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.

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.

Strategic Importance and Objectives of Cloud Computing

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.

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.

Olympus relies on a widely distributed operating model that illustrates how diverse their enterprise systems are and how they have used NetSuite, a cloud-based ERP system, to unify these diverse global systems onto a common platform (Olympus Investor Relations, 2012).

Olympus chose to implement a SaaS-based ERP system because the operating costs were significantly lower than continuing to rely on a series of SAP-based on-premise ERP systems. The decision to standardize on NetSuite and eventually consolidate the SAP-based ERP systems saved Olympus millions of dollars a year in maintenance charges and led to greater production efficiencies as information was shared in real time. One major benefit of the cloud-based ERP system was the ability to reduce incremental spending on additional modules as Olympus continued to expand. This also helped streamline reporting lag times, which on SAP ERP systems ran in batch mode and often required two to three weeks to generate a full activity or costing report. Using a cloud-based reporting platform, Olympus was able to create real-time reporting using analytics applications linked to production centers in Asia and report sales results in the United States within the same time period — with no information latency.

The result was that Olympus became significantly more competitive and was able to deliver products on or before schedule to its many resellers and channel partners globally. The company also improved overall new product introduction performance. These gains were achieved by streamlining integration with legacy systems and ensuring that each aspect of new product development, supply chain planning and execution, distribution, and sales was unified with the new cloud-based ERP system (Yoo, 2011).

Operations Management Concepts of Cloud Computing

Olympus was also able to customize its ERP systems far more efficiently than had previously been possible. On-premise ERP systems from SAP had to be reconfigured through a highly specialized, difficult-to-understand programming language called ABAP. SAP designers had created ABAP specifically as a transaction processing language, defining their own syntax to ensure commonality across all SAP ERP versions. The challenge for many enterprises is that ABAP does not integrate easily into legacy environments due to byte ordering, compression, and unique syntax requirements. Cloud computing-based integration applications were able to replicate ABAP code and emulate the functions of an ABAP controller, creating a unified network. What Olympus accomplished was the creation of an entirely new enterprise computing platform that accelerated the most critical business processes its operations depend on. Cloud computing technology, used as the foundation of this shift from on-premise applications, was one of the primary catalysts of its turnaround as a global competitor in camera, imaging, and advanced optics markets.

Based on an analysis of cloud computing and its revolutionary impact on the economics of software — both generally and in the enterprise context — a paradox also emerges for many organizations. With so much latent demand to replace monolithic on-premise ERP systems that cost millions of dollars a year in maintenance, it is clear that many organizations are actively evaluating cloud computing-based platforms (Dhar, 2012). The paradox is that while the economic case is compelling, the change management strategies and initiatives within businesses are often slow to respond (Lin & Chen, 2012). It is not the technology that slows businesses down from adopting cloud computing — it is the high cost of changing how people work and the strong resistance many employees have to modifying their daily routines. This is the central paradox of cloud computing productivity: how to capture the economic gains of new technology while effectively managing the human dimension.

First, like ERP, cloud computing faces a significant challenge from a change management standpoint. To overcome these challenges, organizations need to follow established ERP New Implementation Critical Success Factors (CSF). These are directly comparable to large-scale cloud deployments, as the most successful enterprise cloud implementations fundamentally change business processes to make them more efficient and focused. The same principles hold for ERP implementations, and they apply directly to cloud-based ERP deployments as well (Velcu, 2010; Nah & Delgado, 2006).

For enterprises evaluating cloud computing-based architectures and applications, the most critical decision is how to structure the decision framework. Too often enterprises approach new technology with strong assumptions about cost savings that do not fully materialize. For cloud computing-based architectures and applications to deliver their full potential value, a framework must be created that weighs the specific business strategy contributions of the cloud-based applications first. Once the total value of the cloud-based architecture has been determined, the decision to pilot the system can be made (Low, Chen, & Wu, 2011).

Second, top management support is essential for any cloud-based architecture or application to succeed. Not only can senior leaders clear organizational roadblocks, they often serve as role models for the broader workforce (Truong, 2010). This dimension has direct bearing on attitudes toward change and on how the change management program is defined. The third most critical success factor is the clear definition of goals and the formation of a balanced project team. This is essential for unifying the first two critical success factors while also establishing a strong project management foundation. All of these critical success factors reinforce one another over time, creating a solid change management base that increases the probability of success for any enterprise adopting cloud computing.

Conclusion

Wenrich, K. I., & Ahmad, N. (2009). Lessons learned during a decade of ERP experience: A case study. International Journal of Enterprise Information Systems, 5(1), 55–73.

Yoo, C. S. (2011). Cloud computing: Architectural and policy implications. Review of Industrial Organization, 38(4), 405–421.