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The cloud, technology, and innovation

Cloud technology has become a big buzzword and it’s a new technology that corporations are actively adopting. But companies shouldn’t be adopting “cloud” as an end to itself, as too many do. The problem in many cases is that adopting cloud technologies is an IT initiative, which means that cloud solutions are all around improving IT and IT productivity. But that’s not where growth is going to come from. Some 25 - 30 percent of overall revenues are expected to come from new sources of business, and that requires innovation. What that means in practice is that companies need to think about investments in IT and technology in a completely different way.
Incremental investments in productivity don’t drive growth. Companies need to manage those costs and get them as low as possible, and then use the saved money for innovation. Investments need to go into innovation and disruptive business models. Presented at the Cloud Connect Summit.

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The cloud, technology, and innovation

  1. Cloud & Innovation November, 2012 Any use of this material without specific permission of McKinsey & Company is strictly prohibited William Forrest at the Cloud Connect Summit
  2. McKinsey & Company LastModified3/19/20143:11PMEasternStandardTimePrinted31/10/201220:58RomanceStandardTime | 1 Historical and expected revenues generated from new sources The world is changing: CEOs recognize that future revenue growth will come from new business models 25-30% +50-67% 10-‟15 expected 04-‟09 15-20% Increase in Google search volume2 for “business model innovation” between „07 –‟11 117% 1 Estimates based on survey responses of ~1,500 CEOs globally, conducted in 2010 by IBM 2 Sourced from Google Insights for Search; indexed to 100 as peak search volume SOURCE: McKinsey FPIS; Google Insights for Search worldwide (data pulled on March 14th, 2012); 2010 IBM Global CEO Study; McKinsey research % of overall revenues1
  3. McKinsey & Company LastModified3/19/20143:11PMEasternStandardTimePrinted31/10/201220:58RomanceStandardTime | Cloud is a key lever to decrease costs and reach industry average cost levels … 21 Benefits beyond IT spend reduction were not quantified Non x86 Telecom Facilities and Fabric Hardware Software Internal Service IT Services Cloud services Hybrid cloud 76 Pure public cloud 80 Pure private cloud 82 Legacy IT 100 Annual total IT spend, 100=Total IT spend with all on-premise infrastructure ▪ Moving to the cloud can yield ~20-25% savings in current IT spend ▪ Cloud should be used primarily for cost reductions (not agility and other efforts)
  4. McKinsey & Company LastModified3/19/20143:11PMEasternStandardTimePrinted31/10/201220:58RomanceStandardTime | 3 … but business model innovation is where the growth is 20112005 4% 16% +279% 18% +468% 20112005 3% Revenue Performance of Apple, Amazon, and Google vs. remainder of NASDAQ-100 % contribution to NASDAQ-100 aggregate SOURCE: Bloomberg and public financial data Some “pure play” New IT companies are already achieving major top- and bottom-line advantage… EBITDA
  5. McKinsey & Company LastModified3/19/20143:11PMEasternStandardTimePrinted31/10/201220:58RomanceStandardTime | The drive to innovate continues: successful top firms are perceived in social media as more innovative than non-successful top firms 4 64 108 155 Ø 93 47 The 100 largest firms globally ranked and grouped by total return to shareholders (TRS) and their average Innovation Sentiment Score1 2nd quartile TRS Average Innovation Sentiment Score1 by TRS quartile2 Hundreds web articles; global social media; Mar – Aug 2011 Top quartile TRS Bottom quartile TRS 3rd quartile TRS 1 Number of positive-sentiment articles and blog posts linking company with the words “innovation” or “innovative” over the last 6 months 2 Performance measured by average TRS over the last 5 years (2006 – 2011) SOURCE: Sysomos Web Analytics; Bloomberg; Datastream; team analysis x3
  6. McKinsey & Company LastModified3/19/20143:11PMEasternStandardTimePrinted31/10/201220:58RomanceStandardTime | “New IT” enables new business models and sources of growth ▪ Online collaboration tools (e.g., internal wikis) help teams work together Individual worker productivity ▪ Google‟s AdWords delivers customized, personalized ads Non-human- scale computing ▪ uses heavy “push” for cross-selling related products Labor automation Example usesCurrent IT use cases “New IT” use cases Team & corporate productivity growth Digital only products Business model transfor- mation a b c
  7. McKinsey & Company LastModified3/19/20143:11PMEasternStandardTimePrinted31/10/201220:58RomanceStandardTime | 6 Example: Amazon transforming e-retail by driving customer preference and share of wallet gains Approach ▪ Collection and analysis of data to offer recommendations and generate “push” based sales ▪ 5X investment in internal IT to enable innovation BUSINESS MODEL TRANSFORMATION 1 The only year this figure is available for – not reported separately in financial reports SOURCE: Company web site, company reports, press and literature search Amazon is the market leader among online retailers in average order size, driven by “push” sales 35% of all sales (~$3.8B) in FY20061 came from recommendations New businesses enabled by investments in “NewIT” e.g. AWS ($1B), Kindle(10% of revenue) and instant video to drive Prime
  8. McKinsey & Company LastModified3/19/20143:11PMEasternStandardTimePrinted31/10/201220:58RomanceStandardTime | 7 Example: AdWords and AdSense deliver data-driven, custom advertisements, resulting in $36B of annual revenues for Google (2012)Now(pre 2000)Then ▪ Text-based custom ads delivered based on search data and page content ▪ In 2011, Google represented 6.5% of total advertising industry, and 35.3% of the online advertising industry – In 2011 the total online advertising industry size is $78.6B, up from $10.5B in 2000 ▪ Offline advertising dominated online ads ▪ Online ads were untargeted and ineffective, primarily driven by display banner and popup ads DIGITAL-ONLY PRODUCTS SOURCE: Interactive Advertising Bureau, Google finances, Magna Global forecasts 2012
  9. McKinsey & Company LastModified3/19/20143:11PMEasternStandardTimePrinted31/10/201220:58RomanceStandardTime | 8 CEOs are hoping to see improvements from cloud other than current IT cost reductions Percent of respondents SOURCE: McKinsey Quarterly Survey on information and technology strategy, 2010 (BTO strategy Q24, 25) No Do not know Yes 5 22 29 55 70 Other Increased ability for IT to scale up (or shrink) to meet business needs Disaster recovery and business continuity Lower unit cost of IT Increased business flexibility (N = 332) Multiple selections allowed (N = 252) Do you believe that cloud computing could drive value at your company? What are the most significant ways you expect your company to realize value? 9 16 75 Cloud is mainly a cost reduction play for CIOs
  10. McKinsey & Company LastModified3/19/20143:11PMEasternStandardTimePrinted31/10/201220:58RomanceStandardTime | Our leaders 9 Will Forrest @Ayewill Kara Sprague WWW @McK_CMSOForum