Cloud Transforms the IT Ecosystem

When I talk to investors, one of the things I always get asked is “where do you find ideas?” My answer is always the same, I look at how the world is changing structurally over the next few decades and try to get in the way of the good side of change and stay out of the way of the bad. It really is that simple.

Here’s a good window into what I’m thinking about lately. Ever think about the things that have changed the way the world works in your lifetime? I do it all the time, not just those things that have changed my life, but those things that have changed the way every company on the planet does business, as well as those things that have changed the daily lives of at least a couple of billion people. If you’re on that list, you’re in rare company and something worthy of consideration. Here are some things that have made that list in my lifetime:

·         The Personal Computer – brought the power of computing to every individual;

·         Email – the speed of communication just went up…a lot;

·         Cell Phone – the power of communication, anywhere;

·         Internet – changed the way most people do literally everything;

·         Social Media – 2B+ daily actives making social networks global in record time.

Now you can add one more to the list: The Move to the Cloud. Surprised this would make the list? Don’t be. It’s an easy one to miss. You use the PC, send email, own a cell phone, go to the internet multiple times a day, and likely enjoy social media as well. No one “owns the cloud” or “goes to the cloud” or carries it etc. The cloud, at its best, is completely invisible to the user. That’s why its transformational impact on the world is flying under the radar still.

The rise of hyperscale datacenters were an extreme disruption to the heart of the I/T ecosystem that will change the way every company on the planet conducts its daily business. Let me explain. In scores of meetings in my career I’ve asked CEO’s this question: “What are your three biggest problems you’d like to get rid of forever?” Want to guess what the number 1 answer is? Information Technology. It’s not that they want to go back to rubbing sticks together to make fire. They just don’t want to be in the costly, complex rat race of keeping up anymore. Equally true is this - the harsh reality of IT in practice never matched the rosy narrative of the hard sell. As one CEO put it to me years ago, “I’m just tired of the whiz kids coming to me to say that I have to spend $20 million or my entire company is at risk.” It’s a love/hate relationship at best. CEO’s believe in the promise of technology to make their company better. They just never seem to get there in spite of spending massive amounts of money and time. A solution has emerged – enter the cloud.

Innovations in the network architecture have solved scaling problems holding back the rise of computing “utilities,” the idea of which was discussed several decades ago. Amazon’s AWS, Microsoft Azure, Google’s GCP have changed everything. The dream of shrinking the I/T department can now be realized without giving up the benefits! Companies can now eliminate the need for almost all of the hardware, middleware, software etc. by moving to one of the hyperscale players and migrating their systems to the cloud – all with a dramatic decline in complexity to the company AND…wait for it, an equally dramatic decline in the cost of I/T. The rosy pitch is now reality for the customer. For investors like us, it’s also important to recognize there are major ramifications for software and hardware providers as well.

First off, moving to the cloud requires software with different capabilities leading to a whole new crop of potential winners like ServiceNow, Splunk, Salesforce, Crowdstrike and OKTA (all of which we own in the Invesco Global Focus Equity strategy). Further, these companies go to market in a different way - subscription models vs the old perpetual license model. That means a steadier revenue profile for the provider. They also offer one version of their software provided as a service rather than a product. Prior, software companies might have 10 different versions of their offering in the market at once, which led to complexity in supporting the older versions while waiting for customers to upgrade. Not today’s providers. This leads to higher margins for both the customer and the software provider. The new software companies have fundamentally different products and business models than their older incumbents. The economics are different as well. That’s why the market has struggled to figure out what these companies are actually worth.

The corporate enterprise is undergoing true, once-in-a-generation change. Technology was responsible for the last transformation, and new enterprise-class software is currently changing every part of how companies conduct business, thus, re-enterprising the enterprise.