Gartner recently made the following prediction about the growth of the Software-as-a-Service (SaaS) delivery model for IT solutions:

“Worldwide SaaS sales will eclipse $8.5 billion, up 14.1 percent from 2009 sales of $7.5 billion. More telling, this rapid increase in both customers and SaaS vendors means that on-demand applications will make up a larger percentage of total enterprise software sales this year and for the foreseeable future.” (Forecast Analysis: Software as a Service Worldwide from 2009-2014, July 2010, Gartner)

Challenges with Rapid Growth

There are over 1800 SaaS-based solutions on the market today. Several have become familiar names in corporate settings such as Salesforce.com, NetSuite and Intuit. As these SaaS offerings mature and the benefits become more widely recognized, many more organizations are going to adopt a broad assortment of SaaS and cloud based solutions.

The adoption of these solutions creates a new set of problems that many departmental users are reluctant to recognize.  The concern is around governance and the potential risks to the business resulting from a proliferation of SaaS and cloud-based solutions due in part to the ease with which they can be purchased and deployed. There are similarities growing between now and the late 1990’s and early 2000’s, when it seemed every department had their own little app with an Access database or had projects with their own independent web developers. The difference today is that instead of undocumented databases on desktop PCs, you’ve got sensitive corporate data being generated somewhere out in the “cloud”. This proliferation of SaaS and cloud solutions exposes the larger organization to risks around data security, business continuity, access controls, regulatory compliance, contract management, and a host of other issues. In the past, application sprawl was contained within the company’s 4 walls and/or held in the IT budget so you could attempt to manage it. Today with SaaS, it can live out in the cloud and be easier to purchase under the radar.  

What’s needed to protect your SaaS?

You need a consolidated governance platform that can efficiently manage all those SaaS and cloud based solutions. Only when you provide consistent policy enforcement and management can you adequately protect your business IP, ensure regulatory compliance, and perform consistently across your customer SLAs. Generally speaking, enforcing governance implies a reduction in usability or convenience, but when a policy-driven governance approach also greatly improves automation and efficiency, you can have your cake and eat it too. Additionally, you can cover not just your SaaS, but also PaaS, IaaS, and internal and external cloud service providers with a governance and management solution that can improve the service delivery lifecycle for each of them.

Why is Now a Better Time than Ever to Release your Inner IT Creativity

IBM recently interviewed over 1500 CEOs and industry leaders in a report titled, “Capitalizing on Complexity” that had the CEOs prioritize their organization’s criteria for success.  Interestingly enough, the single most important criteria selected by the CEOs was “creativity” to enable business model innovation.  That’s right - not buy more companies, attending more leadership training, or driving costs down further - but creativity.

Creativity - The Good and Bad in an IT Group

If as the CEO of a company, you only consider IT as a cost center in need of cost reductions then you’re bottling up an area of opportunity that is truly the fuel for your enterprise’s creativity engine.

Unfortunately, IT creativity is sometimes considered dangerous. It is assumed that a creative IT department is a group prone to taking unnecessary risks, or will get itself into trouble by wanting to “invent everything here”.  Also, there is the specter of spiraling costs because of a lack of standards or control.

Allowing Your IT Group to Be Creative Doesn’t Mean They Do Everything Themselves

Its important to address what jobs, and therefore, what projects we want our internal creativity to influence. There is significant opportunity to move more of the IT function closer to the business to be more creative and minimize the manual, repetitive and mundane functions significantly.  Many IT organizations are trying to make the shift, but are held hostage with the majority of their current budget and resources consumed by maintenance and support of their IT infrastructure.

Information technology can in fact be a tremendous catalyst for unleashing creativity.  Just in case you’re thinking that I might be a little colored in my opinion of IT, let’s take a quick walk through some major IT milestones:

1970’s: Mainframes with timesharing

1980’s: Personal Computing and distributed access to productivity tools, along with a tremendous uptick in application development.

1990’s: Real portability of computers and the Internet or “Information Age” was born

2000’s: Virtualization, handheld devices, Cloud computing and an application explosion or what I like to call the “Real Democratization of IT”.

