Buffett’s Law and Cloud Computing

6 October 2008

In an interesting post on the future of Cloud Computing, Jake Smith says that one of several antecedents of wide-spread cloud computing is the impact of “Buffett’s Law”.  Basically, the law states that Warren Buffett, the billionaire investor is driving change in the business world through the principles of value investing in ways that promote conservative innovation as opposed to radical or flamboyant visionary creation.  “The value of an enterprise is a direct correlation of it’s ability to deliver consistent return on invested capital, regardless of market conditions.”  What does this mean? 

Return on Invested Capital (ROIC) is a measure of the ability of a company to generate EBIT or earnings before interest and taxes compared to the amount of investment in long term debt or equity.  To maximize the ROIC, the company must do two things:  first, maximize its operating profit which translates to maximizing sales, minimizing the cost of good sold, minimizing the overhead involved and working with a low tax rate; second, the company must minimize the debt and investment required which translates into minimizing the working capital requirements and the non-current assets.

The first part is about efficiency of operations.  The second part is about business models.  Efficiency of operations is the realm of lean manufacturing – a philosophy of organizational efficiency that can be applied to just about any process.  Business models relate to how you make money and the decisions about what you do and what you outsource.  Take the decision to outsource PCB assembly rather than purchase the equipment and build the components in house.  If the cost of goods remains the same, out-sourcing is preferred since it lowers the non-current assets which will result in a better ROIC.  To make the purchase of the PCB assembly line attractive, the cost of goods would have to drop significantly compared to what could be produced through outsourcing in order to generate the same ROIC.

How does this apply to cloud computing?  Cloud computing is essentially an outsourced IT model comparable to the outsourcing of PCB assembly.  The cloud offers lower infrastructure for similar performance which means that, even if the cloud is just as expensive as tradition IT, it will be a preferred simply because it lowers the ROIC – hence the impact of Buffett’s Law.

For more on the trends in cloud computing read Jake’s article here or my own take on the changes in IT here.

MJM Consulting – Helping companies grow.


Tradeoffs in Desktop Virtualization: No Showstoppers.

27 September 2008

In a recent post on ZDNet.co.uk, Jason Hiner, says that the cloud is not ready for desktop virtualization.

I’m more confident in the success of virtualized desktops.  I have, along with many others, been using them for years as remote desktops.  First with GoToMyPC and later with Microsoft remote desktop.  I would leave my desktop computer running at work and then access the desktop remotely from home or on the road.  My primary access method was a laptop connected on my home’s wireless network or the hotel Internet.  Never needing to transfer a file or install software, after two years, my laptop was in the same condition it was when I bought it.

Yes there were limitations.  Editing a Power Point presentation was annoying and multimedia files were poorly displayed.  If the Internet was slow, the mouse and keyboard screen updates could be jerky.  If I didn’t have Internet, I couldn’t work.  But there were always work-arounds and compromises.  For Power Point, I learned to turn off the background graphics or use a different template altogether.  I spent more time on content than format.  For surfing, it was often better to do the surfing locally – but not always.  I read on the plane and worked in the airport terminal.

However, the benefits of a single working desktop, of not having to sync files, of always being able to get to the desktop no matter where I was or on what machine:  these things outweighed the reduction in the “user experience”.  I was willing to put up with less in order to get these benefits.  It was a classic cost-benefit trade-off that I think many people and companies will make in the cloud’s favor.

I’d also like to point out that many companies are not using state of the art multimedia machines as desktops.  A quick walk through some local offices shows 14″ monitors, e-mail and word processing, two-tone text based data entry screens that look like they were programmed in 1970, no multi-media capabilities – basically bare bones corporate only workstations.  These are also the targets for virtualization.

What I am looking forward to with the virtualized desktop approach is being able to get rid of the corporate desktop altogether.  Virtualization has been a key term in servers since it allows servers to be consolidated.  If I had 10 servers, I may be able to get away with five or three or even one with the appropriate virtualization technology.  If you can virtualize the desktop as well, consider the additional savings.  How many computers are there out there in total?  What is the ratio of desktop computers to servers?  Its a probably more than 2 to 1.  If employees have a desktop at work and a laptop for home or the road, the number of non-server computers is even higher.  Now consider that desktop virtualization can reduce the number of redundant computers by up to a 50:1 ratio (as claimed by Qumranet’s President Rami Tamir in April.)  Yes, there will still need to be terminals with screens and keyboards but these can be much cheaper than the multi-cpu, multi-core machine that currently sits on my desk.  In all, this means a dramatic reduction in the amount of desktop hardware out there with a concomitant reduction in the IT support requirements.  The savings are too hard to ignore.

I agree with Jason that the importance of latency in the network will be important.  But just as working with remote desktops in a hotel, it is still possible to do even with tardy connections.  In return, the bandwidth requirements are significantly reduced.  A terminal for a virtual desktop will only need a fraction of the Internet bandwidth since it handles no files, transfers no data and only displays updates to the graphics.  The server in the cloud, on the other hand, has access to the Internet backbone and can deal with files over a high-bandwidth link.  For many companies, the server may have access to more Internet bandwidth than their own servers.

Jason’s article also mentions a bridge approach from MokaFive.  I realize the appeal of MokaFive’s approach, but I have lost (and given away) more USB keys than I can count and would not want to be dependent on one in order to use my computer.  I want the freedom of the web even with its restrictions.

What would you be willing to sacrifice to implement virtual desktops in your company?


Where is your data? Changing attitudes about on-line storage.

