Private and Hybrid Clouds New Operating Models

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In this global economy with short product lifecycles, companies need to be good at bringing new products to market, and they need to be good at tailoring existing products to keep up with shifting customer preferences. In their ongoing search for new products and new markets, companies engage in growth by expansion of existing business units and by mergers and acquisitions of other companies. Business processes need to be flexible to accommodate these activities.
The value proposition delivered by most companies lies in the way they manage their business processes, not their technology. It lies in the way they tailor their processes to meet constantly changing market conditions.

Although the cloud is certainly a platform for managing the delivery of computing services, that perspective is more from the traditional technology – oriented view. Another way to look at the cloud is from the business perspective of companies that use the cloud to support their operations. From their perspective, the greatest benefit they can gain comes not from cost savings in technology, but from the revenue they earn by being more responsive to changing customer desires; the revenues they generate with faster roll out of new products and successful expansion into new markets.
The cloud is not about new technology so much as it is about new business models. The business model shows how companies are evolving away from self – contained organizations that perform all their core and support activities internally. Companies are becoming enmeshed in networks of suppliers and customers . Companies depend more than ever on effective collaboration with its supplier partners. Business services need to be delivered in a reliable and predictable fashion, and it is the flow of information back and forth between companies via the cloud that makes this possible.
The cloud is an ideal environment for companies to build and deliver an inventory of business services targeted to individual market segments and specific customers.

In the present economy, companies are looking for ways to cut IT expenses, yet the real opportunity is to find ways to manage total company expenses in such a way that they track with the demands of business operations. Saving 10 or 20 percent on a company’s IT budget is relatively small savings compared to using IT to save 10 percent on the operating expenses of the whole company or using IT to grow company revenue by 10 or 20 percent.
Companies have the opportunity to power their business operations with systems infrastructure that meets three operating standards:
1. Low capital expense
2. Variable cost of operations
3. Scalable computing platform

Low capital expenses are the order of the day in business because revenue and profits are under pressure, credit markets are tight, and loans are harder to get, so there is less money for capital investments.
Also, because we’re in a period of rapid technological change, making big investments in technology is risky because it might result in your company investing in technology that becomes obsolete a lot faster than expected. Smart executives are learning to shift their investments from the building of facilities like data centers to delivering new business operating capabilities instead.

Committing to the standard of a variable cost operating model is very smart because it’s a great way to protect company cash flow. Pay – as – you – go operating models mean operating expenses will rise if business volumes rise, but just as important, operating expenses will drop or stay small if business volumes contract or don’t grow as big or as fast as expected (you only pay more if you’re making more and you pay less if you’re making less). In this economy, where it is so hard to predict what will happen next and where companies need to keep trying new things to find out where new opportunities lie, variable cost business models are best for managing financial risk.
Committing to scalable systems infrastructure enables companies to enjoy the benefits of the first two standards. A scalable systems infrastructure enables a company to “ think big, start small, and deliver quickly. ” Company executives can create strategies with big potential and try them out quickly on a small scale to see if they justify further investment. Companies can start with targeted 80 percent solutions to address the most important requirements first, then build further features and add more capacity as business needs dictate.

The cloud computing model has a set of characteristics that are always present: massive scalability; provisioning of computing resources on demand; a pay – as – you – go cost structure; multiple systems and multiple users supported on the same computing infrastructure; systems and data available from anywhere with Internet connectivity; built – in disaster recovery; and software oriented toward customer ease of use.

Three models of cloud computing can be defined within this broad vision of cloud computing:
1. Public clouds are owned and operated by third parties and located in data centers that are outside of companies that use them. Multiple companies share the resources of these cloud computing data centers; they are each assigned their own virtual resources based on a common set of physical resources. Public clouds are provided by companies such as Amazon, Hewlett – Packard, IBM, Google, Rackspace, and
2. Private clouds are owned and operated by a company or a cloud computing provider, but they are built for the sole use of a single company. Private clouds utilize the same technology as public clouds, and they are often built to enable an individual company to maximize the use of its computing resources and be more responsive to company needs than was possible under the traditional IT operating model.
3. Hybrid clouds are combinations of multiple clouds that are both public and private. These clouds are created by individual customers to meet their specific needs. For instance, a company may decide to create a hybrid cloud to combine a CRM system provided on a public cloud operated by with an ERP system running on their private cloud, and they may further extend this hybrid cloud by combining it with the Google cloud to provide their employees with the collaboration and productivity tools provided by Google Apps. Hybrid clouds like these sometimes use the services of a cloud aggregator.

