Virtually every year since 2009, has promised to be the breakout year for cloud computing that will “revolutionize” the way people and companies leverage computing resources. Such a broad shift can have significant implications for many aspects of business-to-business organizations.

More than just the latest trend in technology, the benefits and risks presented by cloud computing make it a business-critical consideration for any organization, particularly large firms. In theory, cloud computing can upend constraints that previously limited the speed at which firms react to changing customer demands and reduce IT infrastructure costs. In practice, many significant barriers have challenged widespread cloud adoption.

Looking at this from the vantage point of IT and data center suppliers, a critical question is, “Is cloud computing living up to the hype?”

We at Blue Canyon believe the hype has been excessive. However, cloud computing is still an important force in the marketplace that is actively reshaping a number of business-to-business markets, albeit at a slower pace than many in the industry have claimed.

Just How Big is the Cloud?
The cloud is an inherently opaque term, but it typically refers to the computing model where IT resources are outsourced to third-party providers that operate a large pool of shared computing resources. This is generally referred to as the public cloud. Blue Canyon estimates global spending on public cloud services to be approximately $30 billion, having grown at a 25%-35% CAGR over the past few years. Compare that to Gartner’s estimate that in 2013, global IT spending was greater than $2.5 trillion with approximately $600 billion spent on data center hardware, software, and services. The size of the public cloud market is still dwarfed by spending on traditional enterprise computing capabilities; although cloud vendors are driving much of the incremental growth in data center related spending.

To date, most of the growth in public cloud spending has been driven by firms “cherry picking” applications that are deemed suitable for the public cloud, such as email, CRM, conferencing and file sharing platforms. These tools are relatively easy to outsource and isolate from business-critical systems. Over the past few years, many organizations have seen their presence in the public cloud plateau at a low percentage of their overall computing resources as they run out of services that are easy to move to the cloud.

Why is the Cloud not Breaking Barriers?
The biggest barrier to cloud computing adoption is security. An endless stream of high-profile cyber threats weigh heavily on business leaders. Global firms are under a constant barrage of security threats, whether it be espionage, malice, or surveillance. The stakes are high; a multi-billion dollar corporation may have its entire market capitalization rooted in the systems, property, and information that are housed in its data centers, making it difficult for an organization to justify additional risk for the sake of cost savings or other efficiencies.

Another key challenge for large businesses is the presence of legacy software and facilities. In the 2000’s there was a massive build out of enterprise data center facilities as the demand for computing resources took off. Many of these facilities were designed to last (and depreciate over) 20 or more years. Multi-core server technology and virtualization have greatly reduced the need for businesses to build new data centers and many will not consider drastic changes in IT delivery models until current facilities become obsolete. Software also has to be specially designed to operate in a cloud environment. Most large businesses have legacy enterprise applications that have been in place for the past decade or longer. Moving these applications to the cloud would require significant effort and expense.

Who is Moving to the Cloud?
Small and midsize firms are much more likely than large firms to outsource to the public cloud. They do not have as much security risk and legacy restrictions as large firms do. Still, approximately 45 percent of data center spending is concentrated in large organizations (greater than 5,000 employees), which means that cloud computing will remain a niche technology until there is significant adoption by large organizations, which has yet to occur.

A compromise between technological potential and business realities has been the emergence of private clouds. In a private cloud, a business owns the equipment and is able to keep everything behind an internal firewall. Resources and centralized and deployed in a cloud architecture. These facilities lack the scale that public cloud providers have, but they are still able to realize significant improvements in agility, scalability, and efficiency. Most importantly, the firm retains complete control of its security and reliability. The business is also able to keep legacy applications separated and operating on the necessary platform.

So, What Does it all Mean?
Any premonitions about the demise of traditional enterprise data centers are certainly premature, if not misguided. Public cloud computing is reshaping the data center landscape, but it is one of many end points in a constantly evolving market. The technology that enables cloud computing has elicited a paradigm shift that is driving innovation in outsourcing models as well as traditional data center management, and the future of the data center industry will lie in a balance between those two environments.