Nicolas Day

in·no·va·tion and consumption economics

Blog Post created by Nicolas Day on Nov 10, 2015

Innovation. You hear the word thrown around everywhere these days. But what does it really mean? By definition, it’s the introduction of new things or methods. However, to have a true impact, innovation can just be about the new “shiny object” - it has to provide additional value and help improve over what was done previously. In IT, we are constantly seeing a mix of improvement and new features/functionalities that are advertised as innovation. In most cases, it’s just an improvement over what was done previously. A true innovation should be groundbreaking and help make a change from the route one has been taking into a different direction that provides better results.

 

Innovation isn’t only tied to product features and functionalities, or to solutions. It can also be tied to financial models and how you conduct business with your customers. As the IT industry has been changing due to the impact of the Cloud, cloud service providers have been under pressure to find ways to compete against the Amazons of the world while maintaining a profit. That’s been very difficult as most of today’s vendors don’t operate in a cloud-friendly way: Customers need to make CAPEX purchases up front and invest in all the gear required to build up their cloud. This cash outlay happens day one. The cloud service provider then needs to build the cloud, configure it and then onboard their customers onto it. So the time between the initial investment and the time customers are actually billed to use the cloud services can be measured in months. This requires cloud service providers to finance the investment and roll those costs into their cloud costs, passing it on to their customers – unless they take a loss in order to maintain competitive price points. Does this business even make sense?

 

Now from the vendor’s perspective, they haven’t taken any risk. They sell their gear – at a “great” discount – then transfer the assets from their balance sheet to their customer’s balance sheet, collect their payment and there is no more risk. The cloud service provider, however, needs to then quickly monetize that investment.

 

In order to innovate financially to support their cloud service provider customers, vendors need to shift their cost models to align the cloud service provider’s expenses to their revenues. This shift towards selling an outcome vs selling a product is detailed in J.B. Wood’s excellent book “Consumption Economics”. It is the true basis of a partnership between a vendor and the cloud service provider.

 

Hitachi has a solution around Managed Cloud Services where a fully/partially managed storage environment can be provided to a customer on a price/GB/month. This allows a cloud service provider to be more agile, to innovate and to quickly respond to their customer requirements without incurring the “initial CAPEX investment” penalty that would go along a traditional procurement route. Hitachi and CGI recently engaged in such a partnership and it was detailed in a great whitepaper by IDC. IDC sees a shift towards consumption economics as key to enabling innovation and allowing cloud service providers to grow their business in a competitive way.

 

Sharing risk in a way that vendor, cloud service provider and customer all win is – in my perspective – innovation to be proud of!innovation.jpg

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