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For Executives, Entrepreneurs, and other Digerati who need to know about SaaS and Web 2.0.

The Big Switch Requires A Big Shift In Thinking And Strategy

Posted by Bob Warfield on January 11, 2008

The Big Switch is Nick Carr’s term for the emergence of Utility Computing in the cloud over software installed in individual data centers or machines.  It’s also the title of a new book he has out on the topic.  There’s a lot for everyone to be thinking about with respect to The Big Switch.  It’s full ramifications are still far from clear, but the areas it has touched so far are profoundly changed.  We are further along in The Big Switch than most people suspect, and the momentum to continue is unstoppable.  Google is accessing 20,000 Terabytes of data a day and growing rapidly.  Consider that The Big Switch’s electric utility meter.  That little disc is only going to spin faster and faster and its already whirling at a fantastic rate.

The software world has felt it in the transition from perpetual license software to Software as a Service.  Many are still unconvinced that there is a transition, and feel it’s only an alternative market, but there’s more to it than that.  SaaS is a disruptive and corrosive influence.  It is simultaneous cheaper and better for the customer and much more costly for the seller.  This makes it hard for the incumbents to consider switching wholesale and protects the SaaS upstarts long enough for them to reach dangerous critical mass.  SaaS insulates its providers to a degree from the vagaries of economic ups and downs.  A SaaS company has the benefit of recurring revenue to help tide it through while growth slows.  Provided it treats customers right to minimize churn, a SaaS company can even show growth in down times.

Chris Cabrera says, “SaaS is becoming increasingly savvy.”  He’s talking about SaaS vendors, but it applies to buyers too.  Any recession in 2008 will make SaaS the new black.  Companies will find it is an extremely effective way to cut costs while increasing service levels.  That’s part of its disruptive nature.  Dan Farber quotes Jeff Kaplan saying:

In this tenuous climate, consumer and executive confidence could decline, leading to an economic slowdown. As a result, many companies could hold back on their capital investments to mitigate their risks. The ability to adopt on-demand services on a pay-as-you-go basis will be a perfect sourcing strategy for businesses seeking greater cost-controls and flexibility.

Farber calls this “recession proofing”, both for IT and SaaS vendors. 

Cabrera adds an interesting booster stage to what was already poised to be an exciting launch:  this comes at a time when SaaS is maturing to it’s “2.0″ phase.  The first generation products were regarded as having limited functionality.  They were okay for small businesses, but not good enough for big.  That’s changing rapidly.  SaaS vendors are listening to their customers and filling in the blanks.  It’s hard to argue today that the leaders such as Salesforce or Concur in any way have compromised functionality relative to other “big” players.  The listening process works all the better because SaaS vendors have a much closer relationship with customers than conventional software vendors.

SAP blogger Michael Altendorf is hesitant to make predictions for 2008, but he does notice some similarities in the predictions of others.  Specifically, he looks at those of IDC, Battelle, and Dion Hinchecliffe and tacitly predicts himself by choosing what to emphasize.  His list is interesting:

  • Small and Medium Business is More Important in 2008:  This is the sweet spot for SaaS right now.  It invariably starts with SMB and then moves up market, much as the PC started out small and got very big.
  • More Mobile Internet:  Another symptom of the Cloud.  The more capable your mobile device is, the more inconvenient it will be if your data isn’t in the cloud and accessible 24×7.
  • Macro-economic forces will drive change.  Again, this is plays to The Big Switch because switching is a cost savings move.  Globalization is made easier through the Cloud.  Either way, The Big Switch wins.

Another trend that’s clear is consumer applications lead business applications in The Big Switch.  We’re watching a mass exodus to online gaming, online video, online music, and online Social Networking.  I wrote recently about the massive market forces at work here, but we ain’t seen nothin’ yet.  That’s all about entertainment and leisure, but there will also come a slightly more delayed Big Switch for productivity applications.  Already we see a migration of communication to pure online venues like Twitter, blogs, or the news feeds in Social Networks.  It’s hard to quantify that migration, but its happening.  In fact, the pundits are uniform in their conclusion that a wave of consolidation among Web 2.0 is likely.  That’s a necessary precursor before the next punctuated equilibrium creates a whole raft of new applications that will further fuel The Big Switch.

It’s clear what The Big Switch means to business and consumer software companies, but what about IT?  Nick Carr himself became famous for announcing that IT Doesn’t Matter.  Now, he’s back pedaling a bit on that by saying that IT’s Alive!  Why the, ahem, big switch?  Because the rumors of IT’s demise were greatly exaggerated.  The Big Switch does not presage the demise of IT, but rather, it’s repurposing and retooling.  The Big Switch frees IT of the burden of dealing with commodity tasks that others can often do better.  Why tend to a data center if Google has perfected the task on a far larger scale?  Why not focus on things that uniquely differentiate the business?  The latter has always been a mantra for IT, it led to the great outsourcing shift, but it is difficult to live by.  In many ways, The Big Switch is Bigger Better Outsourcing.  Why hire a 3rd party if you could have the guys who wrote the software tending to it for you?  Surely they can do it better and more cheaply.  And in fact, they almost always do.

In Nick Carr’s view, the IT department will not cease to exist, but it will look a lot different, and a lot less technical:

Many of the information-management and process-design skills currently housed in IT departments will continue to be of great value to companies, of course, but they will likely have been absorbed into business units and other departments instead of being isolated in a technically focused corporate function. Many of the purely technical jobs will have shifted from the users to the suppliers or been automated out of existence.

I’m not sure I agree with the “less technical” aspect.  Nuts and bolts technologies associated with the care and feeding of datacenters will be greatly diminished.  However, an entirely new list of technical skills will be needed for companies to be good at evaluating, using, and most importantly, integrating a set of software solutions delivered in the cloud.  When everything changes, I think it raises the bar on skill sets rather than lowering it.  It also changes the focus.

