Cloud and the Future of Business: Challenges

In this second of five reports, the Outsourcing Unit at The London School of Economics focuses on the four key challenges that must be overcome to unlock the potential benefits of cloud computing.

More information

• Listen to the podcast Cloud and the Future of Business: Challenges
  
  
• Read the related Outlook article: Meeting the Challenges of Cloud Computing
  
  
• Read the general introduction to the series, Cloud and the Future of Business: From Costs to Innovation
  
  

Other chapters in the series:
Read Part 1: Promise
Read Part 3: Impacts
Read Part 4: Innovation
Read Part 5: Management 

Learn more about Cloud Services.

In this second of a five-part review of cloud computing and its likely development trends, Leslie Willcocks, Will Venters and Edgar Whitley of the London School of Economics focus on the challenges cloud will present for buyers and providers of services.

One major finding of the research is that business executives and senior IT executives weighted the risks of cloud computing somewhat differently. For business executives, the top five concerns are data security and privacy, data housed offshore, compliance/regulatory issues, exit strategy and lock-in risks and the credibility of suppliers.

IT executives agreed that security and offshoring of data were significant new risks, but they weighted a cloud exit strategy and lock-in as a much greater risk than their business colleagues. These and other variants in risk weightings could give rise to a “Risk Perception Gap.”

The research also identified an “Expectations Gap” between the relatively high expectations of the benefits of cloud held by business executives as compared with the more circumspect views of IT executives.

Cloud computing is far from mature, and there are four challenges that seem particularly critical at this stage:

• Weighing the security and legal risks. Data security and privacy together with offshore data housing and security are perceived to be the most significant risks. The real underlying challenge is the ability of companies to weigh the benefits and risks of disparate systems and manage them accordingly.

• Defining the relationship through contracting. Cloud providers struggle to provide the sufficiently robust service level agreements that enterprises expect for their data centers. This is in part due to technical problems but also due to the cloud multi-tenant business model. Creating value-added service level agreements is likely to be a key role for service integrators.

• The lock-in dilemma. Exit strategies and lock-in risks are key concerns for cloud contracts. For any technology provision there is always a switching cost, but for cloud providers there is significant incentive to attempt to exploit lock-in. If the various components of computing were able to become easily substituted in a liquid cloud marketplace then costs would fall to marginal cost—and profits would thus be slim. Like telcos before them, cloud providers will tend to focus on maximizing switching costs while remaining competitive.

• Managing the cloud. Perhaps the most significant challenge for organizations and CIOs concerns the predicted extinction of the corporate IT department in the face of cloud computing.  The skill mix in enterprise IT departments will undoubtedly evolve to meet the real challenges, which will center on maintaining strategic control and managing service provision and integration across multiple cloud service providers.