IT firms have heads in the cloud

17/03/2014 - 11:55

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SPECIAL REPORT: Cloud computing is changing the game for providers and those businesses that use the service.

IT firms have heads in the cloud
BUILT-IN VALUE: Geoff Lewis is confident ASG Group’s shareholders will recognise the value in the company’s cloud-focused business strategy. Photo: Attila Csaszar

Cloud computing is changing the game for providers and those businesses that use the service. 

There wasn’t much blue sky from ASG Group’s vantage point as recently as four years ago.

After a period of growth, the information technology company found itself in competition with global heavyweights in its traditional market of IT infrastructure management and outsourcing.

Managing director Geoff Lewis believed that, as the underdog, it would have taken a few years before ASG could reap any reward from the tough battle ahead.

“I think we would have been successful in the end, but you have to keep banging away for a while,” Mr Lewis told Business News.

Rather than play this long game, however, ASG adopted a different strategy that made it an early mover into an entirely new battleground in the Western Australian market – the sale of cloud computing – with a $10 million data centre investment.

ASG’s terms this the ‘new world’, which revolves around contracts focused on business outcomes rather than the technology implemented as a means to reach those outcomes.

“Everyone has the technology, the business differentiator is the data that you hold,” Mr Lewis said.

See the full Business News IQ IT & Communications list.

Technically, cloud computing means businesses relinquish ownership of their IT infrastructure and responsibility for storing their own data. Instead, the data is stored in a data centre shared by many other users and managed by IT services companies.

From a business perspective, moving to cloud computing allows for payment of IT services and infrastructure as and when it’s used, as opposed to upfront investment in privately owned technology.

It’s that model of payment Mr Lewis said was capturing the attention of businesses in WA.

He said the state’s insulation from economic downturns because of the mining boom means businesses hadn’t been too concerned with driving down IT costs, which had continued to increase alongside the amount of data being stored.

But that was changing, Mr Lewis said, with the adoption of cloud computing to become widespread in the not-too-distant future.

“The reason that this phenomenon is happening is purely from a fiscal perspective; companies and governments are starting to look at efficiency and productivity,” he said.

Not only does cloud remove the need for upfront investment and continued maintenance costs, it’s more flexible in terms of expanding and retracting computing power.

Staff can connect with the business data regardless of their location.

ASG Group has invested about $10 million in the strategic shift from traditional IT management to cloud computing services, and reported its first positive earnings since the change in the last quarter of the 2012-13 financial year.

In the first half of the current financial year, earnings before tax, depreciation and appreciation was $10.7 million, up from a loss of $2.79 million in the previous corresponding period.

Of the $79 million revenue for the first half 2013-14, 8.5 per cent was derived from ‘new world’ business – a percentage Mr Lewis said was the tip of the iceberg.

“We’ll do 15 per cent of our revenue in the new world this half, and next year we’ll do 20 per cent, but then it’ll be 28, 35, 45 per cent,” he said.

“In the old world we were just pottering along and not adding any real innovative oomph to the business sector, and I think we are going to start doing that now.”

Common view

Perth telecommunications operator Amcom is also growing revenue from cloud services, and from what’s called ‘hosting’.

Hosted services could be considered a step between traditional data management, where businesses have full ownership and control, and cloud computing; businesses still own the infrastructure, but it’s located (hosted) in a data centre and managed by an IT services company.

With the hosting scenario, businesses save costs associated with powering and cooling a bank of servers on their own premises while not negating their investment in IT infrastructure.

Amcom chief executive Clive Stein said steps such as this, along a continuum to full cloud computing (where neither the data storage nor infrastructure is the business’s responsibility), was the direction in which businesses would gradually move.

“It’s not just an instant shift; it’s really about organisations transitioning over time, simply because organisations own too many assets and no-one wakes up one morning and says ‘I no longer want to use these assets’,” Mr Stein said.

“(The assets) have life left in them so I think it’s a gradual change.”

Amcom recognised the opportunity for cloud computing through telecommunications in 2010 when it bought cloud-based telephony company IP Systems.

Two years later it bought IT company L7 Solutions as the convergence of telecommunications and IT continued.

Mr Stein said those acquisitions placed Amcom in a good position to grow its cloud computing business.

Revenue for hosted and cloud-based services was $15.8 million for the first half of the current financial year – a 33 per cent increase on the previous corresponding period and 19 per cent of Amcom’s total $82.8m revenue for the half year.

“A few years ago you would talk to clients about the cloud and there was a lot of hesitancy,” Mr Stein said.

“Now the question has changed from being a consideration, to how to actually take that step … the fear factor has gone,” he said.

Driving the acceptance of cloud is the fact that businesses are realising the benefits of paying for services as required, as occurs with utilities for example, and avoiding upfront capital expenditure.

