27 December 2016

Sipping Oaxacan coffee in the cosmopolitan neighborhood of Colonia Roma in Mexico City, just around the corner from where Jack Kerouac and William S. Burroughs once lived, my mind wandered back to the moment when I last saw a computer server with my own eyes. Ten years ago a client sent me to evaluate a commercial data center in suburban Mexico City. Even then, even there, it was a magnificent display: rows of gear stretched to the horizon, cable placement that could win a beauty contest, a shimmering sea of blinking LEDs, and a biometric security system befitting an evil lair in a James Bond movie. But none of that mattered. Consistent with contemporary thinking at the time, my client, a Latin American fin-tech startup, decided to purchase and install eight million dollars worth of gear in a soon-to-exist on-premise equipment room. And as it turns out, those were the last servers that I ever saw. Ah, the memories...

But enough with the reminiscing! My attention returned to my coffee, and the Amazon Web Services - CloudFormation template on my screen and the lurking deadline to which it was inextricably connected. The days of on-premise gear and the first-hand knowledge I once had of peculiar subject matter like DAT technology, HVAC, diesel electric generators and halon fire prevention systems all feels like part of a bygone Jurassic era. When I think about where we were and to where we have progressed it feels like I lived through the computing technology equivalent of the stone age. Interestingly however, much of the developing markets are still there, leaving me feeling a lot like Marty McFly in Back to the Future.

Prevailing wisdom is that new infrastructure technologies, such as mobile and wireless for example, are often deployed in emerging markets sooner than in developed markets given that the former have fewer legacy systems constraints to contend with. While that is largely true, IT cloud infrastructure is an interesting exception to that rule. Here in the emerging markets (EM) most IT infrastructure remains on-premise, and, cloud services providers like AWS and Microsoft Azure are still relatively unknown. In fact, AWS’ parent amazon.com launched in Mexico little more than a year ago to modest fanfare.

In the US market in 2008, only a couple of years after AWS’ launch, around 85 percent of corporate IT departments still preferred on-premise solutions whereas more recently by 2014 the market had completely inverted, with that same percentage now preferring cloud-based solutions. Meanwhile, the preferences of emerging market small & medium-sized enterprises ("SMEs") are largely unchanged over the same time period. So, the key question arises - if cloud solutions are generally recognized to be better and cheaper regardless of geographic location, or perhaps even more so in emerging market economies, then why such a sluggish adoption rate here?

The easy part of the answer is macroeconomic in nature. Emerging market SMEs tend to be hierarchal, top-down organizations, and tend to have a single decision maker. If you agree that the evolution of the cloud industry is driven as much by business considerations as it is by the natural progression of technology itself then the latter is at best an abstract concept in emerging markets. Business decision-making is concentrated at the top because in emerging markets equity ownership itself is concentrated in the hands of a few. Vastly summarizing: companies are privately-owned and closely held, there are no ESOPs, employees are not empowered, innovation is neither incentivized nor rewarded, labor is cheap, capital is scarce. Now then, this is certainly not to say that the world's best and brightest aren't hard at work tackling all of these issues head-on, but, it is, nonetheless, the present state of affairs. But what does any of this have to do with market adoption rates of cloud services? Well, when viewed through the proper lens you can see abundant pragmatism.


IT managers at emerging market SMEs are often disincentivized to educate company owners on the benefits of migrating existing on-premise solutions to the cloud. Traditional guidelines for specifying on-premise gear at SME's has nearly always resulted in over-buying on a per-solution basis. In an environment where capital spending decisions tend to be dramatic affairs it behooves the savvy IT manager to buy once and buy big. But the rapid evolution of cloud services inconveniently puts that same IT manager at risk of being second-guessed on recent equipment purchases and IT staff hires. Hence the hesitance to tell the 'king' that he is wearing no clothes.

The timing to implement changes at the infrastructure level is sometimes impacted by the lease contract(s) on which the current gear is financed.
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Having said that, most business owners that I know here are astute. Any foot-dragging by their IT managers with regard to migrating to the cloud simply pushes them out of the "early majority" bucket, and into that of the "late majority". The rapid expansion and integration of the world economy will compel EM decision makers to take a more serious look at migrating their existing on-premise IT infrastructure to the cloud.


Operating as a SME means less scale, which in turn means fewer options when making hardware architecture decisions, which sometimes leads to jaw-dropping bundles of software crammed onto comically underpowered gear. Why? Well, when labor is cheap and both gear and the cost of capital are expensive, then the smart and rational decision maker sometimes draws conclusions that diverge from what you'd expect under more "normal" circumstances in developed markets. An efficiently performing Emerging Market (EM) Small and Medium Enterprise (SME) sometimes simply means that the owners are deliberately maintaining a bare-bones cost structure and capital investments program. So the saying goes in Latin America, "bankrupt companies, rich owners." But that approach leads to a catch-22 situation. Shouldn't migrating on-premise IT equipment to the cloud result in lower operating costs? Of course it would! The crux however lies in how this shift is packaged and presented to the decision makers -- that is, the owners. The emerging markets are fertile ground for global cloud providers that have the scale and balance sheets to, for example, bundle financing with their services. The long view works in developing markets, particularly when blended with the right product set and business model approach.


The intersection of corporate finance and IT capital expenditures is as much of a barrier to moving on-premise equipment to the cloud as anywhere else in the world, proving that in some ways emerging markets are not so different from developed economies. The timing to implement changes at the infrastructure level is sometimes impacted by the lease contract(s) on which the current gear is financed; the problem being that budget for cloud services can be appropriated only after the lease contracts for the current on-premise equipment have terminated. When there are many contracts with many staggered termination dates, this can become messy business.

Even in a large organization it's routinely the case that lease contracts have only been reviewed by the controller who negotiated them, which means that the options available to the IT infrastructure team are largely unknown. Moreover, this is a problem space with multiple cruxes: wonky GAAP and tax rules, lack of bridge financing, no IT equipment secondary market to speak of, among other challenges. But importantly, these types of market barriers spell opportunity for large-scale and innovative solution providers like PwC, Accenture, KPMG, E&Y et al.

No doubt, emerging market SMEs stand to reap more benefit from the cloud than the industry's present customer base as a whole which substantially consists of large cap companies and government and military customers.
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Another uncomfortable similarity among Small and Medium Enterprises (SMEs) is their IT staff, or rather, what to do with some of them after having migrated key business systems to the cloud. Small IT teams at SMEs often evolve into a custom glove fit for the business systems and on-premise IT infrastructure. Migrating to the cloud can create an ethical dilemma for management regarding what to do with staff filling now-obsolete IT job descriptions. