Cloud computing is an unfortunate moniker in an industry like information technology, which has been accused of selling fluffy promises. But beyond the hype, it is likely to be remembered as the most significant IT trend of this decade. Definitions vary wildly but the basic premise of the cloud is that it delivers software applications and hardware capacity as services via the internet.
This means organisations can scale up IT resources to meet extra capacity demands during busy periods, and down again when business is slow, while paying only for the resources they use.
It is the latest manifestation of "on demand", "utility" or "grid" computing that vendors have been pushing for several years, with limited success.
As with most things in the world of IT, the success or failure of a development is all about timing.
The global financial crisis could be a tipping point that lets cloud succeed where previous incarnations of pay-as-you-go computing have ended up back on the drawing board.
"The global financial crisis has made organisations more willing to look at different ways of doing things and it has also made it more difficult to avoid them," the research vice-president of Gartner's Emerging Trends and Technologies Group, Brian Prentice, says.
"Some people are very interested in cost optimisation because they are really feeling the heat financially and will consider any alternative, including cloud. But others like the status quo and would rather avoid disruptive approaches to IT. However, as cloud gets more mature those economics will get more compelling."
An obvious benefit of cloud computing is that it allows organisations to move technology costs from the capital expenditure budget to operational expenditure.
In July, cardboard manufacturer Visy announced it would push its core business systems into the cloud under a five-year deal with Telstra for infrastructure outsourcing and telecommunications services, valued at $50 million.
Visy will migrate its SAP platform and more than 140 software applications onto hardware at the telco's premises. Visy staff will manage the software remotely.
Visy chief information officer Ken Major told The Australian Financial Review that the ability to shift capital expenditure from computing to its manufacturing plants was a key driver in a tight economy.
But it isn't the only benefit. IBM distinguished engineer Michael Shallcross describes cloud computing as a new consumption and delivery model that shifts the emphasis from servers to services.
"Some attributes of the cloud model make it attractive from a business perspective," Shallcross says.
"The speed of deployment is particularly attractive, [as is] the ubiquitous access and consumption-based charging, as well as a much more user-friendly way of requesting services."
Most large corporate organisations are still reluctant to put their information into a "public" cloud shared with other organisations because of concerns based largely on the security and availability of data.
But they are experimenting with building "private" clouds that they can keep behind the corporate firewall and manage more closely.
As a result, it is small and medium businesses that are not shackled by huge investment in legacy IT systems and don't have the resources to spend on high-grade security and storage solutions that have been first to engage the public cloud model.
Telstra launched its T-Suite software-as-a-service platform in April and added Microsoft's Online Services to its arsenal in September. Telstra business development director Marcus Bartram says small and medium-sized business successes include General Fasteners, which is a wholesale supplier to hardware stores. He claims the company has saved 10 hours and $500 a month by using T-Suite data back-up, workforce coding and compliance tools.
T-Suite is part of Telstra's cloud computing strategy but the C word is not usually mentioned in customer conversations.
"We're talking to customers about simplicity, being able to buy online, having a single point of service if there is a problem and the flexibility that comes from scaling up and down that fundamentally changes the way people buy software," Bartram says.
Although the adoption of cloud services seems certain to accelerate in the years ahead, they are unlikely to replace traditional IT models entirely. Microsoft's developer and platform group director Gianpaolo Carraro compares in-house IT and cloud computing to making travel decisions.
"It used to be that you had the choice to build software or buy it but, regardless of that choice, you were hosting it in your own data centre," he says.
"What's happening now is that you have a choice of where you run your software - within your own data centre, through a hosted service or directly through the cloud. The same way you own a car but it does not prevent you from using public transport where it makes sense."
While the potential benefits associated with cloud computing are difficult to ignore, there are also some significant consequences for chief information officers (CIOs).
For one, cloud computing is likely to have a serious impact on how they source technology and how their users view those acquisitions. KPMG's national IT sourcing advisory director, Michael Smart, predicts that an explosion in the number of cloud-based services available from established players and new entrants will lead many organisations to experience a blowout in the number of suppliers they deal with. He sees a future where CIOs are "multi-sourcing on steroids".
IBM's Shallcross also thinks cloud computing will reinvigorate the multi-sourcing model, but suggests there will be a different twist to it this time around.
