A Microsoft Services Enterprise Architecture Paper

August 24, 2017 | Autor: Brikena Cuka | Categoria: Information Systems, Economics, Real Options, Cloud, Private Cloud
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A Microsoft Services Enterprise Architecture Paper

Economic adaptability Business drivers and strategy for a private cloud Abstract: Businesses today are challenged to become more agile to facilitate their ability to innovate. To be competitive, IT departments must operate in an increasingly challenging economic environment, spend more time delivering new value, and do it more quickly while assimilating disruptive technologies. IT departments are responding to these multiple requirements by exploring and adopting new computing models. Unfortunately, the immaturity of the public cloud, especially with respect to governance, risk management, and compliance (GRC), precludes many enterprises from contemplating it as an option. The remaining feasible options are private cloud and hybrid cloud.

This paper presents the primary business drivers that cause enterprises to consider using private clouds, and introduces the real options valuation method for evaluating private cloud strategies. Microsoft Services Author: Bryan McMillan, Architect, Microsoft Services Publication Date: June 2012 Version: 1.0 We welcome your feedback on private cloud computing. Please send your comments to the Microsoft Services Enterprise Architecture IP team at [email protected].

Economic adaptability Business drivers and strategy for a private cloud

Acknowledgments The authors want to thank the following people who contributed to, reviewed, and helped improve this white paper. Contributors: Brian Seitz, Delbert Murphy, Jim Wilt Thanks also to: Richard Webb © 2012 Microsoft Corporation. All rights reserved. This document is provided "as-is." Information and views expressed in this document, including URL and other Internet website references, may change without notice. You bear the risk of using it. This document does not provide you with any legal rights to any intellectual property in any Microsoft product. You may copy and use this document for your internal, reference purposes. This document is confidential and proprietary to Microsoft. It is disclosed and can be used only pursuant to a non-disclosure agreement.

© 2012 Microsoft Corporation

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Economic adaptability Business drivers and strategy for a private cloud

Table of Contents 1

EXECUTIVE SUMMARY .................................................................................................................................... 1

2

EVALUATING NEW TECHNOLOGY REQUIRES A NEW APPROACH ..................................................................... 1

3

PRIVATE CLOUD IN THE CONTEXT OF COMPUTING EVOLUTION...................................................................... 2

4

BUSINESS DRIVERS FOR MOVING TO A PRIVATE CLOUD ................................................................................. 2

5

RISK SIDE OF THE EQUATION .......................................................................................................................... 3 5.1 5.2 5.3 5.4

GOVERNANCE, RISK MANAGEMENT, AND COMPLIANCE ................................................................................................3 SECURITY ............................................................................................................................................................4 PRIVACY AND IDENTITY ASSURANCE ..........................................................................................................................4 DATA SOVEREIGNTY ..............................................................................................................................................4

6

PREPARING TO USE THE REAL OPTIONS APPROACH TO EVALUATE A PRIVATE CLOUD STRATEGY .................. 4

7

CONCLUSION: PAYOFF OF USING THE REAL OPTIONS APPROACH................................................................... 5

8

REFERENCES .................................................................................................................................................... 6 8.1 8.2

CITED SOURCES ....................................................................................................................................................6 ADDITIONAL READING ...........................................................................................................................................6

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Economic adaptability Business drivers and strategy for a private cloud

1 Executive summary The goal of this document is to provide enterprise executives (CxOs) a strategic tool for assessing and measuring investment in the private cloud. The realized value of private clouds varies because of the architectural tradeoffs they require. Understanding the priorities of a cloud strategy requires understanding the business strategy first. Technological strategy then follows, based on the maturity of the relevant capabilities within the enterprise. Note that this document is one in a series of documents that address the economics of the private cloud, and identifies the business drivers and the strategic preparations that an economic assessment requires.

2 Evaluating new technology requires a new approach As business environments continue to increase in complexity, they also operate at higher velocity. To seize opportunities presented in today’s marketplace, a calculation method that provides timely adjustment through rapid insight to real risk is essential. Furthermore, these adjustment intervals must be reduced from years to months to weeks. The traditional notion of predicting the outcome of an upfront investment that plays out over long timeframes is no longer valid. Publications are full of articles, studies, and presentations that illustrate the technical dimensions of cloud computing. It is a given that an enterprise roadmap must consider public and hybrid cloud strategies, as well as other permutations. Still, the evidence (as indicated in the following quote by Campbell R. Harvey) and current thinking indicate that private cloud will be the platform of choice from which these other options will evolve.

Introduction to real options In many project evaluation settings, the firm has one or more options to make strategic changes to the project during its life. For example, a natural resource company may decide to suspend extraction of gold at its mine if the price of gold falls below the extraction cost. Conversely, a company with the right to mine in a particular area may decide to begin operations if the price rises above the cost of extraction. This occurred during the Gulf war when a number of oil fields in Texas and Southern California (where the deposits are such that the cost of extraction is relatively high) began operations when the price of oil rose. These strategic options, which are known as real options, are typically ignored in standard discounted cash flow (DCF) analysis where a single expected present value is computed. These real options, however, can significantly increase the value of a project by eliminating unfavorable outcomes.1

By using the real options valuation method, executives can quantitatively assess and measure the value that can be realized from investment in a private cloud strategy.

1

(Harvey 1999)

© 2012 Microsoft Corporation

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Economic adaptability Business drivers and strategy for a private cloud

3 Private cloud in the context of computing evolution The cloud represents the latest big wave of computing technology. In 1954, the first wave of the modern era of pervasive electronic computing—the era of mainframes—was made possible when the silicon transistor was first produced. The next wave occurred in the late 1970s and early 1980s, when the microprocessor made the advent of the desktop computer possible. The co-evolution of the Internet and computing created opportunities and also increased complexity when technology was applied to business processes. This co-evolution continues, and the emergence of cloud computing is the next major disruptive wave of technology. Businesses continue to struggle with how to cope with the disruption of evolving computer technology as they form and execute their business plans and operating models.

4 Business drivers for moving to a private cloud The business computing model is evolving. What is unique about the current evolution is that for the first time, the users of business services and enterprise employees are driving the change. For example:   

Globalization. Interconnectedness leads customers to expect access to goods and services anywhere on the globe. Mobile. Customers expect to consume goods and services at equal service levels whether in a traditional storefront, at home, or in transit. Social. Platforms such as Facebook, Twitter, and others are becoming the interaction mode of choice. Customers expect that businesses will accept transactions that use integrated personal and business communication.

At a tactical level, a recent survey by Tata Consultancy Services (TCS) provides insight to the business drivers for cloud adoption. The survey also highlights why today's environments choose a private cloud strategy rather than a public cloud or hybrid cloud strategy. According to the study, business drivers for private cloud adoption include:3   

Despite a significant shift to cloud applications, most companies (especially in Europe) remain conservative about which applications they put in public clouds. Less than 20% of U.S. and European companies would consider or seriously consider putting their most critical applications in public clouds. But 66% of U.S. and 48% of European companies would consider putting core applications in private clouds.2

Standardize applications and business processes Provide capabilities to capture, analyze, and store big data securely Increase flexibility to act at the velocity of business

A 2012 Gartner study asked, "What is your main driver in moving to private clouds?" The responses (summarized in the following figure) clearly indicate that respondents want to deploy private clouds, primarily for speed and agility; respondents were less concerned with reducing costs.

2 3

(Tata Consultancy Services (TCS) n.d.) (Tata Consultancy Services (TCS) n.d.)

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Economic adaptability Business drivers and strategy for a private cloud

Figure 1. Drivers for moving to private clouds4 (used with permission)

5 Risk side of the equation Despite the need for agility and responsiveness, executives must balance needs with the associated risks. The primary drivers of risk for the enterprise are:    

Governance, risk management, and compliance (GRC) Security Privacy and identity assurance Data sovereignty

5.1 Governance, risk management, and compliance When considering a private cloud strategy, executives need to understand the potential impact of regulatory and industry requirements on the strategy. They must ensure that any private cloud service offerings comply with the regulations, frameworks, and standards that apply to their customers. Executives may also have organization-specific requirements for governance, risk management, and compliance. Some requirements can be fulfilled by self-certifying compliance; more commonly, organizations must contract with an external party to conduct compliance audits. Lack of compliance can result in financial penalties, decertification, and the inability to function effectively in an industry. Laws, regulations, and governing agencies vary by country and by industry type; when considering a private cloud strategy, it is prudent to engage corporate legal resources early. With reasonable management, controls, and monitoring, enterprises can address the appropriate GRC requirements using a private cloud strategy. An additional advantage that private cloud strategy has over public cloud, hybrid cloud, and other designs is that it is less susceptible to risks that can accrue through the misdeeds of a third party. 4

(Bittman 2012)

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Economic adaptability Business drivers and strategy for a private cloud

5.2 Security By using the private cloud model, enterprises can retain the governance and hosting of corporate data in trusted environments while transitioning those environments to accommodate greater software automation and monitoring throughout their organizations. To be successful, enterprises must consider security from the starting point of the private cloud deployment. It is an essential aspect of the planning and architecture phases. Furthermore, regulators expect increased security diligence. In terms of real options, the enterprise must consider the various data-breach disclosure laws that are in effect. The key factor is the quantity and type of customer records that have the potential to be breached. Again, there are differences in how regulations such as the Health Insurance Portability and Accountability Act (HIPAA), the Payment Card Industry Data Security Standard (PCI DSS), the Sarbanes–Oxley Act (SOX), and corresponding international laws affect the business. Private cloud computing can provide both reduced costs and increased robustness. At the same time, it is essential to address security, data sovereignty, or regulatory compliance demands. A private cloud is an ideal balance between ensuring security and capitalizing on the benefits of cloud computing.

