The Role of Individualization and Project Learning for Cloud Service Profitability

The Role of Individualization and Project Learning for Cloud Service Profitability

Alexander Herzfeldt (Technical University of Munich (TUM), Munich, Germany), Thomas Wolfenstetter (Technical University of Munich (TUM), Munich, Germany), Christoph Ertl (Technical University of Munich (TUM), Munich, Germany) and Helmut Krcmar (Technical University of Munich (TUM), Munich, Germany)
Copyright: © 2018 |Pages: 19
DOI: 10.4018/JECO.2018040104

Abstract

This article describes how cloud computing has been one of the most important IT topics in recent years. In increasingly greater numbers, service providers have entered this dynamic market turning it into one of the most competitive markets in modern IT industry. As the market matures, many providers are struggling with profitability issues. Studies on cloud services have primarily approached the topic from a technical or customer's perspective, neglecting the provider's perspective. In this article, the authors address business aspects of cloud services from the provider's perspective. Based on an empirical study of 78 cloud service providers, they analyse the impact of service individualization and project learning on service delivery cost and profitability. The results indicate that while project learning merely helps to reduce service delivery costs, service individualization positively affects profitability.
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1. Motivation

Cloud computing is said to have “the potential to transform a large part of the IT industry” (Armbrust et al., 2010). Especially in larger enterprises the use of cloud computing has risen 10 percentage points since 2014. Market researchers estimate that this number is likely to continue to grow in the years to come so that “by 2018 more than three quarters of workloads will be processed by cloud data centers” (Cisco Systems, 2014). Gartner (2017) estimates the global market for public cloud service will reach a volume of more than US $300bn by 2019.

The term cloud computing refers to the provisioning of applications over the internet as well as hardware and software in data centres that enable the provision of such services. Hence, cloud computing can be seen as a service delivery model for IT solutions, often referred to as cloud service. Cloud service offers several benefits for customers when compared to traditional IT sourcing. By using cloud service, customers can reduce costs through standardized resources and variable billing. Additionally, cloud service reduces the complexity of infrastructure management as the responsibility for IT resources is transferred to the provider. In order to realize these advantages for customers, cloud services must frequently be adapted to the individual customer’s needs and at the same time designed for flexible scalability. In this way, cloud service facilitates aligning the IT to the customer’s business strategy as required resources can easily be adjusted according to current business needs.

There are a number of challenges encountered by providers offering cloud services (Böhm, Leimeister, Riedl, & Krcmar, 2009). Cloud service providers need expertise with regard to the technical infrastructure and at the same time expertise with regard to the management of a service-oriented business model. As a consequence, cloud service providers must understand customer needs and design service in a way that allows the customer easy integration of the service into their system environment. Cloud providers frequently act as system integrators bundling offerings from multiple providers for one customer. Here, the provider typically needs to position himself in the cloud computing stack, i.e. as in infrastructure-as-a-service (IaaS), platform-as-a-service (PaaS), and software-as-a-service (SaaS) provider. At the same time, cloud service should feature typical characteristics such as pay-per-use pricing and easy scalability; customers frequently want to pay less for cloud service than for traditional IT service designed for a single customer.

From a provider’s perspective, cloud computing is a difficult market for two reasons. First, the advantages of cloud services, namely flexibility, scalability and cost reduction, are mainly realized by the customer, while incurred risks are shifted to the provider. This is especially true if, for example, performance and availability are guaranteed through service level agreements. Furthermore, the market environment itself is highly challenging. As the technology continues to mature and the market continues to grow, cloud service providers face strong price competition and are threatened by new market entrants.

In order to survive in this market, cloud service providers must live up to the promise of delivering individualized service to customers while providers need to provide highly cost-efficient cloud service at a competitive price. This leads us to the question, “How can providers position themselves in the market to assure long-term profitability?”

When reverting to literature to analyse what determines profitability for cloud service providers, we find that existing contributions focus on technical aspects of cloud computing and for the most part view issues from a customer’s or user’s perspective. Because of the high practical importance of service profitability, we find that research has not yet systematically addressed business aspects from a provider’s perspective (Böhm et al., 2010). In this paper, therefore, we take the business and provider’s perspective to answer the question, “What makes a cloud service business model profitable in light of market competition and special cloud service constraints?”

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