All About the Cloud

Industrial equipment executives need to evaluate what cloud computing can do for their business – and asking the right questions is the right place to start. By Thierry Decroix, Birgit Kleinhans, and Alan Healey.

No leader in business or government today can afford to ignore cloud computing. Many global organizations, including Starbucks, Citigroup, and a major pharmaceuticals group, are already using it to analyze data, provide applications to employees and run special projects. Media giants are reported to be working on a cloudlike service that will enable content to be delivered dynamically in multiple formats and on a variety of devices. And more cloud services will soon be available, as established IT and telecom providers including Accenture, Microsoft, Fujitsu, KDDI, China Mobile and SingTel join cloud pioneers like Google, Amazon and

Given the momentum behind cloud computing across so many industries, it is not surprising that industrial equipment companies are beginning to evaluate its potential and to capitalize on the benefits it offers. When assessing what cloud can do for their businesses, industrial equipment leaders need to take into account the distinct and rapidly evolving challenges that their sector faces today.

These challenges include macroeconomic trends, as markets worldwide recover at differing speeds from the global downturn, and as awareness of environmental issues increases; customer trends, as new markets open up and as customers increasingly demand flexible, demand-driven manufacturing and throughlife services and solutions; supplier trends, as supply chains globalize and critical capabilities become more evenly distributed round the world; wider industrial sector trends, as population growth and infrastructure needs continue to drive demand; and finally trends within the industrial equipment sector itself, as the scale and scope of operations expand, operational excellence increasingly becomes a cornerstone of high performance, and non production issues such as R&D spend and talent management become ever more pivotal to success.

Cloud computing solutions have the potential to play a key role in meeting all these challenges. However, even with the optimism that currently surrounds cloud computing, it is also generating difficult questions. For while cloud can undoubtedly bring significant benefits to industrial equipment businesses, such as significantly reducing the required capital investment in expanding to a global footprint, reducing operating costs and working in new ways, questions and concerns remain about issues such as the security of customer data, a feared loss of control over business critical applications, and the reliability of cloud technology for industrial equipment companies’ most critical-customerfacing systems.

Trend setting

Executives in industrial equipment companies face different challenges from their counterparts in other industries and need to scrutinize their decisions about cloud computing through a different lens. Specifically, they need to take into account the impacts on their business from the following four factors:

Macroeconomic trends

The recent economic downturn has resulted in industrial equipment companies facing a series of near-term business challenges that they must tackle as a matter of urgency. While positive GDP growth is expected to continue in most markets, the pace will vary widely, with developed economies in recovery mode and emerging markets on an escalating growth path. With costs under pressure, limited demand – exacerbated in many countries by tight constraints on public spending – is restricting opportunities for growth.

At the same time, recent merger and acquisition (M&A) activity has left many companies with significant debt that they need to service. In response to these macro pressures, most companies have cut costs, but many still face a growing need to realign their organizational models to meet changing customer demands and improve their flexibility and agility.

Customer trends

New customer bases and requirements are emerging, as major new geographical markets open up and expand rapidly, and as customers’ expectations and demands rise exponentially. Overall, customers now want a blend of innovation, quality, efficiency and global consistency, creating challenges across the entire industry value chain.

Companies have expanded their focus from offering products to offering solutions and services, and an increasingly competitive global marketplace has resulted in a need for a greater focus on innovation to broaden companies’ product sets. Customers and regulators are also becoming increasingly conscious of the environmental impact of industrial equipment activities.

Supplier trends

Supply chains are continuing to globalize, driven by sourcing from lower-cost countries, which are moving up the value chain to support more knowledge-based activities and entire business processes. The nature of the workforce is also changing, as supplier relationships become more flexible and collaborative enabled by technology, and as talent spreads more evenly around the world. Suppliers – like industrial equipment companies themselves – are also focusing increasingly on supplying services and solutions based on through-life availability, rather than just providing components.

In response, many companies are moving towards a more customer-centric focus by leveraging channel partnerships, reinventing dealer networks, and integrating their operations and supply chains more tightly across the world. In some cases, this involves a drive to expand and globalize the footprint that is being achieved through acquisitions and alliances.

Wider industrial trends

Industrial equipment is inevitably affected by wider trends across the industrial sector as a whole, with ongoing escalation of the main drivers of demand, including population growth, rising energy consumption, and growing requirements for infrastructure. Industrial operations are also becoming increasing interconnected, boosting the need for responsiveness, quality and consistency.

