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Is Cloud Computing a Tipping Point for IT Innovation Leading to Next Wave of Business Growth in Developing Economies

  • Ramkumar Dargha
Conference paper

Abstract

Developing economies like India, China, and Brazil have seen tremendous growth in domestic economy and GDPs. However, the actual GDPs in these economies are much lesser as compared to developed countries like USA and Europe. Indian GDP is just about 5 % of the world economy, and that of China is around 12 % though each of these countries accounts for nearly 20 % each of the world population, whereas US GDP is around 25 % of the world economy though USA accounts for only nearly 5 % of the population.

So, though the emerging economies like India and China are growing at a good healthy rate, there is lot of gap that needs to be filled. One of the main reasons why such a gap exists between developed economies and emerging economies is the technology adoption and diffusion in these economies. For instance, Internet penetration in India is not more than 25 %, whereas in USA, it is more than 70 %. Technology, being a keep enabler for business growth, plays a highly crucial role in enhancing the business processes bringing in efficiencies and productivity improvements in the economy and population, which in turn fuel the business growth.

Technology adoption also requires significant investments in hardware and software. It is not the awareness or lack of skills that is inhibiting the adoption of technology in economies like India, but more to do with lack of required investments in technology hardware and software, particularly the capital expenditure.

In this chapter, we will analyze how new technologies, the new deployment, and delivery models like cloud computing can potentially have a great impact in overcoming capital investments as the main barrier of technology adoption in emerging economies. This chapter will take some examples to drive this point. In addition, this chapter will also analyze other inhibiting factors of cloud computing technology like security, compliance, etc., which need to be addressed to make this technology more suited for such developing economies so that this technology can get into mainstream adoption, thus acting as the fuel to drive further business growth in these economies.

Keywords

Cloud Computing Develop Economy Large Enterprise Business Growth Customer Engagement 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

1 How GDP of Emerging Economies Expected to Shape Up in Future

Over the next 5–10 years, emerging markets (markets excluding developed markets) are likely to account for much of the economic growth. In order to compete in such an environment, businesses and companies in these emerging markets need to be prepared so that they are ready to make use of this enormous opportunity available in front of them. Technology preparedness plays a very important role in this endeavor.

Emerging markets are expected to have a major share in the global GDP by 2015 (The European Business Review). By 2015, the global GDP is expected to be 60,000 billion dollars (or 60 trillion dollars). The GDP growth during this period is expected to be around nine trillion dollars. Out of this growth of nine trillion, more than 60% of the growth is expected to come from emerging markets.

The summary of this growth pattern is depicted in the diagram below (Fig. 1) (The European Business Review).
Fig. 1

Expected GDP growth pattern from 2010 to 2015 (Source: The European Business Review, Sep/Oct 2011 edition. All rights reserved (The European Business Review))

Key points to note from the above diagram are:
  1. 1.

    Key importance and contribution expected from the emerging markets. These markets expected to contribute more than 60% of this growth.

     
  2. 2.

    These emerging markets themselves are expected to grow by CAGR of nearly 6% on an average, while a selected few emerging markets like India and China are expected to grow more than 7% CAGR in coming 5–10 years.

     
  3. 3.

    For these markets to grow at this rate, they need to focus on all the key enablers of growth.

     
  4. 4.

    Information technology investment is one of such key enablers. It is a well-established fact that, these days, without IT investment, no economy can expect to grow to its potential.

     

Let us have a closer look at the importance of IT as a key enabler for economic growth (to substantiate point number 4 above).

2 IT as a Key Enabler for Economic Growth

The diagram below depicts summary of importance of information technology and communication in the overall growth of society and hence leading to GDP (Fig. 2):
Fig. 2

Impact of information and communication technology on increase in GDP

As depicted in the diagram above, IT and communication technologies play an important role in overall GDP growth and per capita income growth by enabling the following:
  • Easier access to information

  • Easier access to markets for producers of products and services including both domestic and international markets

  • Enabling operational efficiencies of the enterprises as well as governments

  • Providing better access to knowledge and hence better learning opportunities

  • Better innovation possibilities through knowledge, automation, and productivity improvements

In addition to IT, other key enablers also need to come together for the overall social and economic development like government fiscal and monetary policies, social policies, economic policies, and foreign relationship policies. However, IT is a core component for all these to come together and to make the economic growth in a country feasible.

