Contemplating the CLOUD
When Bob Graham, vice president of IT at Concord, Calif.-based beverage retailer BevMo!, walks into another company's headquarters and sees a large data center, he thinks about his own company, and its very different approach to IT.
"What is our job? To sell beverages," he says. "Does it enhance our ability to sell great beverages if we have a 10,000-square-foot data center? I'm not sure that it does."
"What is our job? To sell beverages. Does it enhance our ability to sell great beverages if we have a 10,000-square-foot data center? I'm not sure that it does."
Instead, since Graham took over as vice president of IT in 2010, BevMo!, a chain of 151 alcoholic beverage and specialty food stores in the western U.S., has made do with a 10x12-foot computer room. The room houses one IBM server and mCisco networking equipment. As for the rest of its IT resources, most have been farmed out to "the cloud."
Generally speaking, the cloud is shorthand for software, infrastructure and platforms sold "as a service" via the Internet. Providers of cloud services offer retailers almost unlimited supplies of servers, storage, networks and applications "dynamically and rapidly deployed at a significantly lower cost than through traditional mechanisms," says "Cloud Computing for Retail," a comprehensive report produced by the Association of Retail Technology Standards (ARTS), a division of the National Retail Federation.
Cloud resources can be easily scaled up or down within minutes and can be accessed at any time from anywhere, generally on a "pay as you go" basis, the report noted. In addition, cloud computing capabilities are shared by multiple users across organizations to take advantage of economies of scale.
In food retailing, software-as-a-service (SaaS) applications have proliferated, from point-of-sale (POS) data sharing between retailers and manufacturers to high-tech video surveillance of checkouts, among many others.
The emergence of cloud computing now presents retailers with critical strategic questions: Should they keep their IT assets in-house, or leverage the IT offerings of cloud providers? And if the latter, to what degree?
Cloud services are typically less costly than investing in equivalent technology in-house, and offer far more scalability, flexibility and rapidly accessible computing power than any retailer could muster on its own. With SaaS, all users are on the same software release and automatically receive upgrades at the same time, notes Karen Dutch, senior vice president, marketing for Revionics, which runs a cloud-based price optimization system for more than 37,000 stores.
On the other hand, retailers relinquish some control over data security and application performance when they rely on a network-based platform like the cloud.
Adding to the complexity, the cloud comes in different flavors–from the most open (public cloud) to one with some proprietary restraints (private cloud) to some combination (hybrid cloud).
The time is now
Retailers should make their decisions quickly. According to Framingham, Mass., research firm IDC, public IT services between 2013 and 2017 will grow five times as fast as the IT industry as a whole.
"The emergence of the cloud as the core for new 'business as a service' offerings will accelerate cloud adoption and dramatically raise the cloud model's strategic value beyond CIOs to chief experience officers (CXOs) of all types," says Frank Gens, senior vice president and chief analyst at IDC.
The cloud is a phenomenon that is touching all types and sizes of retailers. One small retail operator that has adopted a number of SaaS applications is Freson Bros., a 15-store family-owned grocer based in Stony Plain, Alberta, Canada.
For example, Freson's wi-fi in-store infrastructure is managed via the cloud. The retailer runs its accounting system and its price optimization system with SaaS providers. Freson also uses a cloud-based business-continuity service to back up mission-critical data.
Ken Lovsin, vice president of IT for Freson Bros., points out that Freson's three-person IT shop would not be able to manage in-house all of the applications it's using in the cloud. "It allows us to be as flexible as a big company," he says. "We need to do this to stay in business."
Not every retailer is embracing the cloud, however. Foodland, a Honolulu-based grocery chain, has kept all of its IT applications in-house for financial reasons. "We have had our key applications for many years and unless there is a financial benefit to move from in-house to the cloud, we will stay in-house," says Robert Murphy, the chain's chief information officer. "To date we have not found a sufficient ROI for us to make the change on any of our key applications."