For many startup companies it makes sense to start immediately with the use of a public cloud, instead of investing precious capital in building their own data centers. By doing this, they avoid the distractions of running commodity computer hardware and software, and are able to concentrate on developing their unique value – added product or service that will be the profit generator for the company.
But for existing companies that have already made significant investments in systems infrastructure that they run in – house, the choice of how to proceed with the use of cloud technology is not so clear. They can consider the choices of creating private clouds or using hybrid clouds.

Private Clouds
Many industry analysts believe that private clouds will be attractive to in – house IT groups for the foreseeable future because of concerns about governance, data security, and performance management.
Private clouds also offer large companies an inviting way to consolidate data centers, cut technical support and operations staff, and increase server utilization. Typical server utilization inside corporate data centers ranges from as low as 2 percent up to around 10 percent, and implementing a cloud can raise those levels to 60 to 70 percent, saving the need to buy a lot of additional servers.
There is a case to be made that private clouds don’t need to be quite as automated and self – served as public clouds to deliver value to companies in the form of increased server utilization and faster user provisioning. Instead of using online Web request forms to provision computing services for a new application system, employees of a company could just send an email to their IT provisioning group with the request. The in – house IT organization could get it done and email the requestor back in a few hours with the confirmation and information they need to start using the newly provisioned system.
There is also a case to be made that larger companies enjoy certain economies of scale in the IT operations, and they can provide IaaS and PaaS less expensively than those services could be obtained from outside cloud service providers. In this circumstance, private clouds make good business sense for certain categories of services.

Private clouds may not need to run entirely on uniform hardware the way public clouds do. For instance, IBM has experience building private clouds that use products such as Tivoli on its mainframes, Windows and Linux on its servers, and Websphere transaction management and SOA and MQ Series for message sharing between these different platforms. By doing this they are able to create fit – for purpose clouds and increase the utilization of each platform.
Building a private cloud in the typical heterogeneous enterprise environment offers advantages such as:
• It enables IT organizations to leverage existing infrastructure and get cost – effective use of their previous IT investments.
• Placing cloud computing inside the corporate data center eliminates many of the issues that accompany the use of public clouds such as data security, performance management and SLAs, and concerns about regulatory compliance.
• Private clouds also have the potential to obtain a lower cost of use, since they don’t have a profit margin added onto their services, as is the case with public clouds.

In building their private clouds, companies can take an approach that allows them to invest in their private cloud as the first step on a journey to become comfortable with a cloud operating model.
Companies may feel that external cloud environments have too many unknowns and too much risk until they become accustomed to this new operation model. Private clouds are a good way to test maturity and reliability of the technology. Companies can develop trust in the technology and the pubic cloud providers they work with on a limited scale. They can learn to deal with different regulatory, data control, and security issues. Over time, the in – house private cloud versus public cloud mix goes from 90 – 10 to something like a 50 – 50 mix or even a 20 – 80 mix. Large companies will probably not get to an all or nothing situation regarding their use of public and/or private clouds anytime soon.

Hybrid Clouds
A company may have a private cloud to share IT resources across multiple applications and increase utilization of the servers in their data center. Suppose that a company starts to experience a surge in user demand for one of their applications. By using a hybrid cloud they can quickly and cost effectively expand the capacity of the servers in their private cloud. They can draw upon the power of a public cloud to handle the increased user demand and maintain good system service levels for the people using it.

To create a hybrid cloud, companies need to put the infrastructure in place that will allow them to integrate public clouds with their private clouds while still maintaining security and performance management capabilities. IT vendor companies (Cisco, Itricity, Juniper Networks, and Nimsoft to name a few) are making the technology that allows companies to do this. This is the underlying infrastructure companies need for hybrid clouds.

Integration of cloud applications and in – house systems requires an effective method for maintaining security, monitoring performance, and passing data back and forth between the cloud and the in – house systems. Perimeter security in hybrid clouds can be provided by a number of methods, such as data encryption and virtual private networks. Many in – house IT groups are already familiar with the use of this technology.

Most cloud vendors provide robust tools to help manage system performance in the cloud. This is their business, so they invest heavily in performance monitoring and reporting capabilities that often are superior to what companies have in – house. Once in place, this infrastructure becomes the base for new business models. It allows rapid expansion and contraction of computing power as business needs change, and it also provides the security, performance management, and regulatory compliance needed to operate hybrid clouds.

Cloud applications are, by their nature, relatively easy to integrate with other systems because they are built with well – defined application interfaces, known as application programming interfaces (APIs).
Compared with the task of integrating different in – house applications, integrating cloud applications with in – house applications is often easier because the APIs of cloud applications make it easier to import and export data and pass that data back and forth between the cloud and in – house systems.

