Capturing the Value

of Cloud Computing
How Enterprises Can Chart Their Course to the Next Level

David Dean and Tamim Saleh

November 2009
Capturing the Value
of Cloud Computing
How Enterprises Can Chart Their Course to the Next Level

S
ome of the biggest and most powerful IT players—Microsoft, Google, IBM, SAP, and Wipro
Technologies—are jostling for positions in the emerging cloud-computing market. Countless
start-ups, many telecommunications companies, and several other unexpected players—Ama-
zon.com, in particular—have joined the party, too.

Analysts estimate that in 2012, the size of the enterprise cloud-computing business may reach $60 billion
to $80 billion—or about 10 percent of the global IT-services and enterprise-software market. Although its
double-digit growth rate is welcome relief for vendors in this downturn, the cloud-computing market is still
early in its life cycle.

So is cloud computing overblown hype or a real opportunity to transform how IT is consumed and de-
ployed within an enterprise? The truth is more subtle than some analysts and service providers might
suggest. As with other technologies, it is easy to overestimate the short-term effect of cloud computing
while underestimating its longer-term consequences.

Similar to Web 2.0’s disruption of traditional business models in the entertainment, media, and telecom-
munications industries, cloud computing presents a new paradigm. It extends the Web 2.0 concepts of
common architecture, abundant bandwidth, and community to computing resources, and could help
spark the creation of new business models built around collaboration, networks, and information in nearly
all industries.

The Potential of Cloud Computing

To explain the potential of cloud computing, it is useful to start with a definition. Cloud computing is
commonly defined as the deployment of IT resources as a service over the Web and other networks. Those
resources—such as processing power, storage, computing platforms, and applications—are remote from
the user, or “in the clouds,” and are paid for only as they are used. (For a fuller definition, see the sidebar
“Defining Cloud Computing.”)

The nature of computing changes when IT resources become more abundant and can be instantly and
affordably deployed, flexibly managed, and universally accessed from a broad range of devices, including
PCs and mobile handsets. This “variabilization” of both the costs and scope of IT resources is central to
the promise of cloud computing and helps explain the gathering interest in it. In the enterprise environ-
ment, cloud computing has the following advantages, not only for the CIO but also for all IT users:

◊ Accelerated deployment of new applications without consuming the computing resources of the
enterprise

◊ Reduced capital requirements for up-front investments in IT since the enterprise is able to utilize the
infrastructure, applications, and platforms in the cloud

◊ The flexibility to meet sudden changes in demand and peaks and troughs

◊ The capability to provide applications or services that meet demand precisely and can match future
demand

◊ Significant cost savings in selected situations, notably when the scale of an enterprise’s computing
resources is relatively small compared with that of cloud providers

The Boston Consulting Group November 2009

 Capturing the Value of Cloud Computing 2

Defining Cloud Computing

Cloud computing has sparked several competing cloud services, software as a service currently
definitions. One commonly accepted definition has the largest market by a wide margin.
explains cloud computing as a pay-per-use model
for enabling convenient, on-demand access to a ◊ Infrastructure as a service is the availability of
shared pool of configurable computing resources— storage, processing, and network capacity that is
such as networks, servers, storage, applications, and billed by consumption.
services—that can be rapidly and easily deployed
and released.1 This definition focuses on public ◊ Platform as a service refers to a development
clouds, but private clouds—those dedicated to an environment and associated tools and services
organization or group of organizations—will likely that are offered to customers for building their
spur large enterprises to adopt cloud computing. own applications.
Private-cloud offerings will lead to hybrid models
that combine public- and private-cloud infrastruc- ◊ Process as a service is the logical extension of
tures. software as a service—the full provisioning of a
process, such as accounts-receivable collection,
The cloud-computing model offers four general in the cloud.
types of services:

◊ Software as a service is the provision of applica-

tions, such as customer-relationship-manage-
ment software, which is offered over a network 1. This definition draws heavily on one used by the National
and does not require users to install and run the Institute of Standards and Technology, an agency of the U.S.
application on their own computers. Of the four Department of Commerce.

◊ Data sharing and collaboration capabilities for processes that involve many parties; cloud solutions are
often more economical and faster to deploy than their alternatives

◊ The ability to efficiently deploy greenfield business processes; cloud computing frequently enables
enterprises to launch new initiatives without relying on legacy systems and architecture

Although the enterprise cloud-computing market is developing rapidly, it will take time for enterprises to
realize these advantages. Challenges involving data security, privacy, and regulation will slow implemen-
tation in some cases. To date, cloud technology has been deployed in those areas with low perceived risk,
such as e-mail, backup and recovery, batch processing, testing, and quality assurance. Other emerging
cloud applications include customer relationship management, workflow, unified communications, and
simple enterprise-resource planning. Applications that are more sophisticated will be deployed as the
market matures. For example, research and development in the pharmaceutical, automotive, and other
industries is increasingly moving to the cloud.

