It seems that the deeper you drill down into the middle market, the deeper the demand may be for cloud computing. Singu Srinivas, a partner with Waterstone Management Group, shares his thoughts on the middle-market dynamics that govern the adoption of cloud applications.
MME: Is there typical path that middle-market companies take when adopting cloud computing applications?
Srinivas: You’ll find that many middle-market businesses today have quite a few legacy elements within their technology landscape, and these are there as a result of some of the initial products and businesses that were launched. While these are not a legacy on the scale of Y2K, they can be significant for a business, and here’s where you find cloud computing penetrating an organization almost at the worker productivity level. What you see is workers using collaboration types of applications such as Dropbox for storage, or security applications on their desktop.
What has happened is that workers have gained confidence in these types of applications from an individual security level, and we see business leaders take it to the next level by asking themselves, “Okay, but am I now comfortable with our applications data being stored in the cloud for more of my mission-critical applications?” What we see is that while not every company is yet comfortable with having, say, their ERP system in the cloud, there is less resistance to evaluating sales force and pipeline management applications.
Meanwhile, while in the past these types of evaluations may have been limited to the leading three cloud vendors in Gartner’s top right quadrant, we see companies now asking about who the up-and-coming cloud services providers in this category are. What’s their economic model, and can I benefit from their applications?
MME: Does the adoption of cloud computing applications among middle-market companies often follow a common path?
Srinivas: When it comes to the lower middle market and smaller business, it’s really a bottom-up phenomenon in which the individual employees are using cloud technologies. And then it becomes more the top-down as we see CFOs become more aware of the cost and strategic benefits. Strategic means that we don’t have to put up or lease a building in the next geography we want to expand into — we can recruit a virtual team and we need only three people there instead of 10.
We view Step One as just getting the company to think that way, whereas Step Two is really getting your head around how much of what our company does is unique and what I can leverage out of the cloud without modification. The younger companies we have watched embrace the cloud more quickly and use it to disrupt markets, whereas the older companies are now saying, “Okay, how can I drive up margins?” So, there’s a different mind-set depending how long a given lower-middle-market company has been around.
MME: What are the types of issues that middle-market companies should be prepared to address when adopting cloud computing applications?
Srinivas: At first, we often hear “I want my own server, I want my own security, and no one else should access it.” Then they get a price quote back that doesn’t look a whole lot cheaper than what their traditional systems approach had been. So putting in requirements can in essence create barriers for a financial business case. The second piece of this is the relative immaturity of some of these applications. Of course, you have Salesforce.com and the bigger companies, but a lot of these lower-middle-market companies may identify applications that are being built specifically for their industry and category; these companies are not $500 million in size but they are $20 million or so and certainly getting comfortable around the viability of the vendors providing these solutions, especially as you get to offloading mission-critical applications to the cloud. The third piece is really specific to the lower middle market: These are lean companies with not a lot of overhead, and the transformation that these companies need to go through to correctly adopt these technologies is probably just one of two or three transformations that their company has ever gone through. I think that’s daunting for some chief executives, and this transformation now needs to be thought about as one of their top priorities.
MME: Are there a number of levels of privacy, or is there really a private cloud?
Srinivas: Yes, there’s the macro level where some vendors don’t have their own data centers; they use Amazon or large infrastructure providers, which is really the public cloud. Then companies can go to a smaller data center, which tells the business owner that they’re going to purchase servers for them specifically and they’ll host them and manage them, and you’ll get the benefit of the economies of scale of these servers not being in your back room but in their data center with all these other companies’. The next level is to say, “I don’t even want other companies that you work with on the same server, so I want a dedicated, secured, locked cabinet with all of the protocols that permit no chance of my data mixing with others’ data.” This last piece is really just outsourcing your back room to a third party rather than benefiting from the scale effect.
MME: So who is helping to drive the adoption of cloud computing applications inside middle-market companies? It’s usually two in the box, so certainly the business owner, but in a lot of cases it’s less about IT saying it’s time to upgrade. Instead, the CFO, a general manager, or business line leader is driving the initial push for adoption. And when it comes to businesses in the $50 million to $100 million range, we increasingly see the discussion taking place along with the expansion of market offerings and a need to take a different approach with new offerings or a new business line. As a result, they are talking about how this impacts their business model, and the CIO is often brought in to ride shotgun as part of that process.
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