Strategic challenges

In combination, the above four trends are driving the emergence of a distinct set of challenges for industrial equipment companies across the world. These include:

• Existing multinational and mid-sized/regional players in sectors such as heavy equipment manufacturing need to align their IT more effectively across all their operations, to improve their agility, management information and ability to respond to market change.

• Many mid-sized and regional players in the industry are looking to increase the scope and scale of their operations, enabling them to expand to a global footprint in order to meet customer needs more effectively, especially in fast-growing emerging markets.

• To help them gain economies of scale and expand their footprint, companies need to improve their ability to support and facilitate consolidation and collaboration.

• With world-class operational excellence increasingly emerging as a key enabler for success in the industry, effective management of selling, general and administrative costs is increasingly important, and tools and techniques such as lean manufacturing and six sigma are coming to the fore.

• To thrive in today’s increasingly competitive global marketplace and meet rising customer expectations, industrial equipment companies will have to move to more time-flexible and demanddriven manufacturing, again demanding greater agility, scalability and integration across the business.

• For many sectors of the industrial equipment industry, the challenges of these changing dynamics on the customer side are compounded by a continuing need to manage extended dealer networks and sustain continuous improvement in their dealer management systems.

• A wide range of emerging technology trends – ranging from GPS fleet management to remote diagnostics, and from customer data integration to mobile devices – are creating compelling new value opportunities for industrial equipment companies.

Six key questions

As with most technologies, the significance of cloud computing differs widely from industry to industry. Accenture has identified six key questions that industrial equipment decision makers should ask about this still new phenomenon. By focusing on these questions, executives can narrow their inquiries and start to identify opportunities and risks that will impact their own companies.

1. What is cloud computing?

Accenture defines cloud computing as the “the dynamic provisioning of IT capabilities whether hardware, software or services via the internet”. In general, a cloud-based model provides rapid acquisition, low to no capital investment, relatively low operating costs and variable pricing tied directly to use. As a result, cloud technologies allow IT to respond faster and more effectively to the changing needs of the business, creating new services and opening new markets, thereby helping to achieve high performance. Although the term “cloud computing” was coined relatively recently, many elements of the concept, such as timesharing and virtual machines, have been around for several decades.

What makes cloud computing a growing reality for today’s businesses is the pervasiveness of the internet and internet technologies, combined with advances in virtualization, hardware commoditization, standardization, and open source software. A key catalyst is the success of major internet companies such as Google, Amazon and Microsoft, coupled with the emergence of a group of highly credible pure-play firms, including and Workday.

Across all these offerings, cloud services tend to share several characteristics: little or no requirement for capital investment to enable usage; variable pricing based on consumption buyers “pay per use”; rapid acquisition and deployment; lower ongoing operating costs than IT-owned and managed in-house; and programmable and adaptable in use.

Within these overall parameters, clouds can take two forms: private and public. Private clouds are built within a company’s data center and are designed to provision and distribute virtual application, infrastructure and communications services for internal business users. In contrast, public clouds extend the data center’s capabilities by enabling the provision of IT services from third-party providers over a network.

The choice between private and public clouds represents a tradeoff between security and flexibility. A company using a private cloud gains the perceived benefits of lower risk and higher data security, since it owns and holds the cloud data and services within its own infrastructure, an approach that is sometimes required by regulators. A public cloud is seen as involving higher risk, since the user’s data is held externally alongside that of other businesses, but it also tends to offer greater flexibility and scalability than a private cloud.

At the infrastructure level, companies are sourcing raw computing resources, processing power, network bandwidth and storage from the outside on an on-demand basis. These resources are also known as infrastructure-as-a-service, or IaaS.

At the platform level, cloud-based platform-as-a-service (PaaS) environments provide application developers with similar functionalities to those available in traditional desktop, including tools for development, testing, deployment, runtime libraries, and hosting.

At the application level, cloud- based application-as-a-service offerings, also known as software-as-a-service or SaaS, are available via standard browsers, supporting device independence and anywhere access.

And at the business process level, cloud-based solutions, also known platform-based business process outsourcing (BPO), offer an internet-enabled, externally provisioned service for managing an entire business process. This differs from application clouds in that it provides end-to-end process support, covering not just software but also people processes such as contact centers.