"Traditional approaches to multi-sourcing focused on technology domains like networks, desktops or application maintenance," he says. "Cloud computing makes it possible to source particular workloads or services from providers like business analytics, storage or collaboration. "It's multi-sourcing of particular services to support particular workloads. That's one of the important shifts and, if you don't take a strategic approach, it could lead to a proliferation of service providers."
The other issue for CIOs will be mixing and matching the internal and external delivery of services. Where IT departments have been responsible for managing systems in the past, Shallcross sees them evolving to become systems integrators that deliver end-to-end services from multiple suppliers.
"The attributes business that executives find appealing - such as rapid deployment and usage-based charging - will effectively set a new benchmark for the way internal IT departments deliver services," he says.
"Business executives will expect a faster and more flexible response as well as lower prices. Cloud computing is the industrialisation of IT service delivery - IT providers will have to embrace the same sort of techniques that other industries have around standardisation and automation."
The picture painted by Shallcross is a longer-term vision of how the adoption of cloud services will have a major impact on how organisations buy and use information technology. But the short-term reality is much less strategic and much more ad hoc.
Gartner's Prentice says the beauty of the cloud model is that users don't have to go through a formalised sourcing process. Instead, they can go straight to the specialist companies that are offering a specific service. However, he predicts it's only a matter of time before that situation changes.
Cloud computing is "seeping in from so many different directions that at some point senior IT leaders are going to decide they need to create some form around it and a strategy for where it is going", Prentice says. Brian Corrigan
Sidebar: Corporations should wait in wings for vendor hype to settle
Leading technology industry analysts believe corporate uptake of cloud computing will increase in the next year as concerns about the reliability of the approach subside. However, they caution that businesses looking to adopt systems hosted online must be wary of over-hyped vendor claims about cost savings, and assess which areas of their organisations are suitable for a cloud solution.
Intelligent Business Research Services analyst Kevin McIsaac says uptake of software-as-a-service (SaaS) through cloud computing will grow strongly throughout the next 12 months. But he says enterprises must be aware that the generic phrase "cloud computing" could also be applied across infrastructure and technology platforms.
"From discussions with clients we have observed these terms are not well understood and mean a wide range of different things to different people," McIsaac says.
"There will be an increase of cloud computing in the next 12 months, but the question is how much and where?" he says. "I think it will be quite slow for general purpose infrastructure as a service and platform as a service, but there will be continued strong interest in SaaS for specific areas, such as email, customer relationship management and some industry vertical applications."
The director of Asia-Pacific services at research firm IDC, Chris Morris, has just completed an end-user study on attitudes towards cloud computing across the region. He says the recent economic turmoil has been a prime factor in increased interest, but there is also a level of maturity in the offerings that is overcoming users' typical fears about cloud. These include doubts about security, reliability, availability and predictability of price.
"The Australian cloud market is dominated by SaaS offerings from Salesforce.com, Google and a range of smaller providers with targeted offerings," Morris says. " Typically these are business-oriented services, but personal productivity services such as email and collaboration also have a strong presence.
"There are big differences between the enterprise sector and the SMB [small and medium business] sector. Within the SMB sector, cloud use is much broader, with cloud being used more readily and across the whole organisation. They see it as cheaper and less hassle than managing their own IT infrastructure."
Morris says that many smaller organisations will secretly admit that the cloud services they consume are more secure and reliable than anything they could afford within the traditional asset ownership model.
Ovum research director Steve Hodgkinson says that while he has detected increasing confidence in cloud computing, there is still a healthy degree of caution. He says confidence would increase as the major vendors boost their commitment to enterprise-ready cloud services in terms of security, service level assurances and pricing models.
"There are still many reasons for enterprises to be cautious about relying on the cloud for mission critical applications," Hodgkinson says.
"The situation is similar to the early years of outsourcing and off-shoring - there are many factors that need to be sorted before an enterprise CIO will come to trust a third party to deliver critical services."
Hodgkinson says enterprises are tending to use cloud services in selected, relatively well bounded, areas to gain experience.
"The sweet spot is where a business need is urgent, there are financial constraints, users are prepared to use a standardised solution without customisation, there is a collaboration element, there are no complex integration issues and the data is relatively benign in terms of privacy and security issues," he says. Paul Smith, Australian Financial Review