“Thanks in part to cloud, Moderna was able to deliver the first clinical batch of its vaccine candidate (mRNA-1273) to the US National Institute of Health for phase one trials just 42 days after the initial sequencing of the virus,” wrote the authors of a recent McKinsey article, - Cloud’s trillion dollar prize is up for grabs. When the COVID-19 pandemic hit, “The company was well positioned to quickly design research experiments and to harness its automated laboratory and manufacturing processes and enhanced drug-discovery pipeline.”
Over the past year, a number of articles have pointed out that, in response to the pandemic, digital adoption by business and consumers has already reached levels that weren’t expected for many years. “More companies are starting to see the real benefits of cloud, which has been long heralded as a catalyst for innovation and digital transformation, thanks to its ability to increase development speed and provide near-limitless scale,” adds the McKinsey article. “While Moderna’s success illustrates the business opportunities that cloud makes possible, it only scratches the surface of the potential value at stake. A detailed review of cloud cost-optimization levers and value-oriented business use cases foresees more than $1 trillion in run-rate EBITDA [an accounting measure of a company’s overall financial performance] across Fortune 500 companies as up for grabs in 2030.”
To quantify cloud’s 2030 trillion dollar potential, - an estimate with a range of $0.7 to $1.2 trillion, - McKinsey analyzed the impact of cloud on worldwide IT spending based on independent surveys of over 1,000 organizations. As part of its research, it assessed over 700 use cases across 19 industries to help them forecast the revenues and financial performance of Fortune 500 companies by 2030.
The research looked at cloud adoption along three dimensions, - rejuvenate, innovate, and pioneer. It estimated the specific drivers of value across the first two dimensions and the likely growth opportunities for the third. Let me summarize the article’s key findings.
Rejuvenate
“Rejuvenation describes a break from traditional legacy approaches by using cloud to lower costs and risk across IT and core operations.” Rejuvenate accounts for $340 to $430 billion of the 2030 estimated potential. Its key value drivers are IT cost optimization, improved resilience, and core operations.
IT cost optimization. Cloud service providers (CSPs) provide access to capabilities that most companies could never afford to develop on their own. CSPs achieve economies of scale by running their IT assets at much higher utilizations. Since companies pay for their cloud usage based on the assets they consume, they must make sure that their existing applications run efficiently in the cloud, otherwise their costs can actually increase.
Companies that have remediated existing applications and built new ones leveraging cloud-native attributes are seeing major efficiency improvements. Not only have they reduced their overall spending on IT infrastructure, but they’ve also increased their development productivity through the use of agile capabilities, self-service workflows and automation tools. Effective cloud usage can reduce infrastructure costs by 29% and improve the productivity of application development and maintenance by 38%.
“Early research indicates that developers spend measurably less time on infrastructure and production support and more on business requirements and development when companies move to public cloud. … As a result, increasing the share of Fortune 500 applications in the cloud from 10 percent to 60 percent would yield benefits of $56 billion in application development and maintenance and $12 billion in infrastructure expenditures.”
Improved resilience. McKinsey estimates that by 2030, companies will lose around $650 billion due to system downtime and cybersecurity breaches. CSPs can improve the integrity of their cloud platforms through security processes and controls that can automatically identify, detect, and investigate advanced threats, compromised identities, and malicious actions. More resilient architectures could reduce the downtime of applications on the cloud by 57% and the cost of breaches by 26%.
Core operations. Cloud can help reduce manual tasks by accelerating the implementation of standardized, automated solutions such as analytics-driven accounting and HR management. “Organizations that shift to public cloud unlock additional value by repurposing and reskilling their workforce to focus on higher-value tasks, such as developing products and services that address customer demands.”
Innovate
The innovate dimension harnesses cloud to accelerate the deployment of emerging technologies like AI, IoT, and automation at scale. This enables companies to focus on growing their business and optimizing the costs of their operations. Such innovation accounts for $360 to $770 billion of the 2030 estimated potential. Its key value drivers are growth from new and enhanced use cases, accelerated product development, and rapid scaling.
Growth from new and enhanced use cases. Market experimentation is a hallmark of the most innovative companies in our increasingly digital economy. But, learning how to do so effectively is still a work in progress. Cloud enables companies to experiment with applications and business models swiftly, inexpensively and at scale by providing on-demand access to nearly unlimited computational and storage capacity. “Executives who embrace cloud avoid large up-front capital outlays when they launch or expand businesses. New cloud apps tend to draw on ever-evolving large and complex data sets at much lower cost and greater speed.”
Accelerated product development. “Companies have adopted cloud to enhance their operating-model agility, which accelerates the implementation of use cases while lowering R&D investment.” In addition, CSPs provide organizations with innovative approaches to software development and innovative tools and capabilities such as containers, microservices, DevOps practices, continuous integration and delivery, and serverless architectures. “This enhances product development from the outset and dramatically speeds design, build, and ramp-up, helping companies to dramatically reduce time to market.”
Rapid scaling. “The infrastructure and global presence of cloud providers can be harnessed to scale products almost instantaneously to a broader set of customer segments, geographies, and channels. In addition, organizations are able to gain access to instant on-demand elasticity in compute and storage capacity - critical elements in launching and building new businesses.”
Pioneer
The final dimension, pioneer, enables companies to extend the value of cloud beyond the previous two dimensions once they’ve reached a certain level of maturity. At this stage, companies can leverage cloud to experiment with new and emerging technologies, such as advanced AI capabilities, blockchain, augmented and virtual reality, and 3D printing. Given the nascent stage of these technologies it’s too early to quantify their potential impact with any reasonable precision.
Adoption of emerging technologies. This advanced level of cloud maturity can help companies attract and retain top talent to work on emerging technologies. Along with agile operating models, companies can then set up swat teams to develop proofs of concept for the use of advanced technologies, helping them understand the potential value of transformative technologies that haven’t yet achieved mass adoption.
Finally, the McKinsey article recommends that companies adopt four key actions as they get started on cloud-driven performance improvements:
- Set an ambitious and urgent business aspiration. “Business and IT leaders should clearly and urgently articulate a high-value ambition - a moon shot achievable when they work closely together on cloud.”
- Pursue a hard-headed economic case. “A business case for cloud should be grounded in a clear understanding of cloud economics across cost savings (rejuvenate) and business acceleration (innovate). It should be adjusted to transformation risks and prioritized by business domain, and it should include the required resource allocations and sequencing of tasks.”
- Adopt agile, cloud-native ways of working. “The scope of the change needed to harness cloud requires companies to have real expertise: leaders, staff, and partners with deep experience in cloud and cloud transformations; expert practitioners; and a broad ecosystem. Further, successful cloud efforts are possible only when organizations transform their operations.”
- Build a standardized, automated cloud platform. “Invest in creating a standardized, automated cloud platform that improves productivity and delivers a great self-service experience for developers, who are among the primary consumers of cloud.
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