Dos Santos et al. (Information technology: when it is worth the investment 2007) note that the IT investments have a significant impact on the outcome of a firm’s internal activities and processes. Brynjolfsson and Hitt (Information technology: when it is worth the investment 2007) observed that the investments on computer capital and IT staff spending contributed significantly to firm level output. They also affirmed that the return on investment for computer capital was higher than the one for noncomputer capital.

Another study by Qiang (2009) (Alcatel Lucent strategic white paper information and communication technologies enablers of a low carbon economy) states that the overall growth affects of information technology and communications on low- and middle-income economies (like emerging economies) is significantly higher as compared to high-income economies (like developed economies). For instance, for every 10% point increase in Internet penetration, there will be a 1.12% growth in GDP in emerging economies as compared to 0.77% increase in GDP in developed economies.

It is thus clear that IT plays a very significant role in overall economic growth in a country including emerging economies.

3 Expected Spend on IT in Emerging Economies and IT Spend as Percentage of Revenue

Businesses in emerging economies would increasingly look to IT to help support the challenges of growth. They would need IT to support their needs to increase customer satisfaction levels, innovations in supply chain management, business processes optimizations, and in overall innovation in their businesses. These in turn will place enormous demands on the IT environment including infrastructure, software, networks, storage, middleware, etc. IT will thus be a primary driver of business growth in emerging economies in coming years.

How much percentage of revenue that each of these economies spends on IT today? This metric is one of the key metrics used to compare relative spend across markets and industries. As per Gartner IT Key metrics data (2006) (Gartner Key Metrics 2009), in the USA (an example of a developed economy), the BFSI sector spends the largest of about 12% of revenue on IT expenditure followed next by media, insurance, and telecommunications sectors. Overall average IT spend as percentage of revenue is about 4.1% of revenue.

However, if we look at the same metric in emerging or developing markets like India, the average IT spend as percentage of revenue is around 1.8% which is less than half of that in developed markets.

As we can see, there is a clear discrepancy in the amount of IT investments (measured as percentage of revenue generation) between developing and developed economies. Developing economies have quite a lot to catch up in this aspect. Add to this is the fact that the GDP these economies are going to grow by more than three times that of the developed economies. So clearly there is a need for the IT investments in emerging economies to grow by more than six times as compared to that of developed economies.

One estimate by Global IT research firm International Data Corporation (IDC) and Microsoft Corp (Contributions of IT Sector to Global Economic Recovery 2012) on IT Industry in India, states that IT spending in India is expected to grow to USD 37.6 billion at a compounded rate of growth of 11.8 percent. IT in India is expected to drive creation of more than 300,000 new jobs between end of 2009 and end of 2013. As per Gartner (Gartner Press Release 2012) the global IT spending will reach around 3.8 trillion US dollars in 2012.

4 Now the Question Is: Do Emerging Economies Have This Wherewithal to Spend on IT and Still Be Competitive in World Economy or Do They Have Better Options

As is evident from the above discussion, to keep with the pace of economic growth and IT needs of the businesses as well as to compete with global economy, the IT investment needs of emerging economies are quite huge. Doing a simple calculation based on increase of GDP in emerging economies by 2015 indicates that these emerging economies would need a total investment of around 1,500 billion USD by 2015 (around 3% of 5,000 billion USD, which is the GDP growth from all emerging economies in absolute numbers).

Now the question is, do these emerging economies have the wherewithal to spend so much on IT and still be competitive in world economy, or do they have better IT options?

There would be many different parameters for IT decision making in an enterprise. These could be:
  • Cost of IT

  • Time to implementation

  • Flexibility and scalability

  • Existing IT landscape within an enterprise

  • Brand of IT vendor, etc.

As per a recent survey by Zinnov Consulting (Cloud computing in India CIOs perspective), IT costs seem to be a dominant factor for IT decision making in Indian scenario (assumed as a representative of emerging economy in this chapter).

Now, let us look at cloud computing technology as a viable alternative for IT in emerging economies.

5 Cloud Computing as an IT Option

Cloud computing (Cloud computing key considerations for adoption. Infosys) refers to the technology that enables functionality of an IT infrastructure, IT platform, or an IT product to be exposed as a set of services in a seamlessly scalable model so that the consumers of these services can use what they really want and pay for only those services that they use (pay-per-use). A more formal definition of clouding computing as per Gartner is: “a style of computing where massively scalable IT-enabled capabilities are delivered as a service to external customers using internet technologies.”

