Cloud Computing as an Enterprise Application Service

Introduction: Rethinking Enterprise Software Economics

Cloud computing is reordering the economics of software by alleviating many capital expenses (CAPEX), reducing the inflexibility of previous-generation software platforms, and eliminating the inability of on-premise applications to be customized on an ongoing basis to meet evolving customer needs. These are three of the top factors driving the adoption of cloud computing technologies in enterprises today. Implicit in all of the critical success factors forcing the migration from on-premise to cloud computing platforms is the greater agility and speed the latter platform offers. Line-of-business executives are increasingly defining the priorities of IT departments and often the budgeting cycles as well. Their primary concern is the ability to quickly get up and running on a new enterprise application, integrating its workflows into existing legacy and third-party systems, databases, and applications, while also realizing the performance gains of the new software (Bentley, 2008).

Due to these factors, cloud computing is evolving rapidly, changing the economics of enterprise software especially. Large-scale systems are most often purchased using Capital Expense (CAPEX) budgeting processes that can take several months to over a year to complete. CAPEX-based spending on enterprise software often also requires board of directors authorization for large expenditures. The greatest cost benefit of cloud computing applications is that they do not require this level of funding approval, as cloud-based applications are typically expensed. The Operating Expense (OPEX)-based approach to purchasing that cloud computing applications in general — and Software-as-a-Service (SaaS) specifically — create through their scalability and usage models is leading line-of-business managers to pay for them out of their operating budgets, bypassing the Chief Information Officer (CIO) for approvals (Aljabre, 2012). This has also completely changed the balance of power in how software is purchased and used in enterprises today.

Throughout this analysis, these dynamics are examined in the context of the strategic importance and objectives of cloud computing, while also reviewing the operations management concepts of cloud-based applications. The analysis concludes with a series of recommendations for improving cloud computing operations.

Strategic Importance and Objectives of Cloud Computing

Unifying legacy, third-party, and enterprise-wide systems while simultaneously improving time-to-market for new product development strategies are two of the many strategic priorities that drive enterprises to adopt cloud computing platforms. The economics of this platform are pervasive across all enterprise systems, with the most immediate impact seen in line-of-business applications that can be readily replicated onto a cloud computing platform. Because cloud computing economics favor OPEX-based purchasing models — where enterprises pay only for the computing power, processing, and storage time they actually use — Customer Relationship Management (CRM), accounting, finance, Human Resource Management (HRM), and most recently Enterprise Resource Planning (ERP) systems are being migrated from costly on-premise licensing models to cloud-based pricing models (Dihal, Bouwman, de Reuver, Warnier, & Carlsson, 2013).

The strategic performance objectives of cloud computing include providing enterprises with greater cost efficiencies in their use of computing systems, as well as accelerating how quickly an organization can integrate legacy systems and accomplish long-term strategies. These strategies include more efficiently orchestrating new product introductions, which are by nature highly integrative and synchronized. Another dimension of cloud computing's strategic importance is the transition of IT infrastructure-centric assets to a more solution-centric role within the organization (Bowers, 2011). This migration is also re-ordering all of enterprise computing, with cloud computing serving as the most disruptive catalyst forcing the redefinition of the enterprise software market.

The technology structure of cloud computing comprises several layers. Cloud Services Enablement — also referred to as Infrastructure-as-a-Service (IaaS) — forms the foundation of cloud computing platforms. Management and Security Services, System Infrastructure Services, and Application Infrastructure Services represent the Platform-as-a-Service (PaaS) layers of the cloud computing architecture. Application Services and Business & Information Services constitute the Software-as-a-Service (SaaS) level. Taken together, the IaaS, PaaS, and SaaS stacks combine to create the complete cloud computing stack (Dihal et al., 2013).

Cost efficiencies are created through the use of multitenancy models to manage applications across the entire cloud computing stack. Multitenancy is often considered best practice for attaining higher levels of profitability over time, as a single instance of a given application can serve multiple customer accounts (Corbett, 2009). While security considerations remain significant, cloud computing platform providers — including Amazon, Google, IBM, Microsoft, and others — continually invest in research and development to strengthen their cloud platforms. All of these factors together yield more secure, scalable, and cost-effective cloud computing platforms that enterprises are increasingly relying on to manage their application suites.

Operations Management Concepts of Cloud Computing

Cloud computing's initial adoption was oriented largely toward the development of applications that streamlined easily replaceable workflows in enterprises. This included basic forms of CRM, sales management, and partner relationship management. In many cases these workflows had been completed manually less than a decade before enterprise software was designed to automate them, so enterprises were accustomed to viewing them as candidates for cost reduction through automation. This mindset of moving from highly manual processes to automated workflows has continually progressed over the past five years, accelerating into more complex areas of the enterprise (Dhar, 2012). Where complex CRM workflow implementations once presented significant challenges, more sophisticated procurement workflows — including source-to-pay, contract-to-resolution, and order-to-cash — are now being implemented with regularity.

The progression of cloud computing at the enterprise level has also driven greater acceptance and adoption of large-scale Enterprise Resource Planning (ERP) systems (Yoo, 2011). These systems ensure that inbound supply chain, pricing, services, logistics, production, distribution, and sales systems remain synchronized with one another. ERP systems evolved from traditional Material Requirements Planning (MRP) systems that were widely used for managing single-instance production environments. With greater variation in production centers, sourcing contracts, and the advent of two-tier ERP deployment strategies that capitalize on cloud computing, adoption of cloud-based ERP systems is continually increasing. This is especially true for companies whose supply chains, production centers, and markets span diverse geographic regions.

Conclusion

Cloud computing continues to reshape enterprise software at every level — from the economic models that govern purchasing decisions to the operational workflows that define how organizations function day to day. The shift from CAPEX to OPEX models has redistributed power from centralized IT departments to line-of-business managers, accelerating adoption across CRM, HRM, and ERP systems alike. Yet as the Olympus case demonstrates, the most significant challenge is rarely technical. Organizations that invest as seriously in change management, top management sponsorship, and user training as they do in technology selection will be best positioned to realize the full competitive and operational benefits that cloud computing platforms offer.

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