There is a clear pattern here. Change and creativity in IT is at the core of many of the most explosive waves of growth and opportunity for businesses. The issue is how do you position IT to be most effective for your enterprise? Each company will have to grapple with that question to find the right answer, but suffice it to say, for most companies, it means moving your technical staff up the value stack. If your team is like most IT organizations, their budget is probably split 70/30 with the 70 focused on “maintenance” activities. The 70/30 equation needs to be reversed.

Enabling enterprise creativity requires a well conceived IT strategy that highlights the use of very responsive, flexible, and scalable IT operating models and infrastructure.  It doesn’t mean that you need to hire an army of IT talent and try to beat Microsoft, Google, Apple, or whoever your industry goliath is. An effective global use of technology does mean that you find a way to provide IT services in a just-in-time fashion.  Your IT resource needs to be like the camera in your phone, it’s ready whenever you need it, where ever you happen to be. In the past many important Kodak moments were missed because we didn’t have a camera ready. Your IT needs to respond to business creativity and innovation like the camera in your phone - instantly, easily, and inexpensively.

Instantly, Easily, and Inexpensively - How the Heck Do We Do That?

It starts with IT leadership. If you don’t expect your IT team to be creative, then you might get good cost management and solid availability of applications but not much else. If you do ask your IT team to be creative, then you need to demonstrate you mean it by putting in the right reward systems.  Next, you’ll have to think beyond having solid infrastructure and highly available applications. Enabling an instant, easy to use, and inexpensive IT environment doesn’t happen overnight, but the tools and resources are available and largely proven; and for many industries and organizations the time is right.

Help your IT team make the move to an “Agile” infrastructure and “Everything as a Service” IT operating  model.  This is more than just new tools. It’s a new way of delivering and enabling the creativity locked in your organization. If you want to react instantly to new ideas and business opportunities, then you need an IT environment that can keep up.

If the CEO needs to be creative, then why lock up the single best tool for helping to build on those creative ideas? Go ahead and release your organization’s inner IT creativity. You might be very surprised at the positive impact on your business.

Say it isn’t so, how could modern client server virtualization have gone from nothing, to golden, to plumbing in just 12 years.  I’ve spent the better part of the last 7 years of my career helping companies take advantage of virtualization. I’ve implemented it in SMBs, consulted with large enterprise and strategized on its impact on data center design. As an IT guy the introduction of virtualization to the market was the best thing to happen since the Internet, I mean I love this stuff.  However, now it seems like the shine, the thrill, the oohs and aah’s are fading, why is that? What’s happened in the last year to make me believe I should consider virtualization differently? I mean hypervisors, Vmotion, dynamic resource scheduling, and dynamic power management, they’re all still useful and important, right?

Where are we in the lifecycle of the virtualization market?

I see the virtual software market as having two phases so far. Phase I brought us more for less, more virtual servers vs. physical, greater functionality and dramatic improvements in the flexibility and usefulness of our infrastructure. In Phase II virtualization created the foundation for the cloud movement. New features like dynamic workload management, automatic scale and server architecture abstraction. Phase III will likely be when we see virtualization truly commoditized. So the importance is there, but not necessarily as a change agent.

What does the next 24 months look like?

Today the market for virtualization is still going gang busters and until the vast majority of application workloads have been moved to the cloud the virtualization market will stay strong.  However, the horizon for the importance of innovation at the virtualization layer will hit in about 18-24 months, if it hasn’t hit already.  After 24 months innovation in the cloud software, server & CPU markets will have overtaken virtualization through the sheer number of companies involved.  There are hundreds of companies making products for the “Cloud” market, there are less than 10 real server virtualization players.  Today technologies that would have seemed like miracle tools just two years ago are readily available from dozens of new players.  We’ve got tools that will move workloads, spin up VM’s, help you move from one cloud to another, distribute load based on demand, provide cross site availability, automate network provisioning and so on. We’ve got new server manufacturers that are building solutions that don’t need virtualization and chip manufacturers that are building virtualization into the chip. Innovation in the cloud hardware and software market will far outstrip the ability of the three to five primary virtualization players to keep up. Sure, we’ll all still need our VMs, but we won’t need to care anymore about who’s VMs they are. There are even cross platform management and VM visibility tools available, making innovation in tools like VMware’s excellent Virtual Center less important.