Added to this is the convenience of being able to easily expand and retract computing power.

Mr Stein said Amcom’s business was built on a model that aligned with service-based payment, rather than clients paying for a product.

But he said such a change would be difficult for IT companies that did not take a service-based approach.

“Most of the IT world is wired to selling products with services to make it work. If you’ve been selling a product, not a service, it’s very hard to start selling it as a service,” Mr Stein said.

“That’s why people are going to resist the change.”

Risk aversion

The impact of cloud computing on traditional IT companies can be clearly seen at a macro level.

For example IBM, traditionally a hardware provider, reported a 5 per cent decrease in global revenue for the 2013 financial year (to December 31).

Specifically, its revenue from systems and technology business (traditional hardware) fell 26 per cent, or $US768 million.

Revenue from cloud increased 69 per cent, but with lower profit margins and from a lower base.

However it’s clear the adoption of cloud computing is not suitable for all businesses, meaning there will be room for more traditional business models into the future.

International non-profit organisation ISACA, which provides advice to enterprises considering cloud adoption, told Business News there remained a strong business case for retaining data within an organisation’s four walls.

Past president Ken Vander Wal said it depended on the nature of the information.

“What is their risk appetite, what is the data they want to put in the cloud? Some of it may be so sensitive that it doesn’t suit being put into a cloud application,” he said.

Managing director of local company Precise Business Solutions, Mark Batina, agreed with that analysis, and said hesitation could also be seen from specific industries such as manufacturing, which traditionally preferred to retain all computing on-site.

“Manufacturers by nature are very precise and engineering-focused people, and to have as many elements of their supply chain under their control as possible makes them believe they have lower risk,” Mr Batina said.

Conversely, he said sectors such as professional services were readily adopting cloud technology due to the nature of their mobile workforce, and he expected that to pervade other sectors.

“Cloud is not a fad anymore, it’s a reality and more and more IT and infrastructure applications are being seen as viable options through the cloud than what was even three years ago,” Mr Batina said.

“There is no doubt that for the forseeable future there is still a very good business case within a number of companies to have an on-site model, but I think we will continue to see that eroded over time.”

Justin Thomas, founder of DC Two and Global Networks (which was sold to Amcom last year), said much of the shift to cloud could be attributed to younger generations entering the business world.

“The younger generation has a different way of approaching data and data management,” he said.

“Some older people are like ‘yeah let's go for it’ but the majority making the business decisions are saying they know it’s out there, and they know it’s coming, but they want to ease into it.

“Whereas the younger generations started using Facebook in high school, so why would they not have faith in the cloud?”

Storage saga

DC Two and Global Networks are both data centre businesses – an increasingly active market segment this past year.

Both NEXTDC and Nextgen Group subsidiary Metronode opened enterprise-grade data centres in Perth during the past month.

NEXTDC’s $80 million facility at Malaga, its first in WA, includes about 3,000 square metres of technical space and the ability to handle 5.5MW of IT load – power consumption for computing.

Chief executive Craig Scroggie describes the facility as a layer above the capacity already available in the state, with NEXTDC aiming to partner with different IT services companies that may already have their own data centres.

Amcom, for example, owns seven data centres in WA (following the acquisition of aCure Technology and Global Networks last year) but it is also a tenant in the NEXTDC facility, which it will use for its own contracts while also reselling space to other IT companies.

Mr Scroggie said such examples were the basis of the NEXTDC model, and the reason it didn’t consider itself to be in competition with Fujitsu, which also has a significant data centre in Malaga.

“But we didn’t build for single large customers, we built for all of the people that are offering something as a service,” he said.

“What we want is lots and lots of small customers because they make a very rich ecosystem.

“The reason we’ve got such substantial support around the country is because those companies don’t have the money to build their own facilities or a presence in multiple locations.”

IT companies have welcomed the entrance of NEXTDC to the market, and the opening of Nextgen’s second data centre, Metronode at Shenton Park.

Half of the first stage of Metronode’s facility has already been sold to customers including IT companies Empired and RackCorp, showing clear demand for data centre space.

ASG Group’s Geoff Lewis said the company was forced to build its own data centre at a cost of around $10 million in 2010 because there simply wasn’t enough capacity in the Perth market at that time.

It’s been looking to offload that facility, but is yet to receive an offer it deems suitable.

Mr Lewis said while the Bentley facility was a strategic asset, it was not core to ASG’s focus going forward.

Convincing shareholders of its new strategy remained a work in progress, however.

“It’s very hard being a public company and changing your business model in the public eye,” Mr Lewis said.

“I think shareholders will start to see the benefit of (the new strategy) from ASG’s perspective, but they’re still waiting to see the results come on the board.”

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