The Levels of Clouds

In our work with clients, we see three distinct levels of value in cloud computing. Each level builds on the
previous one and requires a shift in current business processes. But each level also enables value creation
up to an order of magnitude larger than the prior level. (See Exhibit 1.)

◊ Utility Level. Enterprises can benefit from lower costs and higher service levels through the availability
of elastic computing resources and pay-per-use models

◊ Process Transformation Level. Enterprises can introduce new and improved business processes by
leveraging the common and scalable assets and collaborative potential of cloud computing

◊ Business-Model-Innovation Level. New business models can be created by linking, sharing, and combin-
ing resources using cloud computing in an entire business ecosystem

The Boston Consulting Group November 2009

 Capturing the Value of Cloud Computing 3

Exhibit 1. Cloud Computing Offers Three Levels of Value

Utility level Process transformation level Business-model-innovation level

Lower costs and higher service levels Improved integration of and collabora- New business models and ecosystems
through the elastic computing tion in business processes by through linking, sharing, and combin-
resources and pay-per-use models of leveraging the common assets of cloud ing resources among enterprises using
cloud computing computing the scalable assets of cloud computing
◊ “Variabilization” of costs: capital ◊ Acceleration of business processes ◊ Requires an understanding of core
costs become operating expenses and noncore activities, and a
◊ Common data and process willingness to share data across the
◊ Lower and more predictable costs standards ecosystem
◊ Less time to roll out new applica- ◊ Shared linkages ◊ Considerable organizational and
tions cultural implications
◊ Requires new ways of working

Shift from current business practices

Source: BCG analysis.

Although utility-level cloud services can produce bottom-line results quickly, the benefits of the process
transformation and business-model-innovation levels will take longer to realize because they represent
fundamental shifts in the way that work gets done within enterprises and among business partners.
Many companies have begun to benefit from the utility level; however, far fewer have explored the
process transformation and business-model-innovation levels. To do so, CIOs will need to work closely
with executives to develop a strong understanding of the strategic and operational requirements of
their businesses. But, as companies are discovering, the benefits of each level are considerable. (See
Exhibit 2.)

The Utility Level: Lower Costs and Higher Service Levels

Although small and midsize enterprises and start-ups may have been early adopters of cloud computing,
larger companies are now beginning to selectively pick applications that take advantage of the greater
efficiency, scale, and focus of cloud service providers to improve their companies’ deployment of labor,
hardware, software, and power. Genentech, the biotechnology company acquired earlier this year by
F. Hoffman-La Roche, is an example of a company that has turned to Google Apps for its e-mail and
calendar programs and a host of other applications for its 11,000 employees. At the time of its migration
to the cloud-computing model a year ago, Genentech had 36 terabytes of e-mail and 2 million sched-
uled meetings stored in its systems. It was contemplating spending tens of millions of dollars on a new
data center. Genentech avoided that capital expense and reduced its anticipated cost of ownership by
several million dollars over the next five years by using cloud service providers and virtualization
technologies.

Even the public sector is using cloud computing. Carlsbad, a city in southern California, is relying on
Microsoft’s cloud offering for e-mail and collaboration services, such as meeting scheduling and instant
messaging. The city is saving more than 30 percent annually. On a potentially much larger scale, the U.S.
government has launched Apps.Gov, a portal that helps government agencies migrate their computing
resources to the cloud-computing model. This is part of President Barack Obama’s initiative to modernize
and reduce the cost of IT infrastructure in government agencies.

Labor. Most CIOs recognize that their departments spend too much time “keeping the business running.”
These responsibilities decline significantly in a cloud environment. Rather than fixing the plumbing, IT
staff can be improving the functionality and features of IT systems while CIOs work on transforming the
business. IT organizations can become more strategic or smaller.