So what’s next for the big names in virtualization? 

Companies like Microsoft, Citrix, VMware & Red Hat must develop visions and technology strategies that transform them from being bit part providers to strategic partners. A great example of the potential risk is how HP missed the Internet boom in the late 90’s. They bought several web technology companies, but couldn’t transform their acquisition strategy into a coherent vision for the enterprise (of course HP has the diversity and scale that allowed them to survive this vision misstep). I think in each case these companies are making an attempt at transforming, but none of them have effectively spelled out how they will combine their virtual roots with an “Everything as a Service” IT business model for the enterprise.  VMware bought Zimbra and SpringSource and both companies have interesting potential. However, there’s been no vision spelled out for what these technology and services oriented acquisitions mean for their core customers in the long run. Microsoft has started saying “Cloud first” revenue second (indicating a strong focus on moving business and software delivery to the cloud), and both Microsoft and Citrix have tools for managing heterogeneous virtual environments. However, none of these moves really tell a customer what they need to hear, which is “why”. Why are we doing what we’re doing, why are the things we’re doing creating an ecosystem that supports enterprise IT transformation to an everything-a- a- service model. We have to remember that business enablement is the goal, not new technology. Again, the key point here is that cloud, virtualization, and other IT solutions are a means to an end, not an end in and of themselves, unless you’re Microsoft, Yahoo, or Google.

 Historical Industry Parallels in Technology Trends

Over the last 10 years “cell” technology has gone from being "the" reason for a phone to being “oh ya”. The technology is still critical, but it’s the ecosystem of the modern smart phone that has turned it in to something much more useful than just a tool for making calls. These market changes in where value from cell phones comes from parallels the hypervisor.  In 2005 the hypervisor was the clamshell phone, now it’s the underlying enabler for so many other solutions, like cell technology is to an iPhone.

Where Will the Early Players Land

I believe we’re seeing the dawn of a new age of Agile IT and its unfortunate but likely true that some of the companies that enabled this new age (VMW, RHAT, MS, Citrix) won’t necessarily be the long term winners.  As the dominant player with the strongest product set VMware has the most to lose and the most to gain in this changing market. RHAT seems most at risk as they are primarily focused on the nuts and bolts of infrastructure operations.  Citrix & MS working together is interesting and their efforts to provide multi-platform management are also important. Will each of these companies continue to play a part, sure? The question is will it be a strategic enterprise part or a bit part similar to a commodity piece of hardware?

Paul Venezia got me thinking this week with his InfoWorld article, Why do we trust Google? In the article, Paul points out that generally people are reluctant to hand personal data over to a third party, unless that third party is Google. While Google has a "Don't be evil" motto, that's hardly reason to extend them trust. After all, that's exactly the motto you'd expect for an evil corporation, right? Paul rightly points out that with all the various data that Google is collecting about us, starting with search terms but then extending to location data used with Google maps on smart phones, to email, to documents, there is a lot you can know about a person if you just sift through the data and make connections. And Google has really great infrastructure to sift through that data. Should that concern us? You bet. But that said, at some point you have to start trusting service providers. The only alternative is to completely avoid using service providers at all.

For instance, the Amish culture's avoidance of many modern conveniences is not because these inventions are viewed as evil, but rather that the Amish do not want to become dependent on the outside world for their survival. Because the Amish don't fully control the electricity that would power their farms, their desire for independence requires that they avoid using it.

Richard Stallman, of GNU fame, has previously argued that computer users should not cloud computing because of the associated loss of control. In effect, Stallman is an "Amish computer user." He has always been adamant that users be able to control their computing environment, all the way down to having all the source code available to all the programs that they run, a philosophy that kicked off the GNU project and ultimately the whole open source movement.

