When NOT to Use Cloud?

During the July 4th long weekend, I got the chance to read the book “Delivering Happiness” by Tony Hsieh. It’s a great book with many great ideas and lessons he learned from LinkExchange and Zappos.

So, how does this relate to cloud computing?

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Here’s what Tony wrote…

“It was a valuable lesson. We learned that we should never outsource our core competency. As an e-commerce company, we should have considered warehousing to be our core competency from the beginning. Outsourcing that to a third party and trusting that they would care about our customers as much as we would was one of our biggest mistakes. If we hadn’t reacted quickly, it would have eventually destroyed Zappos.”

In this paragraph Tony summarized the lesson from contracting eLogistics for inventory services in Kentucky, which turned out to be a mess and almost killed Zappos when cash flow became a big issue.

From a business perspective, cloud services are not much different from the inventory services. Both are all about outsourcing. The high tech nature of cloud doesn’t change the business nature of cloud services. What happened to Zappos could potentially happen to any cloud customers.

The question your business needs to ask, and answer, becomes “Is IT your core competency?” Or, more specifically, “What part of IT is – and is not – your core competency?”

At face value, they seem like easy questions. When you dig down to the details of your business, however, you may find surprising or even counter-intuitive answers.

Let me give you an example.

Most of us know Paypal, now part of eBay.com, as an online payment service company. You may think the core competency is the web site itself. It’s true. But the most important technical competency is not the web site itself. According to the founder Max Levchin, it’s the ability to judge risk, or protect against fraud. That is why they built a software package called IGOR, which brought down the fraud down to one-tenth of a percent. Without this core competency, they would have been quickly out of business just like their competitors such as MoneyMail that had 25 percent fraud and burned through cash too quickly. (full story at “Founders at work.”)

To decide whether an IT system is your core competency, consider these questions:

  • Is your system a secret weapon in your market competition with others? By saying a secret weapon, I mean does IT give your business competitive advantages in increasing sales, lowering costs, or creating good-will in the community?
  • Will you lose big money when the system is offline? You should look both internally for the impacts on daily operations and planning, and externally for impacts on sales and customer satisfaction. There are things that may be impactful in subtle ways.
  • Are you OK with the system being breached? That includes illegal access, data corruption, and data stolen by malicious hackers. This may involve cash losses and direct legal consequences in the short term, as well as loss of customer trust in the long term.
  • Will you have enough control of your systems to fulfill different business unit needs? IT systems have to support the growth of the business. Do you need to have control of the systems in terms of software configurations, maintenance, support, SLAs, and so forth? The last thing you want is to have your system become a hurdle of your growth.

Once you decide whether a piece of your IT is a core competency or not, you can plan accordingly. In future blogs, I will talk about when you should consider use cloud services.

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3 Comments

  1. Posted July 7, 2010 at 3:28 am | Permalink

    Steve I am interest to see where you are going with this. It sounds like you might be about to say that external (Cloud) can never be as good as internal.

    Watching with interest.

    Rodos

    P.S. Always love the posts!

  2. JA
    Posted July 7, 2010 at 3:41 am | Permalink

    Hi,
    Although I completely get the point you are making here (and agree) I think somebody could get the wrong end of the stick very easily. Which is where Rodos is going I think.

    Examples to go along with the 4 questions will probably help a lot.

    core competency = secret weapon + enough control

    is the way I think of this.

  3. Gilbert
    Posted July 8, 2010 at 9:47 am | Permalink

    Private cloud is the answer to keeping our core IT competency in-house while making IT more responsive to ever-changing business.

    I think the question is not “when to use cloud services” but “how to use cloud services”. In some situations, companies might want to leverage external public clouds to run their non-sensitive and transient workloads. Agree?

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