Cloud technology has become a big buzzword and it’s a new technology that corporations are actively adopting. But companies shouldn’t be adopting “cloud” as an end to itself, as too many do. The problem in many cases is that adopting cloud technologies is an IT initiative, which means that cloud solutions are all around improving IT and IT productivity. But that’s not where growth is going to come from. Some 25 - 30 percent of overall revenues are expected to come from new sources of business, and that requires innovation. What that means in practice is that companies need to think about investments in IT and technology in a completely different way. Incremental investments in productivity don’t drive growth. Companies need to manage those costs and get them as low as possible, and then use the saved money for innovation. Investments need to go into innovation and disruptive business models. Presented at the Cloud Connect Summit.

1. Cloud & Innovation
November, 2012
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William Forrest at the Cloud Connect Summit

2. McKinsey & Company
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Historical and expected revenues
generated from new sources
The world is changing: CEOs recognize that future revenue growth will
come from new business models
25-30%
+50-67%
10-‟15
expected
04-‟09
15-20% Increase in Google search
volume2 for “business model
innovation” between „07 –‟11
117%
1 Estimates based on survey responses of ~1,500 CEOs globally, conducted in 2010 by IBM
2 Sourced from Google Insights for Search; indexed to 100 as peak search volume
SOURCE: McKinsey FPIS; Google Insights for Search worldwide (data pulled on March 14th, 2012); 2010 IBM Global
CEO Study; McKinsey research
% of overall revenues1

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Cloud is a key lever to decrease costs and reach industry average
cost levels …
21 Benefits beyond IT spend reduction were not quantified
Non x86
Telecom
Facilities and Fabric
Hardware
Software
Internal Service
IT Services
Cloud services
Hybrid cloud
76
Pure public
cloud
80
Pure private
cloud
82
Legacy IT
100
Annual total IT spend, 100=Total IT spend with all on-premise infrastructure
▪ Moving to the cloud can yield ~20-25% savings in current IT spend
▪ Cloud should be used primarily for cost reductions (not agility and other efforts)

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… but business model innovation is where the growth is
20112005
4%
16%
+279%
18%
+468%
20112005
3%
Revenue
Performance of Apple, Amazon, and Google vs. remainder of NASDAQ-100
% contribution to NASDAQ-100 aggregate
SOURCE: Bloomberg and public financial data
Some “pure play” New IT companies are already achieving major top- and
bottom-line advantage…
EBITDA

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The drive to innovate continues: successful top firms are perceived in
social media as more innovative than non-successful top firms
4
64
108
155
Ø 93
47
The 100 largest firms
globally ranked and
grouped by total return to
shareholders (TRS) and
their average Innovation
Sentiment Score1
2nd quartile TRS
Average Innovation Sentiment Score1 by TRS quartile2
Hundreds web articles; global social media; Mar – Aug 2011
Top quartile TRS
Bottom quartile TRS
3rd quartile TRS
1 Number of positive-sentiment articles and blog posts linking company with the words “innovation” or “innovative” over the last 6 months
2 Performance measured by average TRS over the last 5 years (2006 – 2011)
SOURCE: Sysomos Web Analytics; Bloomberg; Datastream; team analysis
x3

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“New IT” enables new business models and sources of growth
▪ Online collaboration tools
(e.g., internal wikis) help
teams work together
Individual
worker
productivity
▪ Google‟s AdWords delivers
customized, personalized ads
Non-human-
scale
computing
▪ Amazon.com uses heavy
“push” for cross-selling
related products
Labor
automation
Example usesCurrent IT use cases “New IT” use cases
Team &
corporate
productivity
growth
Digital only
products
Business
model
transfor-
mation
a
b
c

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Example: Amazon transforming e-retail by driving customer
preference and share of wallet gains
Approach
▪ Collection and analysis of data
to offer recommendations and
generate “push” based sales
▪ 5X investment in internal IT to
enable innovation
BUSINESS MODEL TRANSFORMATION
1 The only year this figure is available for – not reported separately in financial reports
SOURCE: Company web site, company reports, press and literature search
Amazon is the market leader
among online retailers in
average order size, driven
by “push” sales
35% of all sales (~$3.8B)
in FY20061 came from
recommendations
New businesses enabled
by investments in
“NewIT” e.g. AWS
($1B), Kindle(10% of
revenue) and instant video
to drive Prime

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Example: AdWords and AdSense deliver data-driven, custom
advertisements, resulting in $36B of annual revenues for Google
(2012)Now(pre 2000)Then
▪ Text-based custom ads delivered based on search
data and page content
▪ In 2011, Google represented 6.5% of total
advertising industry, and 35.3% of the online
advertising industry
– In 2011 the total online advertising industry size
is $78.6B, up from $10.5B in 2000
▪ Offline advertising
dominated online ads
▪ Online ads were
untargeted and
ineffective, primarily
driven by display banner
and popup ads
DIGITAL-ONLY PRODUCTS
SOURCE: Interactive Advertising Bureau, Google finances, Magna Global forecasts 2012

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CEOs are hoping to see improvements from cloud other than current IT
cost reductions
Percent of respondents
SOURCE: McKinsey Quarterly Survey on information and technology strategy, 2010 (BTO strategy Q24, 25)
No
Do not
know
Yes
5
22
29
55
70
Other
Increased ability for IT
to scale up (or shrink)
to meet business needs
Disaster recovery and
business continuity
Lower unit cost of IT
Increased business
flexibility
(N = 332) Multiple selections allowed (N = 252)
Do you believe that cloud
computing could drive value
at your company?
What are the most significant ways you
expect your company to realize value?
9
16
75
Cloud is mainly
a cost reduction
play for CIOs

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