Unlike the Amish or Richard Stallman, the rest of us are typically seduced by the dark side to one degree or another. I use electricity and other modern conveniences pretty much 100% of every day in one way or another. PCs and smart phones make up a large fraction of that mix and those devices are all connected to cloud computing resources in one way or another. At some point, I simply don't have enough time to be paranoid; I have to give up, trust other people, and get my work done.

That said, I'm still wary of many providers. I tend to avoid stuffing my confidential information into new, unproven service providers, for instance. I'd rather see a provider build up a track record on which to base my trust, rather than believing the image projected by a slick home page. I keep my financial life separated from my social life (hint: if you're using the same username and password for both your online banking application and Facebook, you might want to rethink that). Finally, I'm constantly asking myself, "Can I afford to lose this data, or have it compromised? What would happen if either the service provider's security was breached, or the service provider started to misuse the data I'm giving them?"

Trust, whether between humans in the real world or between humans in the cyberworld, is earned. It takes a lifetime to build and can be destroyed instantly with a single careless action. While I'm maybe not as distrusting as Richard Stallman, the Amish, the question is a good one and Paul Venezia is right in asking it about Google and every other cloud provider. You're right in asking the same question, whether personally or about your enterprise's cloud providers.

On December 14, 2009, Amazon Web Services announced Spot Instances, a new option for purchasing and consuming Amazon EC2 compute resources. As the company describes in its announcement, “With Spot Instances, customers bid on unused Amazon EC2 capacity and run those instances for as long as their bid exceeds the current Spot Price.”

This unique offering from Amazon Web Services is a significant step towards true supply-and-demand driven market-based pricing, allowing customers to consume spare AWS compute capacity when the customer’s bid price meets or exceeds the current AWS spot price for such instances, which varies based on real time demand characteristics within each availability zone. 

When the books are written on this era, IT historians will no doubt mark this announcement as a hallmark moment within the IT community by accelerating the commoditization of IT resources and, most significantly, driving towards a long-forecasted era in which compute resources are bought and sold fluidly via an efficient and competitive market. This liquidity will drive new efficiencies in IT economics and enable entirely new business models within the industry.

AWS Spot Instances do not represent the end state in market-based pricing for IT resources. However, the announcement does mark a significant step in the journey.

How Spot Instances Work

Since 2007, AWS has offered developers access to On-Demand (Virtual Machine) Instances of various sizes. In early 2009, in order to provide volume-pricing to customers running persistent instances and guaranteed resource availability, AWS launched its Reserved Instance offering. With the announcement of Spot Instances, AWS introduces a new pricing and provisioning model.

With Spot Instances, customers still specify the instance type required, the Region desired, and the quantity of instances requested.  Additionally, they specify the maximum price they are willing to pay per instance hour. AWS sets the Spot Instance price and the price "fluctuates periodically depending on the supply of and demand for Spot Instance capacity.”  To inform the customer’s bidding strategy, AWS makes Spot Price history available via the Amazon EC2 API and the AWS Management Console. If the customer’s maximum price bid exceeds the current Spot Price, the request is fulfilled (at the Spot Price, which may be lower than the customer’s bid) and the instances will run until either the customer terminates them or the Spot Price increases above the customer’s maximum price, at which point AWS will terminate the instance without warning.

Herein lies the most significant runtime characteristic of the Spot Instances: AWS can reclaim the compute resources when needed to address demand surges for higher-paying On-Demand Instances or Reserved Instances. AWS may increase the Spot Instance price above the customer’s bid, or may make Spot Instance inventory unavailable without notice. This, of course, limits the types of applications and use cases for which Spot Instances might be functionally viable to those which are highly price-sensitive and time-insensitive. AWS suggests the following categories of applications as being well-suited for On-Demand Instance: image and video processing, conversion and rendering; scientific research data processing; financial modeling and analysis. A student with a large video file to be rendered may be price-sensitive and time-insensitive. However, a financial institution with a new algorithmic trading model recognizes that every minute of delay in getting a new model into production can cost the institution millions of dollars in lost profit. Such a customer would, no doubt, prioritize resource availability over cost.