Hardware. Companies can benefit from the presumed higher efficiency of cloud service providers. A
typical corporate data center needs to carefully balance many competing demands—in particular,
optimizing utilization while managing large spikes in volume and delivering high levels of service. Cloud

The Boston Consulting Group November 2009

 Capturing the Value of Cloud Computing 4

Exhibit 2. The Benefits of Cloud Computing Are Considerable at Each Level

Example of the utility level Example of the process transforma- Example of the business-model-
tion level innovation level

Global energy company Small-to-midsize business Global health-care company

Complete virtualization of servers Implementation of shared services in Standardization and automation of the
results in: document management produces: elements of the research process
yields:
◊ Increased server utilization ◊ Workflow improvements through
remote scanning, data entry, and ◊ Ability to access data management
◊ Improved database functionality processing of back-office activities, and data-mining applications on an
such as accounts receivable and open platform that connects
◊ Less time spent managing the payable and claims management pharmaceutical companies and
operating system their research partners
◊ Fewer software licenses ◊ Readily available collaboration
tools, security, data management,
◊ Lower storage costs data diagnostics, and analysis
Estimated impact Estimated impact Estimated impact
◊ Savings of 10 to 12 percent, or ◊ A 50 percent improvement in ◊ Up to a 30 percent increase in
$45 million a year, on IT costs efficiency speed to trial
◊ Labor arbitrage benefits ◊ Savings of up to $400 million
per drug
Source: BCG case experience.

service providers aim to achieve a better balance across these demands by leveraging scale and standard-
ization along with smarter technologies, such as server virtualization. Consequently, they can potentially
operate at a lower cost than a typical enterprise-IT data center. To be sure, traditional outsourcing
arrangements also convey many of these labor and hardware benefits, but they generally lock customers
into longer-term contracts with less flexibility.

Software. Enterprise consumption of software is driven by demand. With cloud computing, companies
can more easily deploy new applications and adjust usage up or down than with a conventional setup.
Traditional maintenance and support are performed by the cloud service provider, significantly reducing
the operating costs of enterprises.

Power. Enterprises can take advantage of the advanced power-management capabilities of cloud service
providers. They can also make use of their renewable energy supplies and other green initiatives that
reduce the carbon footprint of computers and servers.

The Process Transformation Level: Improved Business Processes

Although the value of utility-level cloud services may appeal mostly to CIOs, the benefits of process
transformation should accrue throughout an enterprise—allowing the finance staff to conduct transac-
tions more efficiently, researchers to set up and modify their computer models more swiftly, and sales
professionals to serve their customers more effectively.

Enterprises frequently have a difficult time improving business processes and systems, despite the best
efforts of both business and IT executives. The business processes are often inadequately supported by
the underlying technologies—an array of different systems and incompatible data structures. The
cloud-computing model of standardized applications, data formats, and development tools helps enable
the implementation of processes that depend on access to shared data, collaboration, and mobile or
remote access.

One company aims to undercut its competitors by 30 to 50 percent in offering digital document manage-
ment and storage by moving to the cloud-computing model. The vendor is building a delivery model
involving document scanning and offshore processing. The model relies on workflow, business-process-
management applications, a common database, and storage available through cloud computing.

The Boston Consulting Group November 2009

 Capturing the Value of Cloud Computing 5

Another example of a company using cloud computing is Bechtel, a large engineering and construction
company, which is on a journey to standardize construction management. The company has created a
large private cloud, based on a common and shared set of processes and applications, that allows employ-
ees, contractors, and partners to work together.

Retailers may also eventually be beneficiaries of process transformations enabled by the cloud-computing
model. These companies require vast computing resources to analyze the mushrooming data—which are
doubling every nine months—about customers and products. Cloud computing can provide the resources
needed to perform real-time analysis of customer behavior, such as heavy-spending patterns, and econom-
ic incentives, such as how product placement affects sales of merchandise.

The Business-Model-Innovation Level: New Business Models

All companies rely to a greater or lesser extent on partnerships and cooperation with other companies and
organizations. Some of these so-called business ecosystems are well known, highly developed, and very
successful, such as Procter & Gamble’s Connect + Develop program and Toyota Motor’s network of
suppliers.

Cloud computing can help power the next generation of business ecosystems by enabling the deconstruc-
tion of value chains and the emergence of new, innovative business models. The value chain of the
health care industry, for example, consists of pharmaceutical companies, insurers, physicians, hospitals,
and patients. Under the current crazy-quilt system seen in many markets, bits and pieces of a patient’s
health record are stored in several locations, but the complete record is rarely in one place. Slowly,
patient data and health histories are being made available through cloud providers. Quest Diagnostics,
for example, makes lab results available to patients through Google Health and Microsoft HealthVault,
both cloud services. Although this is a small step, it could eventually lead to more readily available
information that can help deliver medical care more efficiently and effectively.

Pharmaceutical companies are also exploring ways to fundamentally reshape their processes for discov-
ering new drugs by using cloud computing to simplify collaboration on basic, nonproprietary, but expen-
sive research. Through the creation of a common set of data standards, tools, and processes, these
companies can dramatically increase their ability to work with outside researchers and partners, and
save up to 30 percent of the cost of discovery—which could amount to several hundred million dollars
per drug.

