As more middle-market IT leaders find themselves inundated with questions regarding the latest swarm of cloud computing applications, we asked Todd Burner, a senior director at CEB, to field a few of our questions regarding the cloud and its impact on the organizational dynamics inside middle-market firms. Burner has been studying the complexities of cloud technology adoption inside CEB’s middle-market member companies.
MME: Will we see a greater percentage of middle-market companies expanding their businesses more rapidly than similar-size companies have in the past due to the benefits of cloud?
Burner: I think that the answer should be “yes,” but I think too that the rate limiting factor here is each company’s risk tolerance. What we know is that cloud changes the nature of the investment up front. In the old-school world, IT investment very often involved capital expenditure–intensive projects. Cloud changes the investment dynamics, where the capex upfront investment becomes opex (operational expenditure).
The other benefit of cloud is that it is scalable based on actual usage. So in the past you had to buy servers based on what you thought the need of the business was going to be across some time horizon. Take a small $30 million company, for example. They may have a 5-year projection that they are going to get to $200 million in revenues. Well, if they are going to invest today in something that has a 5-year life span, they have to significantly overbuy relative to what their current needs are.
Here’s where cloud changes that dynamic. With cloud, you pay based on actual usage, so you can expand up or down the number of licenses you need based on actual need, so a company is able to more closely align its expenditures with the business needs. From that standpoint, we would expect to see more and more midsize companies use cloud to enable that type of growth.
At the same time, this is where it gets back to the question of what is a firm’s risk tolerance? Right now, people look at cloud-based offerings and say there are risks here that they wouldn’t have if they continued with their traditional IT approach. It might be that cloud offerings become more attractive to certain companies over time, and it comes down to companies assessing the risk and the business case for making the switch.
MME: We’ve heard that functional or department heads inside middle-market companies have garnered greater influence over IT decision-making when it comes to cloud offerings …
Burner: The way we refer to this trend is “greater business partner responsibility.” One of the big themes we’ve seen is that due to generational changes where a larger percentage of the workforce feels comfortable with technology and also as cloud offerings have evolved, it is easier for a business partner to make decisions about a piece of technology without necessarily understanding how it works. Ultimately, that’s one of the biggest benefits of cloud: It provides the business outcome that the executive cares about while it hides all of the technical complexity. Business executives feel more empowered to make these decisions. In fact, our data shows that middle-market executives are more comfortable not only identifying potential vendors, but also actually running entire IT projects, so you’ll see people from sales and sales operations leading the implementation of a CRM system from Salesforce.com, for example, that 5 years ago would have only involved IT.
MME: How is the role of traditional IT evolving?
Burner: Well, it depends on how the business makes decisions. It would be naïve to suggest that IT be involved in 100 percent of IT decisions, and more and more business partner executives are making these types of decisions. What we know is that the technology vendors themselves know that if they sell to a functional executive, they will have sales cycles that are half the time of what they would have if they tried to sell to IT, and these generally lead to deal sizes that are twice as large. You have a vendor community that knows that if they go around IT, they make more money in less time. Part of what we are working with IT executives on is how to make certain that their functional executives know the types of questions they should be asking, so when the sales executive has a call with Salesforce.com, they ask the right questions and avoid some of the biggest pitfalls they might encounter.
MME: When middle-market companies decide its time to consider the cloud, where do they begin? What should be the first question?
Burner: The reality is that there are different types of cloud offerings. From a functional perspective, there are three ways you can think of cloud: software as a service (SaaS), infrastructure as a service, and platform as a service. The challenge oftentimes with a lot of our members is that they talk about the cloud as a single thing, and as they evaluate it for their company, they ask the question, Is cloud right for us? They should be asking: What are we as a business trying to accomplish? Once a company has this answer, they can now begin to look at some of the subfacets of the cloud marketplace and determine where they can benefit from the cloud.
MME: It seems as though when it comes to the adoption of cloud offerings, lower-middle-market companies may be at a type of tipping point. Whereas 5 years ago only the most tech-savvy companies were using them, now almost all are using some form of cloud application …
Burner: We’ve seen a tipping point when it comes to general market awareness of cloud, and when you have in-flight magazines talking about cloud-based services, it’s clear that you have people outside of IT who understand the concept and who are asking the question, Should we be in the cloud? Looking at the data we have from midmarket companies reveals that the majority of companies are increasing their investment in the cloud space. From our data last year, we know that 55 percent of middle-market companies said that they would be increasing their investment in cloud areas.
I think the question is, How do we evaluate this? There are some unique risks and benefits that come along with a cloud model that they didn’t have to consider in the old world. Companies are now wondering what questions they need to be asking. They would like to ask those companies that have already headed down the path, What do you wish you had asked at the start?