Cloud Computing in the Chemical Industry
Six Questions Every Executive Should Ask
Evolving Technology - Most chemicals companies still are at an early stage in their adoption and usage of cloud computing, but the industry's structure and prevailing trends mean it is well-positioned to leverage major benefits from this emerging technology. With cost pressures increasing due to high and volatile commodity prices, and intensifying global competition driving a need for greater operational excellence, chemicals businesses need to achieve a fundamental reduction in their underlying cost base.
At the same time, challenges such as ongoing globalization of both manufacturing and research and development (R&D), industry consolidation and the rise of the sustainability agenda are demanding new approaches to operating models. These pressures are compounded by the need to manage and mitigate supply chain risks more effectively in a globalized world, and to respond to customers' demand for shorter lead times and more specialized formulations.
To help chemicals industry decision makers make the right choices about cloud computing, Accenture has identified six key questions that we think they should ask about this still new phenomenon.
1. What is cloud computing, and how does it work?
Accenture defines cloud computing as the "the dynamic provisioning of IT capabilities, whether hardware, software or services, via the Internet." In general, a cloud-based model provides rapid acquisition, low to no capital investment, relatively low operating costs and variable pricing tied directly to use. As a result, cloud technologies allow IT to respond faster and more effectively to the changing needs of the business, creating new services and opening new markets, thereby helping to achieve high performance.
Clouds can take two forms: private and public. Private clouds are built within a company's data center and are designed to provision and distribute virtual application, infrastructure and communications services for internal business users. In contrast, public clouds extend the data center's capabilities by enabling the provision of IT services from third-party providers over a network.
The choice between private and public clouds represents a trade-off between security and flexibility. A company using a private cloud gains the perceived benefits of lower risk and higher data security, since it owns and holds the cloud data and services within its own infrastructure, an approach that is sometimes required by regulators. A public cloud is seen as involving higher risk, since the user's data is held externally alongside that of other businesses, but it also tends to offer greater flexibility and scalability than a private cloud.
2. What benefits can clouds bring to my organization?
The three top benefits of cloud computing most commonly talked about today are cost, flexibility and speed to market. However, forward-looking companies are already thinking about how cloud technologies will fundamentally change the face of their operations in the longer term.
Low prices on cloud services are a big part of their allure. For example, a major pharmaceuticals group was reported to have paid Amazon Web Services only $89 to analyze data on a drug under development - a job that would have required its researchers to buy 25 servers to perform in-house. Using clouds also shaved three months off the IT budget and approval process, resulting in faster time to market and $1 billion in opportunity costs avoided. Add the savings from eliminating the cost of servers, software licenses, maintenance fees, data center space, electricity and IT labor, and the benefits of replacing a large up-front capital expense with a low, pay-for-use operating expense, and the financial appeal of cloud computing is obvious.
Clouds offer extraordinarily flexible resources: They can be summoned quickly when needed, grow by assigning more servers to a job, then shrink or disappear when no longer needed. That makes clouds well-suited for sporadic, seasonal or temporary work, for finishing tasks at lightning speed and processing vast amounts of data, and for software development and testing projects. Clouds can also supplement conventional systems when demand for computing exceeds supply. And since they are an operational expense, cloud services can often bypass the capital-expense approval process, and be quicker to procure than conventional systems.
With cloud computing, additional infrastructure required for activities such as new product developments can be added more quickly and easily to the existing IT environment. This means that if additional development or testing platforms are required, there is no need to buy or lease the required hardware. More generally, the inherent flexibility and scalability of cloud solutions can help organizations become more agile and responsive, as well as increasing their ability to impose a standard set of applications or processes enterprise wide.
For applications that require a great deal of IT infrastructure (servers and storage), cloud computing can help significantly shorten the lead time to procure, deliver and install the service. Overall, properly implemented cloud architecture can mean the time and costs of provisioning an innovative IT service have never been lower.
A further benefit is that as industry consolidation continues, use of cloud computing boosts the speed at which IT systems can be integrated in the wake of a mergers and acquisitions deal. Similarly, in the event of a disposal, the unit that has been sold off can be "unplugged" from the IT organization more quickly and cleanly.
3. How can cloud computing help me gain competitive advantage over my competitors?
When exploring the use of the cloud computing, chemicals industry chief information officers (CIOs) should carefully consider how the technology can meet the needs of their particular segment. While reducing the cost of noncore activities is relevant for most firms, other aspects of cloud technology may be more relevant to specific business models. For example, a company operating as a specialty chemical provider may benefit more from the ability to rapidly adopt applications for marketing and pricing made available in the cloud; than would a commodity producer that depends on repeatable, global processes to drive a consistent manufacturing process.
Also, experience shows that firms relying on innovation as their primary growth engine can offload large computing cycles to offsite servers to reduce the period of achieving experimental results.