5.3 Privacy and identity assurance CIOs typically rank privacy, security, and risk as their top current concerns. They view these concerns as the primary barriers to cloud adoption. However, a private cloud strategy can minimize the exposure to risk by implementing processes and tools that provide data assurance. Privacy and identity management is a challenge in traditional computing strategies. Proper identification and authentication techniques must exist in any real options scenario. This requirement applies to users and technical resources within private cloud environments as well. If advanced services such as access control, authentication, and user provisioning are outsourced, identity management solutions for the private cloud should interoperate with them.

5.4 Data sovereignty Data sovereignty is the need to ensure that data stored in a private cloud adheres to the laws and regulations of the country or region in which the data originates. Establishing sovereignty is especially important, because current laws and regulations in different countries are ambiguous and conflicting. This complexity has the potential to grow exponentially in a cloud environment. However, if the real options strategy includes proper accounting for the data, a private cloud strategy can provide more control over these legal and policy constraints.

6 Preparing to use the real options approach to evaluate a private cloud strategy The paper “Building Better Business Cases for IT Investments” outlines a six-step approach to developing a robust business case. This simple, direct approach is based on a rigorous and systematic exploration of the costs and benefits expected from the investment. 5

5

(Ward, Daniel and Peppard 2008)

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Economic adaptability Business drivers and strategy for a private cloud

The six steps are as follows: 1. 2. 3. 4. 5. 6.

Define business drivers and investment objectives Identify benefits, measures, and owners Structure the benefits Identify organizational changes that enable benefits Determine the explicit value of each benefit Identify costs and risks

The output of these steps and the approach they describe expands upon traditional business case development in the following ways. This approach:      

Recognizes both financial and non-financial benefits Identifies measures for all benefits, including subjective or qualitative benefits Seeks evidence for the sizes of the benefits Identifies an owner for each benefit Links benefits explicitly to both the IT and business changes that are required to deliver them Identifies owners who will ensure that the business changes are achieved

The six-step approach produces reliable data to serve as input to the real options analysis.

7 Conclusion: Payoff of using the real options approach Organizations that use traditional financial tools such as return on investment (ROI) or net present value (NPV) to build business cases tend to identify benefits that are associated with efficiency improvements and cost savings. Indeed, executives who are considering a private cloud strategy need to account for these financial benefits. However, the traditional approach overlooks other factors such as partner value chains, stakeholder interests, and organizational changes. The unique advantage of a real options approach is that organizations can include and account for these factors in addition to financial benefits. Business cases that are developed using a real options approach make the full economic impact of an investment tangible, and improve the organization's ability to make timely course corrections. And it is often the non-financial factors, rather than financial ones, that are likely to lead to greater commitment from those stakeholders who are crucial to the success of the investment.

© 2012 Microsoft Corporation

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Economic adaptability Business drivers and strategy for a private cloud

8 References 8.1 Cited sources Bittman, Thomas J. Private Cloud Computing: Target Services that Need Agility. Gartner, Inc., 2012. Harvey, Campbell R. Identifying Real Options. Fuqua School of Business, Duke University, Durham, NC; National Bureau of Economic Research, Cambridge, MA, 1999. Tata Consultancy Services (TCS). The State of Cloud Application Adoption in Large Enterprises. Tata Consultancy Services (TCS), n.d. Ward, John, Elizabeth Daniel, and Joe Peppard. "Building Better Business Cases for IT Investments." MIS Quarterly Executive 7, no. 1 (2008): 1-14.

8.2 Additional reading Mbolo, Thomas Ukelo. Project Valuation using Real Options, A thesis submitted for the degree of Master of Advanced Studies in Management, Technology, and Economics, Swiss Federal Institute of Technology Zurich (ETHZ), May 200 Microsoft Private Cloud: A comparative look at Functionality, Benefits, and Economics, January 2012 Slater, Paul. Becoming an Effective Private Cloud Provider, Microsoft, January 2012

© 2012 Microsoft Corporation

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