IT Spending On Cloud Ratcheting Up

Market research for the venture capital firm, the Sand Hill Group, has concluded that cloud computing represents one of the largest new investment opportunities on the horizon.

In a 90-page report, M.R. Rangaswami and Kamesh Pemmaraju cite a CIO who said that spending on cloud computing will reach 40% of his IT budget in the next three years and 70% in five years.

In an interview, Rangaswami said the comment came from "the CIO of a major software company that we interviewed, not prone to making exaggerated comments." He defended it as in line with other less dramatic but assertive comments from the survey. Rangaswami conceded that IT spending today "is not a whole lot. Sixty-eight percent of respondents said 0%-3%."

But the survey also shows that in three years, 16% expect to spend 30% or more of the budget on cloud computing; 8% will spend 21-30% of the IT budget; 22% will spend 11-20% of the budget; and 24% will spend 7-10% of the budget. Those expecting to spend 7% or more make up 80% of the sample, he said.

Based on those figures, Rangaswami projected that large enterprises with 10,000 to 15,000 applications are considering moving 2,000-3,000 applications to the cloud over the next three years or obtaining them there as software as a service.

Rangaswami aired the report's conclusion at last month's Cloud Connect Conference and asked IBM's VP of Cloud Services Ric Telford what he thought: "I have no problem with those numbers (40% in three years; 70% in five) as long as you include the caveat, it could be any one of five delivery models."

Software-as-a-service, infrastructure-as-a-service, and platform-as-a-service are three delivery models often used in talking about cloud computing. Telford didn't specify two additional ones, although analysts also refer to "public" and "private" cloud forms.

Telford went on to say, "In five years, I would say we won't even be using the term 'cloud.' It will just be the norm. It will be the way we do IT."

In the interview Rangaswami said the Sand Hill Group commissioned two Web-based surveys with 511 respondents, followed by 40 interviews to reach its findings. Twenty-two of the interviews were with systems architects, VPs of IT or CIOs at small, mid-sized and large companies. The quantitative Web surveys were conducted by McKinsey & Co. and TechWeb, a UBM company which publishes InformationWeek.

The weak economy and IT cost cutting appear to have been a primary driver of cloud computing over the last two years, but the report found those to be secondary reasons to go to the cloud. "Forty-nine percent of companies are driven to the cloud for business agility reasons, while only 46% are motivated by cost efficiency," the report states.

The ability to produce the software that supports a new product or service seems to happen faster in the cloud. A developer can produce iterative versions that deploy easily because they've been developed in the deployment environment, and they scale there without added work.

A chief architect at a petroleum company is quoted as saying: "I've seen 'skunkworks' projects where smart developers figure out something to do with the cloud over the weekend. They come in and show it to their boss and their boss is blown away because it took a tenth of the time and cost of what it would if done in the normal way... The cloud brings together these pockets of innovation in the company. We need that."

"Innovation is one of the key ingredients. Let's go out there and find new ways to get to market with new applications. It's a big driver," Pemmaraju said.

Nevertheless, the cloud remains an attractive alternative cost-wise. Interviewees didn't hesitate to describe the cloud in the report as "an order of magnitude cheaper than comparable on-premises solutions."

A different angle on the savings came from a CIO, quoted as saying cloud computing and on-premises computing are roughly equal in expense at the three-year mark. But cloud computing starts to pile up savings over the next few years because there is no hardware refresh involved at the end of three years. None of the interview subjects were named.

Another conclusion in the report is that many small businesses and some medium sized businesses consider the cloud to be a more secure form of computing than their own operations. The survey and followup interviews indicated small companies "know they don't have the security they need to have in their own environments. They consider the security of the leading cloud vendors to be far better than anything they could hope to have," Pemmaraju said.

Many companies will weigh their need to continue secure handling of certain kinds of data with their desire for lower cost and more agile cloud computing. The result, the report predicts, will be rapid adoption of hybrid cloud computing approaches, where some use is made of the public cloud in conjunction with internal operations.

"Both our qualitative interviews and survey data found little use of hybrid clouds today. However, our survey indicated the biggest growth will be in this area," the report concluded.

The Sandhill Group reports on major trends in computing for the investment community, such as the venture capitalists located along Sandhill Road in Menlo Park, every two years.