Why Offer Spot Instances? A Lesson in Perishable Inventory

AWS describes Spot Instances as an opportunity for customers to bid on unused Amazon EC2 capacity. This unused capacity, in economist parlance, can be thought of as perishable inventory. Perhaps the most mundane examples of perishable inventory can be found in the grocery store. Wander through the produce section and you can often find a table of over-ripe fruits and vegetables at deeply discounted prices. The grocer recognizes not only that the brown spotted bananas can no longer command the same premium price as the unblemished yellow bananas but, further, the economic value of the over-ripe bananas will drop to zero in a short matter of time.  Similarly, in another part of the grocery store, one can find a shelf filled with packaged products, rapidly approaching their expiration dates. Once again, these products are deeply discounted to incent price-conscious consumers to purchase them despite the impending product expiration date. Time is of the essence. Once the expiration date passes, these products are no longer marketable and their economic value immediately drops to zero.

Many other categories of products do not share this characteristic of time-based perishability. A retailer of TVs or cars need not worry that the value of his unsold inventory will suffer a marked decline with the passage of a few days. Of course other factors, such as the release of a newer model, may adversely affect the value of inventory.

By contrast, every service-based business is subject to the economic drivers of perishable inventory. In a service-based business, the units of production expire with the passage of time and if unsold, those units of production can never be reclaimed, re-captured, or re-purposed.

An empty hotel room represents a lost revenue opportunity to the owner. As a result, hotel operators now regularly dispose of excess inventory through websites such as Priceline.com. The business model is no different for rental car companies. As a day ticks off the calendar and a vehicle has not left the lot, it represents lost revenue opportunity (with fixed cost characteristics) that can never be recovered. So, from a pure economic standpoint, the company should consider strategies for disposing of this distressed inventory at prices as low as $1 more than the variable cost of the rental.

Such examples of perishable inventory and strategies for disposing of perishable inventory are certainly not limited to travel-related industries. Virtually every service-sector business is subject to the same dynamic. If an exterior house painter is unable work on a rainy day, it represents a day’s income he will never recover.  His potential work hours are time-perishable units of production.  The dynamic is no different for an attorney in a law firm, an accountant, or a consultant. The unit of production, in these cases, is one billable hour of time. Rarely lawyers or other professionals advertise deeply-discounted rates. However, sophisticated buyers of legal services know that favorable rates can be negotiated when times are slow and the law firm has excess capacity (perishable inventory).

Perishable Inventory in IT Services

IT services are equally perishable. With every tick of the clock, each unit of unused compute, storage, or network capacity is forever lost. It cannot be stockpiled, stored, recovered or otherwise saved for periods of peak demand. AWS understands this concept and seeks to squeeze every last penny from the utilization of its resources.

IT service providers – both internal and external to the enterprise – can learn a powerful lesson from the AWS example.  IT in most enterprises represents a massive capital investment in fixed assets – data centers, racks, servers, storage, switches, routers, and network cables. As with any piece of capital equipment – a factory, an office building, an airport, or a printing press – the enterprise should seek to optimize the economic value of the assets by maximizing utilization.  However, the reality in IT is that most servers run at an average utilization rate 5%-15% available capacity. Thus, 85%-95% of the company’s compute capacity is ‘spoiling’ every day, like bananas at the grocery store.

Such asset under-utilization would hardly be tolerated in any other part of the enterprise. If a factory ran at 5%-15% of productive capacity, it would be promptly closed and its workload shifted to another factory or outsourced entirely. Yet such inefficiency is commonplace throughout enterprise IT.

