[McKinsey] Cloud adoption to accelerate IT modernization

The cloud is a means, not an end. Success in modernizing IT through the cloud is driven by a complete standardization and automation strategy.

Cloud-computing adoption has been increasing rapidly, with cloud-specific spending expected to grow at more than six times the rate of general IT spending through 2020.1While large organizations have successfully implemented specific software-as-a-service (SaaS) solutions or adopted a cloud-first strategy for new systems, many are struggling to get the full value of moving the bulk of their enterprise systems to the cloud.

The full value of cloud comes from approaching these options not as one-off tactical decisions but as part of a holistic strategy to pursue digital transformation. Such a strategy is enabled by the standardization and automation of the IT environment through an open API model, adopting a modern security posture, working in an automated agile operating model, and leveraging new capabilities to drive innovative business solutions. While cloud is not a prerequisite for any of these features, it does act as a force multiplier. Companies that view cloud capabilities in this way can create a next-generation IT capable of enabling business growth and innovation in the rapidly evolving digital era.

Lift-and-shift is not enough

Cloud services such as Amazon Web Services (AWS), Microsoft Azure, and Google Cloud appeal to many organizations because of their stated features: pay-per-use, ability to scale up or down based on usage, high resiliency, self-service, etc. All these benefits are expected to lead to much lower IT costs, faster time-to-market and better service quality compared with traditional IT offerings.

However, traditional enterprises run into two major issues when moving to cloud:

  • The existing business applications were created using the traditional IT paradigm. As a result, these applications are typically monolithic and configured for fixed/static capacity in a few data centers. Simply moving them to the cloud will not magically endow them with all the dynamic features of the cloud.
  • The typical technology workforce of an enterprise is well versed in developing business applications in the traditional IT framework. Most of them need to be reskilled or upskilled for the cloud environment.

IT security is a good example. Most traditional IT environments adopt a perimeter-based, “castles and moats” approach to security, whereas cloud environments are more like modern hotels, where a keycard allows access to certain floors and rooms. Unless the legacy applications that have been developed and deployed for a castles-and-moats security model are reconfigured for the new security model, migrating to the cloud may have an adverse impact on cybersecurity.2

Enterprises have been successful in adopting SaaS solutions mainly because SaaS addresses these constraints in a simple fashion: they replace the existing business applications and leave the development of new features to the SaaS provider. SaaS solutions have therefore become very popular for business functions such as marketing and sales, back office (HR), and communication and collaboration. However, in most sectors, there are no mature SaaS solutions for core business functions such as billing for the utilities sector and core/online banking for financial services.

As a result, despite overall increased cloud investment, enterprise cloud adoption is maturing slowly.3Many enterprises are stuck supporting both their inefficient traditional data-center environments and inadequately planned cloud implementations that may not be as easy to manage or as affordable as they imagined. While some forward- thinking companies have been able to pursue advanced enterprise cloud implementations, the average enterprise has achieved less than 20 percent public or private cloud adoption (Exhibit 1).

On average, enterprise cloud adoption remains low at around 20 percent.

Benefits of automating IT processes through cloud

Historically, enterprise business applications have been designed to run on custom-configured IT systems, each application requiring its own heavily customized configuration of computer storage and network resources. As a result, IT needed armies of administrators just to keep systems updated and running, to manually add new capacity when demand is high, or apply quick fixes for issues such as low performance. As the number of IT solutions has increased, so has the overhead necessary for testing, integration, and maintenance. In a typical enterprise, just a fraction of IT personnel is focused on designing and developing the market-differentiating solutions the business cares about; the rest are working simply to keep the lights on.

Standardizing system configurations and automating IT support processes can reverse that ratio. By enabling enterprises to better manage their infrastructures, companies can not only save on costs but also shorten times to market and improve service levels.

Adopting cloud is a massive enabler of the necessary standardization and automation. With cloud, companies can:

  • Reduce IT overhead costs by 30 to 40 percent
  • Help scale IT processes up and down as needed, optimizing IT asset usage
  • Improve the overall flexibility of IT in meeting business needs such as more frequent releases of business features; cloud providers are increasingly offering much more sophisticated solutions than basic computing and storage, such as big-data and machine-learning services
  • Increase the quality of service through the “self-healing” nature of the standard solutions, for example, automatically allocating more storage to a database. We have seen enterprises reduce IT incidents by 70 percent by using cloud computing as an opportunity to rethink their IT operations

Capturing these benefits from cloud adoption requires more than just lift-and-shift when the business-application system configurations are heavily customized and IT processes are mostly manual. It requires a certain level of remediation to make IT systems more cloud-oriented.

Netflix is one of the most public examples of this kind of commitment to and investment in cloud-enabled, next-generation infrastructure. It spent seven years on its transformation, adopting a cloud-native approach, rebuilding all its technology, and restructuring the way it operated. It employed application program interfaces (APIs) to reduce its monolithic legacy applications into smaller components, make them more flexible, and then move them to AWS. As a result, service availability has increased, nearing the company’s stated goal of 99.99 percent uptime. And Netflix has seen IT costs for streaming fall to a fraction of what they were in its own data center.

Recently, many established companies have made aggressive moves to adopt public cloud solutions. Capital One is running the bank’s mobile app on AWS; GE Oil & Gas is migrating most of its computing and storage capacity to the public cloud; Maersk is migrating its legacy systems to reduce cost and operational risk while enabling advanced analytics to streamline operations.

Pioneer organizations are also actively seeking ways to leverage the new services on cloud to create innovative business solutions. Progressive Insurance deployed its Flo chatbot on public cloud; NASCAR is leveraging machine-learning solutions on cloud to analyze real-time and historical race car data to improve performance and simulate scenarios.

Even “born digital” companies that initially chose, for strategic reasons, to have their own IT infrastructure and systems are now opting to move to cloud to leverage the scalability and the higher order functionality it offers. Spotify is a prime example.

How to approach the cloud transformation

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