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December 17, 2010

Cloud Computing Productivity Benefits Will Come, but Could Take a Decade

By Gary Kim, Contributing Editor


There are lots of arguments one could make about cloud-based compuing and productivity gains. The obvious casual example is Gmail, or virtually any other web-based application. It is hard to see how applications used by millions to scores of millions of people could be supported efficiently any other way than to use a cloud-based approach. 

There is legitimate optimism about cloud computing for most enterprise applications as well. But past experience with major innovations in informatiion technology suggest there could well be a decade-long lag between the advent of mainstream cloud computing use and the quantifiable business benefits. 

Annual productivity growth for the U.S. non-farm business sector jumped from 1.3 percent per year for 1973-95 to 2.5 for 1995-2000, some would note. See http://findarticles.com/p/articles/mi_m1094/is_1_37/ai_83793970/ for example. 

Many, rightly, would point to the sudden end to the slowdown in U.S. productivity growth by noting accelerating investment in informatiion technology (computer hardware, software, and telecommunications equipment) and the rapid diffusion of new applications. 

For example, real IT investment grew 22 percent per for 1995-2000, compared to 14.9 percent per year for 1973-95. What some also will note, however, is that the intensified IT investment continued throughout the 1980s, and the quantifiable economy-wide results were not seen until mid-1995. 

Aggregate, industry, and firm level studies all point to a strong connection between information technology and the U.S. productivity revival in the late 1990s. At the aggregate level, growth accounting studies show a large and growing contribution to productivity growth from both the production and the use of IT. 

At the industry level, industries that produce or use IT most intensively have shown the largest increases in productivity growth after 1995. At the firm level, IT-intensive firms show better performance than their peers, and several specific case studies show how IT improves real business practices. This accumulation of evidence from a variety of studies suggests a real productivity impact from IT.

During the 1981 to 1988 period, or example, information technology contributed about 0.5 percent to U.S. productivity. From From 1995 to 000, IT contributed about one percentage point to productivity. From 1988 to 1995, in fact, IT contributed just 0.4 percent to productivity gains. 

In other words, over the entire period from 1981 to 2000, U.S. productivity did not markedly increase until the very-last five years of the period. In other words, over a 20-year period, notably marked by increasing application of information technology to business processes, not much actually changed, in terms of productivity, until the last five years of the period. 

See http://pages.infinit.net/harctar/wpap/IT_Productivity_EL.pdf for a discussion.

Some would argue that the reason is the lag time between technology availability and redesign of business processes. Others would likely make an additional case, that the advent of the Internet seems to coincide with the dramatic step change in productivity gains. Consider that MosaicCommunications was formed in 1994. Netscape went public in 1995, for example. 

Between the first quarter of 1969 and 2002, for example, there was no eight-year period in which productivity growth exceeded 3.0 percent. While the post-1995 period includes the boom of the late 1990s, it also includes the NASDAQ collapse in 2000, the 2001 recession, the September 11 terrorist attacks, an investment bust, corporate accounting scandals, the war in Iraq, and rising oil prices. The increasing strength of productivity through this period is nothing short of astonishing, some would say, say researchers at the Federal Reserve Bank of New York.

"An analysis of the sources of this growth over the 1995 to 2003 period suggests that the production and use of information technology account for a large share of the gains,"  Federal Reserve Bank of New York researchers say. "A consensus has emerged that a large portion of the acceleration through 2000 can be traced to the sectors of the economy that produce information technology (IT) or use IT equipment and software most intensively."

See http://www.ny.frb.org/research/current_issues/ci10-13/ci10-13.html for a discussion. 

One might predict that a shift to cloud computing might also take a while to show measurable benefits at the firm and broader economy level, even as the new investments ramp up over the next decade.

At some level, the "minor" gains are easy enough to illustrate. Looking just at what it takes to manage enterprise servers and the applications they support, some might say 20 servers managed by a single administrator is a reasonable ratio.

Other cloud-based approaches might say it is more reasonable to expect to manage one million or two million servers simultaneously, with a management ratio closer to one administrator for every 2000 servers. See http://blogs.forrester.com/jean_pierre_garbani/10-12-17-consider_the_cloud_as_a_solution_not_a_problem?cm_mmc=RSS-_-IT-_-943-_-blog_776 for a discussion. 

The productivity issue, at this practical level, is less a matter of using cloud computing to gain 80 percent savings in data center costs, but also how to multiply IT organizations’ productivity by a factor of 100. 

And that's just a look at operational costs for servers. The more-important productivity gains come elsewhere in the business processes, where some of the gains are related to human efficiency, but where the biggest potential impacts will come in ways to reduce development, manufacturing, distribution, sales and operating costs in ways that also allow creation of new markets and greater share of existing markets. 

One might argue that it is easier to introduce new tools than to meaningfully re-engineer wholesale business processes in ways that actually create brand new markets and dramatically affect market share. 

The reason why it might be prudent to expect a lengthy period before many cloud computing initiatives show up broadly in firm, industry and national economy statistics is that it will take time to do more than move computing chores into the cloud. What will truly take time is the redesign of core business processes to take advantage of cloud computing in ways that measurely affect business results.

History suggests that can take some time. Moore's Law applies to microprocessors, but less so to IT using microprocessors, and even is even less directly tied to redesign of business processes and human uses of those processes. That's no knock on the technology. It's just a recognition that the business and economic benefits will take some time to realize. 


Gary Kim (News - Alert) is a contributing editor for TMCnet. To read more of Gary’s articles, please visit his columnist page.

Edited by Erin Monda




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