There are, of course, solutions.  There are strategies in acquisition, provisioning, and consumption that can drive optimal economic behaviors. In other parts of the corporate landscape, such optimization strategies have already been deployed.  Years ago, for example, large enterprises commonly purchased corporate jets to shuttle the company’s executives to various business destinations with minimal inconvenience or schedule disruption. Then it was realized that these expensive assets were largely under-utilized. Thus, a new market emerged for fractional jet ownership. Companies like NetJets allows enterprises to lease the amount of jet charter time they will need, optimizing the entire ecosystem of corporate jet ownership. NetJets is able to optimize the utilization of these expensive assets by load balancing across multiple customers. As a result, these customers pay far less on an annual basis for their corporate jet needs.  NetJets delivers a utility service and makes a healthy profit en route.

Similarly, utility IT services have emerged, offering enterprises the ability to consume infrastructure, platforms, and software on a consumption-based, pay-as-you-go, as-a-service model.  Companies that intelligently incorporate these services into their IT model will gain strategic competitive advantage versus their competitors in the form of agility, efficiency, and operational effectiveness.  One strategy that is gaining popularity is to leverage cloud-based utility services to provide peak period capacity. With this strategy, enterprises own sufficient capacity to address baseline requirements and purchase additional capacity from utility compute services to address peak loads.  This is analogous to owning a house with only sufficient bedroom capacity to accommodate your nuclear family (baseline) and then renting nearby hotel rooms for the extended family when they come to visit for the holidays a few days per year (peak loads). This approach counters the inherent waste in the alternative approach of owning a 12-bedroom house to accommodate the extended family a few days per year, but which is 90% vacant most of the year.

Projections for the Future: Efficient Markets for IT Services

Amazon’s announcement regarding Spot Instances is an early step in the transformation of IT services to a truly commoditized, utility model. However, it is certainly not an end state. There are many functional limitations of Amazon’s Spot Instances that will preclude customers from embracing the current offering. 

And we shouldn't confuse Spot Instances with a true spot market for services. With the Spot Instances model introduced by Amazon, there are thousands of potential buyers and just one seller who unilaterally controls pricing in an effort to optimize the disposal of perishable inventory while ensuring sufficient capacity for its customers of higher-priced Reserved Instances and On-Demand Instances. 

In the near future, truly dynamic markets will emerge in which multiple buyers compete to acquire the standardized and increasingly commoditized IT services offered by multiple sellers. As in any highly efficient market, the forces of supply and demand will converge to establish a market-clearing price for compute capacity based on real time market information and economic forces.  Rapidly, these markets will move beyond spot market pricing to include futures, options, and a variety of sophisticated derivatives.  Once again, companies that recognize the future and prepare themselves to capitalize upon it will achieve tangible strategic advantage. 

Implications for Today

The rapidly-evolving market for cloud-based IT services is driving a requirement for immediate change within enterprise IT organizations. 

First, CIOs must break down the silos and the internal monopolies that form the cornerstone of traditional enterprise IT.  Such legacy structures are the source of redundancy, complacency, and inefficiency within most IT organizations.  These structures must be replaced with agile operating models and internal service providers that are forced to compete with best-in-class external providers. 

Second, CIOs should lead a drive to start re-architecting applications to take advantage of infrastructure arbitrage opportunities presented by commercial cloud service providers, in general, and spot market pricing, specifically. Traditional, stateful architectures do not support workload portability, dynamic scaling, and the ability to capitalize on real time pricing opportunities such as Spot Instances. This is direction where the market is going. And companies that are prepared to take advantage of it with applications that are architected properly will gain significant economic and strategic advantage over competitors that rely on over-provisioned dedicated infrastructure models. 

Third, as enterprises develop their internal cloud capabilities, their internal pricing models should resemble those offered by leading commercial cloud service providers.  As enterprises embark on developing their internal cloud capabilities, they will be well-served to offer their internal customers a pricing menu with reserved instances, on-demand instances, and spot instances, with varying SLAs and OLAs. This approach will maximize the value of their internal clouds, driving efficiency and appropriate capacity utilization.  Additionally, it will prepare internal users and their applications to fully capitalize on the potential value of the commercial cloud.

 Finally, each enterprise today should be preparing strategies to take advantage of the highly liquid IT services market of the future. That future is rapidly approaching and companies that are prepared with innovative strategies and next-generation architectures will be well-positioned to lead their industries.