2. What benefits can cloud bring to my company?

The three top benefits of cloud computing talked about today are cost, flexibility and speed to market. However, forward-looking companies are also thinking about how cloud technologies will change the face of their operations.

Low prices on cloud services are a big part of their allure. For example, a major pharmaceuticals group was reported to have paid Amazon Web Services only US$89 to analyze data on a drug under development – a job that would have required its researchers to buy 25 servers to perform in-house. Add the savings from eliminating the cost of servers, software licenses, maintenance fees, data center space, electricity and IT labor, and the benefits of replacing a large up-front capital expense with a low, pay-for-use operating expense, and the financial appeal of cloud computing is obvious.

Clouds offer extraordinarily flexible resources because of their technical design. Clouds can be summoned quickly when needed, grow by assigning more servers to a job, then shrink or disappear when no longer needed. That makes clouds well suited for sporadic, seasonal or temporary work, for finishing tasks at lightning speed and processing vast amounts of data, and for software development and testing projects.

Clouds can also supplement conventional systems when demand for computing exceeds supply. And since they are an operational expense, cloud services can often bypass the capital-expense approval process, and thus be quicker to procure than conventional systems.

As for speed, cloud technology has the potential to empower a programmer to create a software service using free or low-cost development tools, and quickly make it available to all. This capability can help organizations to become more agile and responsive, as well as increasing their ability to impose a standard set of applications or processes enterprise-wide. For those applications that require a great deal of IT infrastructure (servers and storage), cloud can significantly shorten the lead time to procure, deliver, and install the service. Overall, properly implemented cloud architecture can mean the time and costs of provisioning an innovative IT service have never been lower.

3. How can cloud computing help address specific company challenges?

As already highlighted, companies in the industrial equipment sector face a number of challenges springing from macroeconomic trends and ongoing change among customers, suppliers and the broader industrial sector as a whole. In our view, cloud computing can help companies tackle these challenges through its combination of low capital investment costs, standard applications and platforms, unprecedented scalability and processing power, quick deployment timescales, and lower running costs.

For instance, for supporting and facilitating consolidation and collaboration, an organization-wide cloud-based platform can make it easier and cheaper to integrate new operations, and also facilitates quicker and easier alliances and collaborative partnering with third parties.

When it comes to achieving world-class operational excellence, the lower, usage-based and more flexible cost base of cloud solutions, including a shift from capex to opex, can drive a dramatic escalation in operational effectiveness and efficiency. European industrial equipment businesses in particular are facing a sustained downturn and intensifying cost and competitive pressures. Given their relatively inflexible business models, they are finding it hard to respond with sufficient improvements in efficiency and effectiveness. Cloud computing can support the move to a new, more industrialized and more flexible business model.

And for moving to more time-flexible and demand-driven manufacturing, this will require rapid product development in response to customer requirements, greater scalability and flexibility in the use of manufacturing lines, closer integration of suppliers and specialized electronics providers into the value chain, and an ability to gather and apply customer feedback in the development process. Cloud’s scalability, interconnectivity and processing power can support all these changes.

4. Can I depend on clouds to save money?

CIOs say they are finding real savings from cloud computing. Accenture estimates its own IT organization could save up to 50 percent of its hosting costs annually by transferring most of its applications to infrastructure clouds.

But clearly, executives should not take the promises and projections of cloud savings at face value. The articles about companies that have saved money rarely explain how these savings were calculated, and several apparently rigorous analyses of cloud savings have been attacked as unrealistic. In our experience, even where US-based firms move their internal applications to the cloud, they usually decide to retain a number of services in-house, because the costs of hosting a server internally are lower than that of an external cloud service. Executives therefore need to look closely into the costs of cloud computing for their organizations. They should seek rigorous ROI case studies based on actual cloud usage, rather than estimates of anticipated savings. Hardware, after all, is a relatively small component of data center costs. They need to uncover the hidden management, transition, and usage costs that reveal themselves only when organizations start to work with the technology. They need to evaluate the pricing models of different kinds of cloud services. And they need to work with the finance department to develop a consistent and acceptable approach to measuring the costs and return from clouds. Only then can they reliably estimate the savings.

5. How will clouds affect the way my organization operates in the future?

In the future, we expect to see industrial equipment companies also making massive changes by leveraging cloud computing. As well as playing a role in meeting the industry challenges we highlighted under question 3, cloud will enable companies to approach and operate many parts of their business in a radically different way, achieving a permanent step-change in their operational effectiveness and competitiveness.