Cloud computing “technology” refers to the technology (including IT infrastructure, IT platforms, and IT applications) that enables the IT functionality to be exposed as services in a multitenant manner. The enabling technologies include (but not limited to) virtualization, grid technologies, SaaS-enabled application platform (SEAP), service-oriented architecture (SOA), metering tools and technologies, etc. Cloud “services” refer to those types of services that are exposed by a cloud vendor and that can be used by a cloud consumer on a “pay-per-use” basis. These services are exposed as industry standard interfaces like web services (using service-oriented architecture, SOA) or REST services or any proprietary (though rarely) services. The types of these services can be broadly classified as follows:
  • Software as a service (SaaS): The applications like customer relationship management (CRM), e-mail, instant messaging (IM), and office productivity applications are offered as a “service” by a cloud vendor. For example, salesforce.com, SFA services, Google office productivity applications, or Microsoft Exchange Online, etc. Here, the consumers of the service (an enterprise or individual user) will use only those functionalities that they really want and pay for what they use. The vendor will host and manage the required infrastructure and applications to support these services. The consumers need not worry about deploying or managing the infrastructure required to host these applications.

  • Platform as a service (PaaS): This can broadly be defined as application development environments offered as a “service” by the vendors. The development community can use these platforms to code their applications and then deploy the applications on the infrastructure provided by the cloud vendor. Here again, the responsibility of hosting and managing the required infrastructure will be with the cloud vendor. Some of the examples are Google App Engine, salesforce.com, Force.com, etc.

  • Infrastructure as a service (IaaS): Here, the entire computing infrastructure is provided as a “service” by the cloud vendor. The actual computing infrastructure that is provided could be a storage environment, database environment, or a complete Linux environment. Here again, the responsibility of hosting and managing the infrastructure will be with the vendor. Examples include Amazon EC2, Amazon SimpleDB, and Amazon S3.

6 Is Cloud Computing a Savior for Developing Economies and Can This Technology Provide an Edge to These Economies

In order to meet the challenges faced by the emerging economies, these emerging economies will look for ways to get the best return on their IT investment and at the same time would want to satisfy all their core needs of IT technologies. Cloud computing is expected to enable emerging markets in developing innovative products and services. With cloud computing, emerging economies are expected to have better access to infrastructure, applications, and tools at a much lesser costs and more importantly on a pay-per-use model, which is particularly suitable for high cost-conscious businesses in emerging economies. Leveraging cloud services is expected to top business and software strategies in emerging markets. Cloud technology along with well-established business strategies is expected to speed up the creation of innovative products or services.

Some of the examples of recent projects initiated by the government of India (again used a representative of an emerging economy for our purposes) which could be good candidates for cloud computing technology are:
  • The Unique Identification project (AADHAAR project): This project requires enormous amount of storage data and huge processing capacity. Owning and maintaining such large infrastructure in on-premise (traditional data centers) could be cost prohibitive.

  • Indian Railways Online Passenger Reservation System: This project is a case of fluctuating demand as well as high capacity demand due to large number of users using this system daily. This calls for an IT solution which is flexible, agile, and yet cost-effective, which cloud technology can potentially provide.

  • India’s right to information act requires digitizing databases and storing huge amounts of data in a cost-effective manner.

The governments would need lot of computing power, storage capacity, flexibility, and agility (flexible IT to satisfy fluctuating demand, ability to scale up based on need) but yet in a very cost-effective manner. Cloud computing could thus be one of the viable options.

We also need to find key IT goals of emerging economies, and see if how some of these goals can be addressed by this cloud computing technology. Some of the key current IT goals as per a survey conducted by Zinnov Consulting (Cloud computing in India CIOs perspective) are:
  1. 1.

    Agility and flexibility of IT

     
  2. 2.

    OPEX models

     
  3. 3.

    Reach and customer engagement

     
  4. 4.

    Efficiency enhancement

     
  5. 5.

    Best of bread

     

Cloud computing technology has potential to satisfy each of these goals.

7 Expected Cost Benefits of Cloud Computing

There are many benefits of cloud computing. Summary of these benefits are:
  • Cost savings

  • Faster time to deployment of IT

  • Reduce IT management burden

  • Flexible payment models through pay-per-use Opex model

  • Less procurement time

  • Lower the barrier of entry

While there are many benefits of cloud computing as described in previous section, let us take cost factor as an example (since cost seems to be one of the major factor for cloud adoption), and see how this technology is expected to be more beneficial cost wise.