More generally, companies in the chemicals industry face a number of common challenges springing from global economic trends, movements in the commodities markets, and ongoing change among customers, suppliers and the broader global environment. Cloud computing can help chemical companies drive operational excellence; meet growing and changing customer demands; accelerate new product innovation and ramp-to-volume manufacturing in key markets; reduce IT spending; manage and mitigate supply chain risks; and enable faster and more flexible delivery of new IT systems.
4. Can I depend on cloud computing to save my organization money?
CIOs say they are finding real savings from cloud computing, but executives should not take the promises and projections of cloud savings at face value. The articles about companies that have saved money rarely explain how these savings were calculated, and several apparently rigorous analyses of cloud savings have been attacked as unrealistic. In our experience, even where U.S.-based firms move their internal applications to the cloud, they usually decide to retain a number of services in-house, because the costs of hosting a server internally, whether in an optimized data center located in the United States or in a captive facility offshore, are lower than that of an external cloud service.
Executives need to look closely into the costs of cloud computing for their organizations. They should seek rigorous return-on-investment case studies based on actual cloud usage, rather than estimates of anticipated savings. Hardware, after all, is a relatively small component of data center costs. They need to uncover the hidden management, transition and usage costs that reveal themselves only when organizations start to work with the technology. They need to evaluate the pricing models of different kinds of cloud services. And they need to work with the finance department to develop a consistent and acceptable approach to measuring the costs and return from clouds. Only then can they reliably estimate the savings.
- For chemicals businesses, the following are critical to realizing the greatest possible cost benefits from adopting cloud technologies:
- Adopting common standards that make sharing of knowledge and services easier.
- Using standard, "fit-for-purpose" and clearly defined service levels as much as possible, geared to requirements of the specific service.
- Applying standard security and data privacy restrictions appropriately, taking into account the fact that most services offered by cloud providers today are managed and provisioned on a cross-border rather than in-country basis.
- Overcoming any departmental "ownership" issues so as much work can be moved to the shared cloud as possible.
- Taking care to maintain flexibility around procurement and not get too tied into specific suppliers.
5. How will cloud computing affect the way my organization operates in the future?
Ongoing globalization will require chemicals companies to change their operating and business models. As well as playing a role in meeting the industry challenges, cloud computing also will help companies approach and operate many parts of their business in a radically different way, achieving a permanent step-change in their operational effectiveness and competitiveness. Key elements of the chemicals industry's future operating models will include the following: innovation enabled and driven by global R&D networks; new products and new markets; an increase need for customized solutions; an increased role if IT to enable co-production; continued outsourcing of noncore functions and shared services; increased competition in talent recruitment; and additional value contribution from IT.
As with the benefits of cloud computing, it is still too early to reach a comprehensive view of all the ways in which the cloud will change how chemicals companies operate. Strategists must investigate what new business services should be pursued using cloud computing, while CIOs must track the evolution of the technology and the market for cloud services to ensure their strategic ambitions do not outrun the capabilities of the technology. More generally, chemicals companies that fail to embrace the cloud may find their IT options become increasingly limited over time, as will their ability to contain costs and collaborate effectively along the supply chain.
There is a growing view that if chemicals companies want to continue to take advantage of packaged software application in the future, they may find that most of this software is written only for the cloud, and that if they have not created a cloud-friendly or cloud-relevant IT environment they will not be able to benefit. This view is supported by the fact that venture capitalists investing in the software industry are increasingly focusing on funding new entrants who are building their applications specifically for the cloud.
6. What about assurance of security and data privacy?
Security and data privacy remain prime concerns for cloud implementers in all industries. The fear of their data being "in the cloud" is often the single greatest hurdle that leaders must overcome to build trust and gain the benefits from cloud computing. CIOs are concerned that their data could be stolen or compromised by hackers, mixed with data from their cloud providers' other customers, or released by mistake. Any of the above could expose companies to compensation claims, public embarrassment, lawsuits and "brand damage." Many companies have very specific challenges in areas of security and data privacy.
However, many companies' IT estates currently consist of fragmented landscapes of security and data privacy approaches and policies taken across different departments. The move to cloud computing may actually provide a catalyst for driving greater security and reduced costs.
For chemicals organizations, the major security concern is usually around their R&D and the distinctive intellectual property that it creates, effectively the "crown jewels" of their businesses. It also is important that as companies choose cloud service providers they include security and data privacy capabilities as a major part of the selection criteria. The key to understanding security in cloud computing is to realize that the technology is not a break with the past. Instead it represents the logical next step in the outsourcing of commodity services to many of the same trusted IT providers that have been leaders in the field for years.
Beginning The Journey
The chemicals industry's migration to cloud computing: not a question of "if", but "when" While it may take time for companies to transition to cloud computing, beginning the journey early can deliver some substantial financial benefits. Executives are still grappling with its risks, possibilities and the cost of writing off current IT investments. However, for several companies the transition to a hybrid cloud environment is already underway. Those that move early to embrace this future will position themselves to be tomorrow's high-performance businesses.
This article is a condensed version of the Accenture study "Six questions every executive in the
chemicals industry should ask about cloud computing." The study can be downloaded in its entirety here: http://ht.ly/5Dg3B