BevMo! is one retailer that has made an unabashed commitment to cloud computing. The cloud approach, coupled with standards developed by ARTS, was taken to "lower integration and implementation costs while significantly shortening the time it take to deploy various initiatives," BevMo! says in announcing its "ITsMo!" technology initiative in 2011.
While not detailing the cost reductions made possible by the cloud, Graham says that BevMo! was able to redirect funds to "improving the retail experience" with a new POS system.
What remains in-house for BevMo! are its POS store servers that operate its checkouts and a legacy inventory management system running on its IBM server. Otherwise, BevMo!'s servers, data warehouse and databus, and its customer relationship management (CRM), master data management (MDM), price optimization, digital receipt and sign management applications are all in the cloud.
The cloud allows BevMo! to operate with a lean IT staff of just 11 plus four support people. "When we have an issue, we're able to go to the provider and get help quickly," Graham says, "That's worth a lot. It lets us focus on running the business versus being system managers."
For Graham, the cloud scenario offers cost and knowledge advantages. "We're leveraging the power of (our provider) at a much more attractive price point for us," he says. "And we have access to really sharp people–with years and years of knowledge–to manage it for us."
Graham also appreciates not having to worry about the "care and feeding" of an internal data warehouse. "Who wants to deal with smoke detectors and air conditioners not working?"
Graham explains that his preference for private cloud vs. public cloud configurations is based on the greater security private clouds afford businesses. "We are able to build in security and not share domains with other companies," he says. "It's truly our environment, and yet it's still cloud-driven so we can spin up servers and decommission servers."
He acknowledges that the cost savings in a private cloud are far less than those of the public cloud. "It does cost something to make things work," he says. "But as far as reliability, availability and being able to change quickly, it's probably a great way to go."
Hrishi Hrishikesh, associate director, Boston Consulting Group, says his clients who use the cloud don't expect more than 35 to 40 percent of their applications–typically the ones in the commodity category that have low data sensitivity–to reside on the public cloud. For other applications, "they prefer a private cloud," he says.
BevMo!'s POS software is so mission-critical on a day-to-day basis that Graham has resisted running it on the cloud. "We have high-volume stores," he says. "If I was ringing 100 orders per day it might be a different story. You have to look at your business and decide what you're willing to risk by being dependent on the network."
For its most sensitive data–consumer's credit and debit card information–BevMo! has invested in a system that provides "end-to-end encryption" of card data from the initiation of payment through to the final authorization point, where the data is decrypted. The system "never sees the card numbers," says Graham.
By securing card data, the system "takes some security concerns off the table" in regard to cloud computing, because the network that conveys BevMo!'s data to the cloud has been strengthened, explained Graham. "It allows us to be more embracing of the cloud" such as "moving POS data into a private cloud."
One of the most exciting aspects of the cloud, Graham notes, is its ability to help retailers deal with the proliferation of "big data" coming from a multitude of digital sources. The cloud, where it is easier to link various touch points, "becomes a natural way to consume this data," he says.
Another way the beverage retailer has facilitated connections between applications is to work with IT vendors who comply with standards established by ARTS. Those standards enable disparate applications to interoperate and share data in a seamless manner.
Word to the Wise
Before moving to the cloud, there are a number of other evaluations a company has to make, especially for core functions, says Boston Consulting Group's Hrishikesh. One is whether it minds a uniform solution, rather than one customized to its needs. "You have to live with the features the cloud provider is offering," he says. "They won't customize for you, which would defeat the purpose of the cloud."
Moving to a new set of features could impact a company's business processes substantially, Hrishikesh added. Thus, change management becomes an important part of the transformation to a cloud arrangement. This would be less the case with commodity applications not core to the business.
Some companies are willing to invest in their own data center or internal private cloud if they can replicate most of the benefits of a public cloud in-house (except for scalability)–especially if their data or technology is "core to their competitive advantage," he says. "They don't mind paying for a higher level of performance and security." An internal private cloud is not necessarily more expensive than a private cloud from an external provider.
It all adds up to a multi-faceted decision process for CIOs and upper management. The cloud "fundamentally changes how companies think about investing in IT," says Hrishikesh.