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

In Part I of this series, I looked at some of the thinking and buyer behavior similarities between today's financial services and today's Cloud Computing trends. In Part II, I wanted to look at the potential similarities in the value-chain between these two markets.

In the past, financial services was dominated by investment banks, insurance companies and large financial conglomerates. They had access to the largest amounts of capitals and access to the best knowledge of market trends. Investors could enable portfolios that created steady, diversified returns that would allow them to build for the future and avoid major catastrophes. Access to those portfolios was available through  a variety of sources, often local or regional professionals, that provided a variety of services.

Over time, due to technology and competitive forces, the financial services giants consolidated and began offering more services directly to clients. They brought together retail banking, brokerage, investment banking and M&A. Differentiating between the largest companies became difficult for many investors. Seeing an opening to offer differentiated or unique services, many "alternative trading" platforms arose, include the rise of hedge funds. These services focused on automated trades, often taking both sides of the market and using extreme levels of leverage to create ROI. By being highly leveraged, often times ignoring (or going against) established guidelines, they began to establish themselves as the area where the most value was derived from the financial services industry. They left the established players to focus on lower-risk customers, often focused on traditional principals and goals.

As similar model has existed in IT technology for quite a while. The largest vendors in each technology segment (OS, Database, Network, Storage, Servers, Applications) were heavily rewarded for having the most capital and driving the models (standards, protocols, licensing) for deployment by customers. Customers were able to buy the equipment from many different sources (direct, indirect, outsourced), so they had choices about how locked into a vendor they would accept, how much they would invest internally in IT skills, and how they wanted to purchase the HW/SW/Services. Sometimes these customers built internal networks, sometimes they built networks that connected their internal resources to partners or customers, and sometimes the builders (Service Providers) used them as the foundation for delivering services to their customers.

As we're seeing with Cloud Computing over the past few years, not only has the technology (Virtualization, Open-APIs, Open-Source) allowed disaggregation between the technologies - allowing IaaS/PaaS/SaaS to be thought of separately or as building blocks of each other - but some companies have established themselves as "alternative computing platforms". They are highly automated, leveraging shared usage models to drive down costs and disrupt existing pricing models (pay-as-you-go) and in some cases taking positions in multiple aspects of the market - technology infrastructure, technology vendor, service creator, etc.. And while their profit levels are still somewhat speculative, it's becoming clear that their growth is not only swaying the market but potentially taking a growing chunk of the value-chain with them.

Here's where it starts to get interesting - back in 2006/2007/2008 - when established financial services firms started seeing the hedge-funds making huge ROI, they started altering their businesses significantly to align to these new models (highly leveraged, automated, risk-shifting). For the ones that didn't truly understand how the game worked or where the actual risk resided, they ran into some challenges in trying to adapt (Bear Sterns, Merrill Lynch, etc.) And in many cases, the "customers" took the biggest loss because they were no longer a large part of the value-chain but all the risk had been (unknowingly) shifted to them.

So do we see any similar trends happening around Cloud Computing today?

• Are established companies starting to make significant shifts in their business to try and move into this new operating model?
• Are these shifts potentially having significant shifts in the overall value-chain between technology creator and technology user?
• Are we seeing customers gaining more or less power in the overall value-chain as part of this shift towards the new operating model?
• Are we seeing customers adopting (knowingly or unknowingly) more or less risk as part of this shift towards a new operating model?

And what about the companies and customers that are staying somewhat aligned to the traditional models?

• Are they considered to be making progress that's aligned to business needs, or considered to be losing ground as technology impacts their markets and competitors?
• Are they investing in alternative technology/people/process models if the newer models aren't aligned to their current or future strategies?
• If IT only makes up 2-8% of overall OpEx (majority of businesses), should you be more worried about getting behind this new operating model (inside-out view) or about new competitors adopting it at much higher OpEx levels (outside-in view)?

The IT industry doesn't have potential government safeguards in case major firms make mistakes and become "too big to fail", so the timelines on changes in this space could be highly compressed. The success or failure of many companies won't be decided overnight, and the future winners and losers are still to be determined, but it seems to be that the similarities we're seeing between these industries may help people connect the future dots and determine where it makes the most sense for their business to align their financial capital with IT strategies.