Understanding Why the “as-a-Service” Model Works, Part Two: Digital-as-a-Service

In the first part of this series, I talked about the early innovations that transformed the electricity industry into the “as-a-Service” model we see today. In this article, I’ll describe how a similar transformation is playing out in today’s digital technology industry. Digital technology is as fundamental to our lives today as electricity was a century ago. By mapping the evolution of these two general-purpose technologies, we gain perspective that can guide our journey to the cloud.

The race for data centers

In the 80s and early 90s, companies built data centers and hired IT professionals to streamline back offices, warehouses, and supply chains. The purpose of IT was to buy the equipment, build the facilities, and staff the talent needed to apply digital technology so they could drive down business costs. The battle was to build the best data center and hire the best IT talent to be competitive in the digitizing economy. Digital competency was the competitive advantage they sought.

A paradigm shift in digital

Today, digital competence is widespread. As IT engineering patterns matured over the past 15 years, the technology in data centers grew very similar from company to company. In recent years, it’s become increasingly difficult for companies to gain a significant advantage over competitors simply by having a data center. Rather, competition is happening at the edges of technology, where brands create digital experiences for customers. And companies are increasingly leveraging cloud utilities to craft those experiences, without the overhead of data center investment.

As it was with electricity a century ago, technology providers today have had to solve three fundamental challenges in order to become the viable alternative to on-site data centers that they are today. Innovative trends from the past two decades have merged to meet these challenges.

1. Central Processing: To compete with local data centers, technology providers needed to centralize incredible amounts of computing power into regional locations. The technology kings of our time, Amazon, Google, and Microsoft, have invested billions in building data centers around the world to meet this demand. As they take on more of our collective digital demand, economies of scale will drive down the costs of technology services, and businesses will shift focus to the design of their digital businesses instead of the support of digital plumbing.
2. Remote Distribution: To deliver digital technology to the masses, technology providers need a vast network to connect the individuals using it. J.C.R. Licklider, the first head of computer research at DARPA, described this “Galactic Network” concept in 1962. He explained how such a network could enable global digital collaboration. It would be another 30 years before Marc Andreessen’s World Wide Web Browser would give the everyday layperson a means to use the Internet. This simple interface, and the access to information it provided to the world, took digital technology mainstream. Communication carriers invested billions laying cables and standing up cell towers to extend the reach and speed of the Internet. And we only have half the world’s population connected so far.
3. Pay-Per-Use: To deliver this centralized processing power to companies, technology providers needed a way to measure how much of a service each individual consumes. Hardware virtualization, first introduced in 1999, made it possible to run multiple server “instances” on a single machine. This meant providers could allocate just the right amount of processing power and storage that a client needed and charge them for that use. As these services mature and increase their market, the Digital-as-a-Service model will continue to drive investment in cloud technologies.

95% of companies are using the cloud

According to RightScale’s 2016 State of the Cloud Survey, 95% of companies with more than 1,000 employees are already using the cloud in some way. Today, only 18% rely completely on cloud utilities. But investment in cloud technology is on the rise and the industry is innovating in the cloud. Although we can’t know if the private data center will disappear completely, we can certainly see the market and the industry favoring the Digital-as-a-Service model over on-premise capital investment.

In the final part of this series, I will describe the types of services that the cloud provides and how companies should evaluate and how to best make use of them.