Can traditional IT service providers survive Cloud Computing?

The use of cloud computing could ultimately and fundamentally change the delivery model for traditional IT service delivery companies. With the assumption that services can be chosen from a catalogue of on-demand technologies and that storage of information and the desktop will be virtualised (see Googles model) the traditional delivery and support organisations like CSC and Fujitsu will have a problem - their current role will no longer exist.

Will they survive the change?

The likes of these smaller outsource providers are based upon revenue from outsourcing/hosting, applications and development. If we assume that cloud computing will take the vast majority of outsourcing/hosting from them, it doesn't leave them with a lot and put's them fighting directly with the tier 1 providers like IBM (and a battle they are in a less suitable position to win).

If you take a look at the application space, even with fundamental changes to their business model to support virtual or cloud application, desktop and office suite deliverables, they will be put in direct competition with their traditional suppliers like Microsoft, SAP, IBM and Google who are and will be offering their application suite and services as SaaS and cloud based services. So if we assume this is also a low profit/commodity battle, even if they do win these bits, there will be nothing in it for them and their business will collapse.

Lastly development. I'm using this term loosely as clearly this needs to cover aspects of design and architecture - someone will still need to pull together all these bits of the cloud. But why would you go with a tier 2 provider, when the real architecture, the designs and the plans are being handled by the largest companies, the Microsofts, IBM's, SAP's and Oracles? and if this was their only real revenue stream, would it be enough for them to survive?

Certainly, if cloud takes off and if it is the way forward (and logic dictates that this is highly probable) then companies can look forward to shopping for virtual services at commodity prices (if market forces take place).

Change for the tier 2 providers is likely to be too much. I would imagine that they will merge, be bought, or have to make massive redundancies to stay afloat.

Change for the largest IT providers and potentially the cloud services providers is also going to be a shock. Why do you need fleets of sales people to sell what is essentially a cots service? Why do you need a fleet of business partners selling your hardware and software if businesses can purchase something that works straight from the cloud? The quickest and cleanest business model must be to change to giving software away free, but charging for support or use of the software on a commercial basis each month. IBM of course have long term experience with this model for their Mainframe product line.

The cuts in work force for the largest IT providers could be massive and often would involve many layers of management rather than the people on the ground (if the produce sells itself via a service provider, then electronic license controls can mostly replace many of the sales and sales process managers). Marketing, R&D, Architecture and Application Design would be the key points of revenue for the organisation. It is likely that none of the largest organisations are nimble enough to flex to this way of working though and they will experience many years of pain and many years of senior managers justifying their job roles. At least though the largest providers are in a position to survive it - if only through their case reserves and longer term customer contracts.

So what about real business, what changes are needed there?

In part 2 of this blog I will discuss the changes that businesses will need to consider and implement to be ready for the benefits of cloud whilst shielding themselves from any dangers that may be present.