Engineering-to-order will become increasingly viable, as cloud enables product development to moves along the lines of customer requests. By helping to standardize, automate and support the individual steps within the end-to-end production process, cloud will empower companies to manage the concept development and production of individual components all the way to entire systems, in line with individual customer specifications.

Purchasing will see major reductions in costs, with companies generating major savings in this area by using cloud to consolidate their orders on a global company-wide basis and manage procurement in a more agile and professionally manner. Cloudpowered analytics will play a key role.

Program management across multi-partner consortia will become more efficient, collaborative and goal-oriented, helping companies to meet customers’ growing demand for ever more complex and comprehensive solutions that require expertise in various areas of competence. Cloud’s ability to support flexible and responsive collaboration with a wide array of third-parties will be key.

The shift from products to services will be supported and accelerated by cloud’s powerful analytics and interconnectivity to a wide array of technological sensors and devices. The key to success will be a service product portfolio which – along with the primary product – offers comprehensive, customized solutions that meet the customers’ needs and are supported by effective, efficient, and continuous processes. Cloud facilitates all these elements.

More generally, industrial equipment companies that fail to embrace the cloud may find their IT options become increasingly limited over time, as will their ability to contain costs and collaborate effectively along the supply chain.

6. What about security and data privacy?

Various surveys tell us that security and data privacy remain prime concerns for cloud implementers in all industries. The fear of their data being “in the cloud” is often the single greatest hurdle that leaders must overcome to build trust and gain the benefits from cloud computing. CIOs are concerned that their data could be stolen or compromised by hackers, mixed with data from their cloud providers’ other customers, or released by mistake. Any of the above could expose companies to lawsuits and brand damage.

Data comes with different levels of sensitivity, from low level (published widely and no restrictions) to ultra secure (highly confidential customer financial information). So, for example, low level data and access may well be suitable to go onto a public cloud infrastructure service with simple password access, whereas ultra secure data may require dedicated secure servers housed in ultra secure data centers with strong authentication required for access. Building and managing a secure and flexible infrastructure cloud using a combination of private and public services will provide the key for companies to gain the enormous benefits that cloud computing can provide.

Work with your provider to determine its attention to security, privacy, and compliance with data laws in all relevant jurisdictions. Make sure the provider can achieving parity or better levels of security, privacy, and compliance with law than you have today.

Remember that the security of the cloud should be equal to the most risky client that is serviced by the provider. Rigorous risk assessment is a complex undertaking that represents the key to effective security in the cloud. Require your cloud computing partner to provide you with its risk assessment and how it intends to mitigate any issues found.

Schedule mandatory monthly discussions with the cloud provider’s top privacy and security people. This discussion should flow both ways with no hidden items. If the cloud provider does not have a seasoned Privacy Officer and a client-facing CSO, CISO, or equivalent security role, be very careful. It is a sign that the provider doesn’t take security seriously enough.

Not if, but when

While it may take time for companies to transition to cloud computing, beginning the journey early can deliver some substantial financial benefits. Executives are still grappling with its risks, possibilities, and the cost of writing off current IT investments. However, for several companies the transition to a hybrid cloud environment is already under way. The capabilities and potential savings from clouds are too great to ignore.

In addition, software developers and venture capitalists will be drawn to this new market. The low development cost, short development cycle, and quick return on cloud services are irresistible. This means future IT advances and innovations are much more likely to be based on clouds than conventional computing. The critical issue isn’t whether cloud computing will become a fundamental technology in the next decade, it is how successfully companies will profit from the capabilities it offers.

Managing the new cloud capabilities with all the existing legacy systems in a way that is seamless to business units and users will be critical to achieving the benefits and managing the risks. However, the fact remains that – over time – cloud will reshape the way all companies do business. In our view, those that move early to embrace this future will position themselves to be tomorrow s high performers.

Click here for Chart 1 - Initial opportunities: Accenture has identified many different possible uses for cloud computing.

Click here for Chart 2 - The basic core functions of an industrial equipment business, and the key potential improvements from cloud.

Thierry Decroix, Birgit Kleinhans, and Alan Healey are all with Accenture. This is an edited version of ‘Six Questions Every Industrial Equipment Executive Should Ask About Cloud Computing’.

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