Cloud computing could also reshape the business models of other industries. The media industry, for
example, is in the process of digitizing content while facing substantial business challenges, including
piracy, declining audiences, and new forms of entertainment, such as user-created videos. Competitors,
such as television networks or cable channels, could conceivably agree to operate common content
production, distribution, and storage platforms in order to create a radically lower cost basis.

Cloud computing is not a panacea—and certainly not the only way that companies can achieve greater
collaboration. Toyota began collaborating with its partners long before the birth of cloud computing. But
cloud computing does provide a common platform that eases the way. Companies will still need to rewire
the way they operate, for example, by putting their data and content in a standard form. They will also
need to make fundamental choices about where they possess competitive advantage and derive value, and
where they can cooperate without jeopardy.

The View of the Cloud from the Inside

CIOs are still figuring out if and how they want to take advantage of cloud computing. The Boston Con-
sulting Group recently surveyed about 30 CIOs in several industries and countries, and found that most of
them were thinking through the performance, availability, and security concerns of cloud computing—but
also considering its operational and strategic implications. About one-third of the CIOs were experiment-
ing with or deploying cloud services for activities such as e-mail and data storage. Another third had
developed clear plans and strategies to fit cloud computing into their overall IT strategy. And a final third
did not have clear plans but said that they will be investigating or developing strategies that address the

The Boston Consulting Group November 2009

 Capturing the Value of Cloud Computing 6

role of cloud computing. We found that the CIOs in the pharmaceutical, health care, media, and logistics
industries were particularly advanced in their thinking.

Many of the interviewees in these industries had moved beyond viewing cloud computing simply as a way
to save money and manage resources. They were considering ways that cloud computing could improve
the technical environment and their business processes, and enable new business models.

Although recognizing cloud computing’s potential, many of the CIOs were still concerned about its
performance, availability, ability to integrate with existing IT systems, and security. Most of the CIOs
recognized that cloud computing poses risks and rewards that must be carefully assessed. Some of the
hurdles will disappear with technological advances. Others depend on an amenable regulatory environ-
ment, both national and global. But some of the most important hurdles are internal—the cultural,
organizational, and legacy barriers of moving applications to the cloud. (See Exhibit 3.)

The Path Forward

Given that cloud computing is in its infancy, enterprises need to chart their course carefully. They need to
understand both the immediate needs of their businesses and their longer-term aspirations. Some compa-
nies may be content with lower costs and higher service levels. Others will have greater ambitions or want
to tackle strategic business challenges. Enterprises also need to fully understand the risks and rewards of
cloud computing and the competitive landscape. All cloud-service providers are not created equal. Their
market ambition and service and support levels vary considerably. Some provide integration with other IT
systems, while others are selling basic, standalone services. Furthermore, companies should understand
how their outsourcing partners view cloud computing and what role they play in fulfilling the enterprise’s
IT needs. Are outsourcing partners embracing cloud computing themselves? Does it make sense to migrate
outsourced applications to the cloud?

Finally, enterprises need to be willing to change how they operate. Within the IT department, work may
become more strategic and less operational. The ability to enforce and maintain common architectural
standards will be a prerequisite for success. Many cloud services require a cultural shift to greater
collaboration, sharing, and trust within the enterprise. Although many employees will embrace this

Exhibit 3. Despite Its Promise, Several Hurdles Still Hinder Wider Adoption
of Cloud Computing

Performance, ◊ Concerns about latency of data networks and service interruptions

availability,
scalability, and ◊ Uncertainty about ability to handle large numbers of users simultaneously
adaptability
◊ Simple and standardized cloud solutions less suitable for complex processes
◊ Difficulty in customizing cloud applications
Security and ◊ Anxiety about data security, especially of critical customer information
regulation
◊ Strict regulation of data privacy and protection in some regions
◊ Underdeveloped rules on cross-border data exchange
Vendor ◊ Road maps of some vendors lack clarity about functionality, performance, and cost
landscape
◊ Concerns about long-term viability of some vendors
◊ Undeveloped cloud-computing standards, making migration between vendors difficult
Organizational ◊ Cultural resistance to sharing data and changing traditional ways of working
inertia
◊ Lack of clarity on IT processes
◊ Large investments in traditional applications, infrastructure, and other resources

Sources: BCG interviews and analysis.

The Boston Consulting Group November 2009

 Capturing the Value of Cloud Computing 7

change, others will find it unsettling. (See Exhibit 4 for an outline of key issues that enterprises need to
address.)