Even more interesting is the potential the Big Cloud has to free up resources to spend more time doing unique work.  There will always be opportunities for software to give a business competitive advantage.  Freeing up resources that are not delivering any technical advantage by outsourcing to a SaaS provider may enable businesses to invest more in such unique opportunities.  This too is a highly technical area.  Writing software isn’t easy, after all, but it is getting easier.  In fact, the Cloud has the potential to make it much easier in a variety of ways.  Why should IT cash in on this as much as anyone else for their internal projects?  And so Platform as a Service has an important role to play.  With it comes a renaissance in tools and other platform-related software.  With the infrastructure moving into the Cloud and being run by someone else, IT may find its less important to focus on complex tools like Java or C++.  It may make more sense to focus on newer simpler tools such as Ruby on Rails.

Which brings me to the next arena where The Big Switch is being felt.  Benchmark recently made an investment in Engine Yard, which is a perfect example of what I just mentioned.  First it capitalizes on a newer platform: Ruby on Rails.  Second, Engine Yard is focused on delivering the new platform from the Cloud and on dealing with scalability so developers don’t have to.  Perfect!  It will make it that much easier for IT and other users to put together new applications that deliver unique value.  Expect to see a lot more of the investment community wondering how to cash in on The Big Switch.  They’re all very much aware of it and interested, although so far they are much more interested in the consumer side than the business side, let alone the tools and platform side.  Yet the other two will follow as they so often do.

David Feinleib, a VC with Mohr Davidow Ventures, recently called The Big Switch “The New Tech Investment Wave”.  I think he’s right, and the wave is just gathering steam.  Aside from some expected consolidation in the Social Networking arena, it should have a good long ways to go before it crests.  Feinleib likens The Big Switch to a shift from client-server to cloud computing.  Remember how big and how long the client-server switch lasted?  Aren’t most of the business software companies of today, especially the biggies like Oracle and SAP drawn from that last wave?  Quick, does anyone remember the companies that preceded them?  And therein lies the interesting game.  The Big Switch is disruptive as I have mentioned. 

Nick Carr draws analogs to the early days of electricity.  Think Thomas Edison and DC as the incumbent client-server gang.  Think Nikola Tesla and AC as the Cloud challengers.  Guess what?  AC won the day because it was better.  Interestingly, even though Tesla’s ideas won out, a lot of the old guard was able to embrace and extend.  Times have changed.  The game moves much quicker now.  It’ll be interesting to see whether everyone can keep up.

Throughout all of this Sturm und Drang, it is important to keep ones wits about one’s self.  There will be tremendous turmoil for some.  Recession superimposed on change will supercharge the economic forces already at work.  It’s time to quit avoiding The Big Switch and figure out how to succeed by going with it.  That’s what I call The Big Shift.  Anne Zalenka reminds us on GigaOm that this is all really a Good Thing.  In his book Carr argues that The Big Switch disenfranchises the middle class and creates a new class of super wealthy.  He’s wrong and short sighted, and Anne brings back some much needed perspective.  Commoditization is always hailed as destroying the middle class.  Mass Production should have done it a long time ago.  Jeremey Rifkin, another academic like Carr, wrote a book called The End of Work that predicted we would have so few jobs that we’d have to ration working hours due to all the automation.  Since the book was written the Dow has flown higher than ever before, and despite the looming recession, times are really pretty good.

The reality is much different than Carr and Rifkin’s gloom.  Commoditization is a healthy force that increases the efficiency of the market.  It drives people to retrain and redeploy where new opportunity is available.  Carr says broadcast and publishing jobs declined by 13% due to the web.  But, as Anne points out, Network Systems and Data Communications is forecast to grow by 54%.  And, creative people are now empowered to go directly to their audience without so many middle men taking their cut.  Commoditization makes scarcity artificial, which creates rather than destroys opportunity.  And, when the pie gets bigger, there are more fortunes to be made.  Everyone won’t be Google, but who wants to be after a while?  The life of the commoditizer can get tedious too.  Have you seen WallMart and Dell lately?  What did they accomplish?  The Walton family and Michael Dell made fortunes, but they also cleared the way for higher end boutique stores in WallMart’s case and a variety of new and interesting PC players including Apple in Dell’s case.

Dan Farber summarizes well (as he often does) with:

More interesting and critical than the formulation of grid infrastructure is what emerges culturally, socially and economically from a super-high speed connected planet enabled by the Big Switch. Nick believes that wealth will be consolidated into the hands of a few companies, a concentration of power that could have negative implications. Given the changes we have seen in the first decade of the public Internet, the next few decades will bring accelerated disruption and innovation impacting all facets of our lives.

If you follow Nick Carr’s gloom and doom views, you’re going to be run over by the freight train.  If you see it for the opportunity it is as Zalenka suggests, you can reinvent your business and career to new heights that wouldn’t have been possible before. 

Vive la Big Switch!  It’s gonna be another great ride. 

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2 Responses to “The Big Switch Requires A Big Shift In Thinking And Strategy”

  1. Hi Bob!
    Happy new year!
    I would like to write detailed predictions but I do this only internal…
    This blog entry are only some thoughts about articles I read last week and not a full overview about all upcoming things in 2008. But feel free to give me some more hints on your post SaaS Business model…I am not sure what this could be, although I know about the key messages of “The big switch”, commodization of IT etc..Perhaps I will read the hole book in my next holiday
    Best regards,
    Michael

  2. [...] Coté’s Excellent Descri…fuzzyman on Is Programming Like Music or E…Michael Altendorf on The Big Switch Requires A Big …Best of Feeds – 23 l… on Is Programming Like Music or [...]

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