are exploring opportunities to leverage their internal operations and become commercial Cloud service providers.

This is a movie script that I’ve read many times before that too often ends in tragedy.

Every time the tech industry experiences a major disruption in the marketplace, it spawns a bevy of new players seeking to capitalize on the promising revenue opportunities. Inevitably, aggressive-minded corporate executives or overly confident IT managers (within organizations that were previously only consumers of technology) become convinced they can resell their internal competencies and recast themselves as tech service providers.

It was this belief that led some of the aerospace companies in the 1970s to pioneer the computer timesharing concept when the demand for mainframes began to surge. It was the same idea which inspired a variety of tech companies, like Eastman Kodak and Wang Laboratories, to acquire central office switches in the mid-1980s to try to become telecommunications service providers; this was in response to the chaos caused by the AT&T divestiture and industry deregulation. And, then we saw it again when various companies, like GE, jumped into the outsourcing business in the 1990s.

Converting an internal competency into a commercial venture isn’t as easy as it looks.

The truth is that few IT departments have succeeded in satisfactorily serving their internal users. In fact, they have even less of an understanding of the needs of a broader assortment of outside customers. They also don’t have the provisioning mechanisms or support systems to meet the needs of potential customers. And never mind the sales and marketing skills to entice them to acquire their services.

That is why few organizations have successfully crossed this chasm and built profitable service businesses historically.

In the 1970s, most of the aerospace companies put aside their timesharing services to refocus on their core businesses, leaving the market for new entries like EDS to move in. In the 1980s, the companies offering corporate telecom services realized that real telcos were better equipped to satisfy the market’s rapidly evolving networking needs. And IT outsourcing proved to be a messy business for corporations who had a tough time keeping their contractual commitments.

Despite these past failures, I’m being approached by a new generation of entrepreneurs today who are dreaming about the potential money that can be made by retooling their existing data centers into private clouds. These clouds, in theory, can then be shared with similar organizations or marketed to a broader target audience.

In each case, these organizations don’t fully understand the meaning of Cloud services, haven’t fully examined the functional and legal requirements, or fully considered the competitive challenges.

This doesn’t mean that moving in this direction isn’t possible. Amazon can be credited with pioneering the Cloud Computing marketplace by successfully converting its internal competency into a highly profitable and incredibly fast growing business.

However, Amazon executives readily admit that they have succeeded because they have always viewed their core competency to be their distribution and sales skills. Their IT infrastructure, which powers its Cloud Computing services, is a reflection of Amazon’s highly efficient distribution mindset and has always been an integral part of its eCommerce sales engine.

Anyone hoping to emulate Amazon’s success has to ask themselves whether they can imitate the same kind of operating efficiency and sales effectiveness.

So, can you put together the right technology service delivery infrastructure with the right amount of sales, marketing and customer support skills to be successful?

And, then you should test whether your perception matches reality by surveying your internal end-users and executives to see if they agree you are as good as you think. Please, look before you leap.

Jeff Kaplan is Managing Director of THINKstrategies (www.thinkstrategies.com), an independent consulting firm focused on the business implications of the on-demand services movement. He is also the founder of the Cloud Computing Showplace (www.cloudshowplace.com). He can be reached at jkaplan@thinkstrategies.com.