Missed Scenario Means Missed Opportunity

 

The cloud services market grew to $597 billion in 2023, up more than $100 billion over 2022 (“Gartner forecasts worldwide public cloud end-user spending to reach nearly $600 billion in 2023,” 2023). Amazon Web Services (AWS) retains the lead share of the market at 32%, though that percentage has continued to drop. Microsoft Azure has increased its share. IBM’s cloud, which was previously third, was overtaken by Alibaba. Still, IBM maintains 3% of the cloud services market, or approximately $18 billion annually.

Background on Distributed Computing and Data Centers

Notably, in the early 2000s, AWS was nowhere on the horizon. At that time, several global outsourcing companies could have become market leaders in cloud services but failed to conduct proper scenario planning. The discussion herein is about one of those major players. The company will be called Global Hosting, Inc. to maintain anonymity. The account and discussion about Global Hosting are based on first-hand knowledge. The following paragraphs describe the distributed computing conditions that led to the emergence of cloud services and market signals missed by Global Hosting.

Circa 2002, a few large global technical companies had dominant positions in the data center outsourcing market. These businesses were created over decades and evolved by 2003 when all companies had global data centers where the server, storage, network, and applications resided. In most cases, these companies also provided management services for the equipment and applications hosting and management services optionally.

Very few of these global companies were also manufacturers that sold data center equipment with hosting and outsourcing services. IBM was one of those major competitors. Global Hosting was an IBM competitor in that era. The global providers' data centers were state-of-the-art facilities that met all international standards for security, remote access, and facility efficiency. The management capabilities at these locations had reached the state of “lights out.” This feature meant the facilities could operate and be managed entirely remotely. Only physical equipment maintenance (scheduled) was performed on-site.

Another characteristic in the early years of the new millennium was the growth of rack-mounted server technology. The major outsourcing companies were selling compute power in rack units, usually 1U to 4U servers, combined with network equipment. Network storage became equally ubiquitous. Arrays of storage area networks (SANS) and network-attached storage (NAS) were popular. Individual disks in these storage systems were hot-swappable and could be easily replaced or added whenever necessary. The data centers were connected globally by wide area networks (WANs), and many were connected to the Internet.

It was not until 2011 that the National Institute for Standards and Technology (NIST) defined cloud computing in what is still considered the fundamental definition of cloud computing (Mell & Grance, 2011). The important part of that definition is the availability of ubiquitous computing resources, computing power (potentially including software applications) that can be obtained from providers and released as needed. These computing resources are hosted in data centers (called cloud centers) owned by the major cloud service providers mentioned in the opening discussion.

An Example of Poor Scenario Planning

In 2004, Global Hosting regularly competed in the data center hosting and outsourced computing services market with IBM and the other major providers, such as Electronic Data Systems (EDS) and Computer Sciences Corporations (CSC). Like IBM, Global Hosting was a global computing hardware manufacturer, including servers, storage, and network devices. In addition, Global Hosting had a software publishing business unit famous for remote monitoring and management applications. Global Hosting held the top market position in the low-cost server market—servers using Intel and AMD CPUs. Similarly, the flagship remote monitoring and management application dominated the market.

In Global Hosting’s services business unit, there were three seasoned experts. Their names are changed here to Christopher, Thedric, and Gregory. Christopher worked in a sales position. Thedric and Gregory were more technical and occupied senior consulting positions at Global Hosting. In 2004, having seen the trend in customer requirements for increased flexibility in hosting and management services, Christopher recruited help from Thedric and Gregory to create a new computing model that would allow customers to quickly provision and release servers, network devices, and storage. Options for this computing utility included software-as-a-service (SaaS) and a range of management services, from hands-off through fully managed applications, such as SAP. This utility nearly met the later definition of cloud (Mell & Grance, 2011).

Christopher built a business case and convinced Global Hosting business unit management to invest in a pilot for the new service. The pilot was highly successful. However, the service would be discontinued a couple of years later. In 2004 and 2005, Global Hosting never considered a scenario where companies would want to connect via the Internet to freely obtain computing resources on a subscription basis despite having all the pieces assembled.

Global Hosting missed an opportunity to become a dominant player in a $597 billion computing segment, where one of their competitors (IBM) was successful, though entering the market late. It was not until 2006, fully two years later, that early offerings from AWS started to appear. Similarly, Google had begun to offer a few online applications, such as Google Docs. However, not until 2010 were the three market leaders offering contemporary cloud services.

The failure to see the trend is owed to a lack of scenario planning at Global Hosting. Forecasting was a common practice. All the business units at Global Hosting forecasted weekly, projecting the fiscal quarter and fiscal year revenue. Near the end of each fiscal year, Global Hosting also consistently forecasted into the following fiscal year. Business forecasting is a natural and necessary part of business, especially for publicly traded companies that must file documents with federal regulators and report to shareholders. However, forecasting can create myopia in business by focusing too much on short-term financials while ignoring longer-term market opportunities, such as cloud computing.

 IBM and Global Hosting had all of the pieces aligned for cloud computing. Both of the companies had competitive advantages over other potential cloud service providers because the equipment was manufactured and owned. It did not need to be purchased at higher prices from another company. Global Hosting also had the personnel resources, with decades of experience and a global reputation. However, Global Hosting failed to connect the dots, ultimately allowing other companies to dominate the cloud service market.

Conclusion

There are lessons in scenario planning that can be learned from the case of Global Hosting. First, scenario planning is not a replacement for forecasting but equally important. Companies must go beyond the financials to explore changes in demand, look at emerging companies that are entering markets in unique ways (such as Amazon), and consider the possibility of a longer future, not just the financials of the immediate future.

Another issue is that strong forces work against companies, making scenario planning a daunting undertaking. Large companies must constantly deal with pressure from investors and shareholders to create short-term profitability and increase earnings per share (EPS). There are also constant cost barriers for larger companies. Large companies become bloated over time. As the size and geography of a company grow, so do expectations for large companies to conform to operational and social norms. More resources (and costs) have to be spent on formal cultural, diversity, and sustainability programs. Though such programs might be worthwhile, the costs and time demands detract from strategic endeavors focused purely on the business. At the same time, the investors and analysts demand short-term progress. Long-term opportunity is often a footnote in the quarterly reports that company executives make.

An additional force that plays against large companies is the tendency for internal business units to become caught in outside forces. Each business unit is expected to perform and contribute to quarterly and fiscal goals. Business unit executives have leveraged compensation plans that depend on business unit performance. Overall, company performance is important, but an executive in a poorly performing business unit will not do well, even if the company reports solid performance. Frequent reorganizations also happen in these cases, so business unit executive have their positions at risk. There is little appetite in these conditions to help other business units in the company or adjust practices for the common good. At Global Hosting, it was common that the product business unit would charge internal business units more for equipment than many customers paid. The advantage Global Hosting had over other cloud service providers disappeared because the opportunity in an emerging scenario was never considered. Global Hosting is a good illustration of how these forces can impact billions of dollars in opportunity.

I believe that scenario planning benefits from a small business or startup perspective. I try to adopt two ideas as I plan for the future. One idea is that the past should inform the future but not dictate it. Opportunities to try different things should always be considered. I work in a large company, and I see the business silos. These translate to thought silos. I encourage leaders to consider the broader good for the company, not just the short-term financials. I also caution leaders not to be so enamored with a social ideology that the business is overlooked and the vision for the company's future fades.

Though small companies have unique challenges, there are also advantages. The entrepreneurial approach is required because a new or small company generally enters a market where large companies have mass and momentum. Entrepreneurs can recognize changes in markets and society and react with much higher agility than large companies. There is also less pressure from brand recognition and public explanation on those small companies, so focus is easier to maintain. Changes in society can be a factor in these cases. WeWork is an example of a company that created a shared-workspace environment for businesses long before the COVID episode drove remote and hybrid working. There was already a social movement in younger generations, where young workers demanded more flexibility in work location and schedule.

Having worked in small and large companies, I see room in a large company for the energetic scenario planning common with small companies. However, company executives will need to change their mindset to avoid repeating the mistakes of Global Hosting.

References

Gartner forecasts worldwide public cloud end-user spending to reach nearly $600 billion in 2023. (2023, April 19). Gartner, Inc. https://www.gartner.com/en/newsroom/press-releases/2023-04-19-gartner-forecasts-worldwide-public-cloud-end-user-spending-to-reach-nearly-600-billion-in-2023

Mell, P., & Grance, T. (2011). The NIST Definition of Cloud Computing (SP800-145). National Institute of Standards and Technology. https://csrc.nist.gov/publications/detail/sp/800-145/final