IT costs in a typical enterprise can be divided into three main categories:
  1. 1.

    Infrastructure costs which typically account for nearly 50% of the total IT costs

     
  2. 2.

    Existing application maintenance costs which account for nearly 35% of the total IT costs

     
  3. 3.

    New application development costs which typically account for nearly 15% of the total IT costs

     
Since cloud computing environment leverages the concept of “economies of scale” to cut down costs for all users, we can expect significant savings in the above costs, particularly the first item above. As depicted in the diagram below, one study from Microsoft (The economies of cloud from Microsoft) indicates that SMBs (small and medium businesses) can experience nearly 40 times cost benefit (cost per server) whereas large enterprise can experience nearly 10 times cost benefit (Fig. 3).
Fig. 3

Expected cost benefits from public cloud and private clouds based on number of servers (Source: Microsoft Corporation (The economies of cloud from Microsoft))

8 Are Emerging Economies in a Better Position for Leveraging Cloud Computing Technologies Compared to Developed Economies

Now, let us ask this question, “Are emerging economies in a better position for leveraging cloud computing technologies compared to developed economies?”

One way to answer this question is to look at some of the key inhibiting factors for cloud adoption for large enterprises, and see if these inhibiting factors in fact are kind of advantageous as far as small and medium business in emerging economies is concerned.

Some of the key inhibiting factors for large enterprises in developed economies are:
  • Existing legacy systems: This means the large enterprises will be reluctant to get away with the existing infrastructure and systems due to the presence of “history” in these systems. For companies in emerging economies, this issue does not arise since these economies currently have low levels of existing IT systems and are implementing IT from ground up. Hence, they can leap frog into newer technologies like cloud computing without much issue due to legacy systems.

  • Internal institutional resistant to change: This is again very much prevalent in existing large enterprises in developed economies. Whereas in companies in emerging economies, since the current institutional capacity is limited, this issue almost is nonexistent.

  • Existing rigid and complex procurement systems: Large existing enterprises in developed economies would already have existing procurements systems which could be inflexible for changes and hence may not be amenable for flexible procurement models provided by cloud technology. This is not an issue with companies in emerging economies.

Due to the above reasons, in fact the emerging economies are in a better position to leap frog into cloud computing models to drive efficiencies due to cost. In addition, by adopting the cloud technologies, these companies in emerging economies can almost nullify the IT-based competitive advantage of the large enterprises which they were enjoying so far.

9 Conclusions

In this chapter, we have looked at how world GDP growth is expected to shape up in near future and how GDP growth is related to IT investments. We then looked at some of the IT challenges emerging economies may face when their economies would grow. We also analyzed the current IT spend as percentage of revenue and compared the same between companies in emerging economies and large enterprises in developed economies. Given the gaps in current IT spend and also given the fact that the emerging economies are expected to grow at a much faster rate, there will be enormous pressures on IT investments in these emerging economies. In this backdrop, we analyzed how cloud computing technology could be a savior for these emerging economies for their future needs.

Based on this analysis, we can conclude that cloud computing technology has very good potential in these emerging economies and sometimes much more as compared to the developed economies. This would be like a win-win situation for both the emerging economies and for cloud vendors.

References

  1. The European Business Review. http://www.europeanbusinessreview.com/?p=4547. The article was originally published in The European Business Review, September/October 2011 edn, pp 42–45
  2. Stewart W, Coulson S, Wilson R (2007) Information technology: when it is worth the investment. Commun IIMA 7(3). http://www.iima.org/CIIMA/14%20CIIMA%207-3-07%20Stewart%20119-122.pdf
  3. Paradox lost? Firm level evidence of high returns to information systems spending. http://ccs.mit.edu/papers/CCSWP162/CCSWP162.html
  4. Alcatel-Lucent Strategic White Paper: information and communication technologies: enablers of a low-carbon economy. http://www.alcatel-lucent.com/eco/docs/CMO7526101103_ICT_Enablers-eco_EN_StraWhitePaper.pdf
  5. Cloud computing – key considerations for adoption. Infosys. http://www.infosys.com/cloud/resource-center/documents/cloud-computing.pdf
  6. Gartner press release, January 5 2012. http://www.gartner.com/it/page.jsp?id=1888514

Copyright information

© Springer India 2013

Authors and Affiliations

  1. 1.Infosys LimitedBangaloreIndia

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