Saturday, April 9, 2011

Has Financial Services shown us the Future of Cloud Computing? - Part I

[This is the first of a two-part blog looking at the parallels of Cloud Computing and Financial Services - Part I looks at trends in the use and consumption of financial services and assets.]

"The value of your internal assets just haven't been unlocked because you're not using them the right way."

"The easiest way to deal with risk is to give it away to some other business (and they'll give it away as well). Package it up and claim that it has no flaws."

"Massive leverage on a shared infrastructure produces incredible ROI."

"You can trust us with your assets, we don't have internal systems that can better leverage that information to position ourselves on the other side of this business."

[muffled in the background, amongst all the noise...., "Create a plan that utilizes tools you understand and can adapt to ups and downs in the market."]

For anyone that lived through the past 5-6 years and was paying attention, phrases like that might sound familiar as coming from the financial services industry and mortgage industry. Your house is an ATM, why bother with upfront capital? Why should a bank care about mortgage risk when they can put it off on someone else? It's good ROI to be massively leveraged against your assets because we make more money. And don't worry about us selling you one side of a trade when we know we're taking the other side with our internal systems.

Wait a second, isn't this blog about Cloud Computing? Come on dude, when did you trade in your t-shirt for a bankers suit and all this financial-markets mumbo-jumbo? [Look again at those first statements and see if they bare any resemblance to today's claims about Cloud Computing??]
Fair enough, but where I'm going with this isn't a lesson in finance, but looking at how Financial Services is potentially showing us the blueprint for where Cloud Computing is going.

In the past, there were certain pieces of guidance that we were given about finance:
  • Work hard and save a certain percentage for the future (or a rainy day)
  • Measure your success (increase in wealth) against well-known benchmarks that delivered consistent results (industry index)
  • Expect ups and down and try to stick to your plan even during challenging times.
  • The most important aspect of buying a home was location, location, location - it was an asset that you expect to provide stability in your life and was a long-term investment.
As of recently, we've been given a different set of guidance or "success stories":
  • Fast money can be made by making frequent trades and looking for arbitrage opportunities.
  • Success is measured by the day.
  • Things move too fast to have long-term plans, get in and out on trends.
  • Refinance the house every couple years and don't be afraid to move when the rates are right or that foreclosure becomes available.
In the past, there were also certain guidances that were given for IT strategies:
  • Establish partnerships with strategic vendors that could help you plan a technology strategy.
  • Push for the use of open-standards within the technologies whenever possible to mitigate risk.
  • Leverage best-of-breed technologies, or two-vendor policies, for critical elements to keep costs competitive and mitigate risks.
  • Establish strong IT teams (skills, operations, knowledge of the business) where it provided a business differentiation.
As of recently, we've been given a different set of guidance or "success stories":
  • Buy everything from a single source (online or direct/inhouse) because they play in all parts of IT
  • Open-standards aren't enough - everything should be open-source and come from commodity suppliers at lowest costs (preferably free). Cheap and crowd-sourced is always better.
  • Buy from somewhere else in the value-chain (Cloud Provider, Service Provider, Direct-from-Vendor-Outsourcing) to reduce intermediary costs or complexities
  • Your IT team is no longer capable of keeping up with IT trends, so trust somebody else because they scale better.
Some of this is the natural evolution of both finance and technology. Things like physical location are less important in some elements (transactions, modes of communication). The length of value-chain between source and customer can be reduced due to technology. But the pace, strength of value-creation and level of transparency have all radically changed. Where did the money/data go? Who am I actually dealing with? How do I know what's really happening (auditing)? Is the new model of pay later actually better than pay now in terms of ROI, Customer Loyalty, Business Strategy, etc.?

One could argue that if you're solely in the information transfer business (day-trader, hedge-fund, online video distribution, data analytics), that the new rules are the best approach going forward. Use what you need, pay for what you need, put the burden of risk or infrastructure on someone else, and get in and out of the business when the information is favorable for you.

But if you're in a business that's tied to something else (creating physical goods, delivering non-digital services, regulated by strict laws) then maybe the technology pace, lack of transparency or frequently changing value-chain is too much variation for a portion of your business that uses 2-10% of corporate assets and may create too much impact on the business in ways that you don't truly understand.  

Now don't get me wrong, I think Cloud Computing is a fantastic advancement in the evolution of technology. I use it every day in various aspects of my life and the value it adds is often impossible to calculate. But just as I'm frustrated (and sometimes confused) that the media likes to glorify the financial services wizards that generate "profits" by creating "synthetic" financing, so too do I wonder if we ought to be as wildly swayed by technology that is generating "profits" from online farms, holding it up as clarity for the future. Sometimes new trends emerge and we can all benefit by borrowing some of those "best practices", but just as often people get overly excited about moving into a $600,000 house where they put nothing down and they don't understand how the interest payments might change in 24 months. 

Cloud Computing is changing the IT industry very, very quickly. How it will impact business is somewhat unknown at this point. During times of great change and uncertainty, I often look to other complex systems to try and find parallels that might give me some guidance. Financial services seems to be one that has some interesting parallels to see if they repeat themselves in the technology world.

Part II will look at how the technology industry may parallel the financial services industry (buyers, sellers and customers) over the next 10 years. 

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