CIOs should take the lead and help prepare their organizations by making both short- and long-term plans
to diagnose current operations, identify opportunities, and act.

In the short term, CIOs should consider the following steps:

◊ Explore cost savings opportunities of the more mature and relatively stable cloud offerings, such as
backup, storage, and e-mail

◊ Initiate controlled pilots in areas such as application development, batch processing, and “burst”
capacity needs

◊ Develop a road map for integrating cloud computing into the IT agenda by identifying potential areas
in which the cloud model could create value

◊ Evaluate specific cloud applications in light of the ease of implementation and the readiness of the
organization

◊ Set up a governance structure to manage and deliver cloud applications

For the long term, CIOs should work with senior executives on a more ambitious set of initiatives. As a
group, they should first develop a common understanding of the potential of cloud computing and its
consequences for business process transformation and business model innovation. They should put cloud
computing on the business agenda.

Second, the team should create an overall plan that enables fundamental business transformation
through cloud computing. The plan should quantify the business case and track it through clear mile-
stones in order to ensure that cloud investments are justified.

Third, the group should define the role of cloud computing in the overall IT strategy, taking into account

Exhibit 4. Enterprises Should Plot a Course to Cloud Computing

Risks and rewards Competitive landscape Role of outsourcing Change management

Which applications are How clearly defined, stable, How do current outsourcing How significant are the
most suited to cloud and suitable are vendors’ partners view cloud change management
computing? current offerings and future computing? Are they challenges of cloud
road maps? embracing it in their own computing and how can
Are the economics as offerings? they be addressed? For
beneficial as some vendors What are vendors’ market example:
claim? ambitions and service and How competitive is
support levels? outsourcing versus ◊ Workforce deployment
Is a private cloud more alternative cloud offerings? as tasks become more
appropriate than the public What is the longer-term strategic
cloud? viability of vendors, What role does outsourcing
especially those providing play in current and ◊ Ability to enforce and
Are risks related to data critical applications? potential future applica- maintain common
security, privacy, perfor- tions when compared with architectural standards
mance, and regulation in cloud computing?
proportion to the benefits? ◊ Cultural shift to greater
What is the potential to sharing, collaboration,
What value does cloud migrate outsourced and trust within the
computing offer beyond the applications to the enterprise
utility level? Are fundamen- cloud-computing model?
tal process-transformation
and business-model
innovations achievable?

Source: BCG analysis.

The Boston Consulting Group November 2009

 Capturing the Value of Cloud Computing 8

the following areas:

◊ Architecture. What standards can be adopted that benefit from cloud technology and provide the
foundation for further development?

◊ Infrastructure. What is the role of cloud computing in managing data centers and delivering infrastruc-
ture services? How will traditional and cloud infrastructures be managed?

◊ Applications. Which traditional applications can or should be replaced by cloud applications? What is
the role of cloud computing in the application road map?

◊ Data Protection, Privacy, and Jurisdiction. What data can be moved to the cloud? How can security and
privacy concerns be rigorously managed? What are the regulations across jurisdictions?

◊ IT Processes and Governance. How will IT processes change, and what capabilities are needed to man-
age them?

◊ Outsourcing and Partnerships. How will outsourcing models leverage the cloud-computing model? How
will strategic alliances and partnership models change?

By following a systematic and measured approach, enterprises can explore the benefits of cloud comput-
ing, manage the risk of adoption, and achieve advantages in cost, speed, efficiency, and competitive
positioning. For some, it will be sufficient to focus on realizing the benefits of the utility level; for others,
the true value of cloud computing will lie in a fundamental reappraisal of business processes or the
development of entirely new business models.

The Boston Consulting Group November 2009

 Capturing the Value of Cloud Computing 9

About the Authors

David Dean is a senior partner and managing director in the Munich office of The Boston Consulting
Group. You may contact him by e-mail at [email protected].

Tamim Saleh is a partner and managing director in the firm’s London office. You may contact him by
e-mail at [email protected].

Acknowledgments
The authors would like to thank Hans-Michael Hauser, Philipp Jung, Fabrice Lebegue, Henri Salha, and
Mark Voorhees for their assistance with writing the paper. They would also like to thank Katherine
Andrews, Gary Callahan, Elyse Friedman, Kim Friedman, and Trudy Neuhaus for contributions to its
editing, design, and production.

This White Paper was cosponsored by BCG’s Technology, Media & Telecommunications practice and the
Information Technology practice.

The Boston Consulting Group (BCG) is a global management consulting firm and the world’s leading
advisor on business strategy. We partner with clients in all sectors and regions to identify their highest-val-
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The Boston Consulting Group November 2009