Private clouds have all the issues associated with public clouds, and they require significant upfront capital investment to set up. They have the same problems with monitoring and managing performance.
They have the same problems with the risk of vendor lock – in (particu larly with respect to the virtualization technology used) 10 and the question of whether that vendor will keep up with the pace of technology change in the marketplace.
It is a huge challenge for internal IT organizations attempting to build private clouds because they often have not dealt with the business – process reengineering aspects of private clouds. The information technology infrastructure library (ITIL) is a popular set of best practices that are widely used to run the in – house data centers of individual companies. ITIL practices are going to clash with cloud practices because ITIL is very manually intensive, and clouds, by definition, must be highly automated in order to achieve the levels of user self – service and the rapid infrastructure provisioning required for meeting user service requests.

At present there are few, if any, in – house IT organizations that can match the operating discipline, automation, and resultant efficiencies of the big cloud data centers being run by vendors such as Amazon, Google, IBM, Microsoft, and Rackspace. Cloud vendors invest in their infrastructure and in automated systems administration capabilities, to achieve great economies of scale and operating efficiency. In – house IT groups are always being squeezed to save money and to cut their operations budgets, so they are challenged to create the economies of scale that public cloud vendors can achieve.

The engineering disciplines promoted by lean manufacturing and implemented by the Japanese and Germans have set a standard that every other manufacturing company needs to match if they want to achieve world – class productivity and cost efficiency levels. Companies need to adopt similar practices regarding their equipment and the layout and operations of their data centers.
Public cloud vendors are bringing this same discipline to bear on their cloud data centers. The public cloud vendors have implemented a new world – class level of practices and use of equipment that in house IT groups must also adopt if they wish to achieve the same level of productivity and efficiency.

Cloud computing by its nature requires a lot of innovation; it demands steady innovation to make it work and to make it easy to use by a mass consumer market. Public cloud vendors in the business to – consumer world have innovated rapidly and done so over the last several years, in spite of our difficult economic situation. Where in the corporate world has so much changed in so short a time? The innovation cycles of public cloud vendors are usually much shorter than most corporate IT lifecycles; most companies work on five – to six – year lifecycles or longer. It will be a challenge for them to keep up with the pace of change initiated by public cloud vendors.

The rapid innovation cycles of public cloud providers like Google and Amazon are driven by real – time customer feedback loops. customer feedback drives their innovation in a much more effective manner than the feedback that drives traditional IT vendors and in – house IT groups. That is because the central business of cloud service providers is to make money by responding quickly to customer desires. In – house IT groups do not have that stimulus, and they are not seen as profit centers in their companies, so they do not have access to the same levels of investment to improve their service offerings.
If not used carefully, private clouds can defeat the central purpose and the value proposition that cloud computing provides to companies. With private clouds, companies still have the distraction of buying servers, building data centers, and operating enterprise systems.
In – house IT staff is still focused on running existing technology and systems instead of figuring out what new technology and systems the company needs.

In a world where products and services quickly become commodities and where profit margins are constantly being squeezed by this commoditization, it is the ability to continuously tailor these products and services that will earn companies an additional profit margin on top of the diminishing margins offered by those otherwise commodity products. The driving force of the responsive economy of this century is coming from the unleashing of innovation via cloud services that are quickly becoming available all over the world. Scientists can collaborate on health and environmental problems; businesses can cooperate to deliver tailored products and services worldwide; and in these business networks, companies can focus on doing what they do best and rely on other companies to perform the complementary tasks that are a part of delivering the finished product to the end – use customer.
It is through this agile process of continuous response to changing customer desires that most companies will differentiate themselves and find most of their profit opportunities. You could call the profits generated in this way as the “ agility dividend. ” Real – time global markets are continuously adjusting the price of commodity products towards their cost of production, just as real – time stock markets continually adjust the price of stocks. So it is in the agility dividend that most companies will find their best opportunities to generate profitable revenue that is above the prices set by global markets.

Cloud and SaaS vendors are becoming more and more like utilities, offering reliable computing power and basic applications like email, ERP, CRM, and a growing array of industry – specific applications. Over the coming years, these vendors will develop economies of scale and expertise that enables them to offer their services at a much lower cost than what most companies would spend to deliver those services internally.
Because of these developments now and over the coming years, companies will outsource more and more of their basic IT operations to manage their costs for basic IT services. This will, in turn, enable companies to shift more of their time and attention to doing things with IT resources that add value to their products and provide meaningful differentiation in the eyes of their customers. IT will be used to deliver competitive advantage.
Cloud computing thrives in entrepreneurial environments where leapfrogging the competition is a daily motivator. Innovators need tools that fi t their fast pace, their work – anywhere mentality, and their collaborative instincts. Cloud computing sets the stage for corporate innovation. Freed from lengthy implementation projects, moribund legacy applications, and armies of consultants, IT personnel can turn cloud computing into a competitive advantage.