25 September 2008

One issue that people often mention with off-site virtualized or cloud computing systems is the loss of control of their “data”. The adults in the crowd grew up with paper, floppy disks, local storage on hard drives, removeable hard drives, CD Roms and more recently DVDs and USB sticks. The data was always at hand. We could point to it and know it was safe and we’d protect it.

The new world of virtualization and cloud computing is changing this. Companies are outsourcing their IT needs and on-line services such as SalesForce are gaining traction. In both cases, the data is no longer in the direct control of the company that owns it. This requires a level of trust that the supplier will not abuse the data or allow it to be compromised. It has been a tough sell with the adults.

Not with the kids. Kids these days are growing up with web services and social media. All the data starts being “out there” and they have grow used to it to the point that it is normal. On-line E-mail services are common, FaceBook, MySpace, Twitter, Fickr, YouTube, are all about sharing data. Google docs, Zoho, Apple’s Mobile Me and other web 2.0 services like them provide on-line storage. Virtual desktops are gaining in popularity – and the young crowd is using them at an increasing rate. . Their digital stuff is out there – on the web, in someone else’s control – and that is just fine. They do not want a local copy because they use computers like terminals and they want to get at their stuff from where ever they are, on what ever device.

When the kids reach adulthood, I’m sure they will change the attitude in industry as well.

Local storage will become, well – so 2001.


IT is Changing: Virtual Desktops and Cloud Computing

3 September 2008

Ever get the sense that the IT world is changing too quickly.  Well hang on because this ice berg is going to flip.  Virtualization and cloud computing are the latest buzz words in the IT world.  Virtualization allows companies to consolidate equipment while maintaining service – essentially a cost saving exercise.  Cloud computing, a reference to clouds drawn on IT diagrams, is a concept where the servers are not local to a company but are out-there somewhere on the net.  Applied to desktops, virtualization and cloud computing may change the nature of computing and cause large shifts in the IT marketplace.

Cloud-computing based desktop virtualization is a disruptive technology.  In the last thirty years, computing power has been distributed from a mainframe to the desktop.  Desktop virtualization will recreate that mainframe experience but with much more flexibility.  With cloud computing, computing power will become a commodity and the desktop computer, the one you use on a daily basis, will become more of a terminal.  At the extreme, the desktop computer may be replaced by a simple internet device that has no software.

The benefits to organizations basically come down to a tremendous savings in the total cost of ownership.  Most companies are not IT savvy and don’t want to be: IT is not their core competency.  They want to buy IT capabilities the same way they buy power or other utilities.  Virtualization and cloud computing will provide this opportunity.  Complex corporate IT infrastructure will become a thing of the past with many companies able to use networks about as sophisticated as the one in your home.  Companies will not have to own, manage, upgrade, expand or deal with IT infrastructure.

Imagine your Internet service provider giving you and your co-workers each a simple computing device along with your corporate or home internet connection.  You use this device to connect with a powerful server somewhere in the cloud.  All your applications and data are there, protected in a data center with lots of bandwidth available to you.  Sound far out?  Well then, read about HP or Verizon’s plans with Desktone.  And Desktone is not alone: the number of new entrants in this market is growing quickly.  Also read Reuven Cohen’s blog “The Desktop Cloud“.

The implications are huge:

  • Organizational change: The biggest reason most “office workers” go to the office is because that is where the IT infrastructure is. Desktop virtualization will change this. If you have access to your desktop from any internet connection and are well supported by collaborative tools, why do you need to go to the office every day? To attend meetings? What else? Could you have Meeting Monday’s and stay home the rest of the time?
  • Restructuring in the IT sector: What will happen to all the IT staff at all the companies that no longer have any IT?
  • No more software to buy: Everything will become a subscription service with a pay-as-you-go approach. You will not have to buy, install, register or configure any software. Software licenses will have to change accordingly. As a commodity, this model will not support license fees. Open source software will have a tremendous advantage here.
  • Microsoft can only lose: As the leader, commodity pricing will reduce their revenue. They will be competing with to Sun, Google, Amazon, IBM and others that can provide the VDI service without any Microsoft software. Google is well on the way with its Google Apps and now Chrome. In addition, the Microsoft operating system and desktop designs do not lend themselves to the cloud computing / virtualized desktop space and require special management solutions. Again, I see an opportunity for open source solutions here such as Ulteo.
  • Internet service providers will win: They are in the best position to provide the service. The last quarter mile problem of getting high-bandwidth to the desktop will be reduced. Rural areas may be well served by high-speed dialup connections.
  • Data centers will win: All the cloud computing servers will have to be hosted somewhere.
  • Multi-media may suffer: Streaming applications that use lots of bandwidth may not work very well when going from source to server to client.
  • Value added services will win: Sales of software will be replaced by subscriptions to service providers and contracts to value-added integrators. IBM has already embraced this model with tremendous support for open source software projects but they make their money from contracting services.
  • More freedom: The controls over what you can access on the internet will be determined by where the server is located, not by where you are connected to the internet. People in China or Turkey will be able to benefit from servers in more liberal countries that have full access to the internet. (Then again, countries with restrictive Internet policies may ban these services as well.)
  • More danger: the possibilities for malicious use are higher. Like off-shore banking used to evade taxes, cloud computing can be used to hide all sorts of nefarious wrong doing.
  • The end of Moore’s law for the desktop: The main computer sold will become a simple device with a browser, screen, mouse, keyboard and an internet connection. Or it will be your phone.

Let me know what you think.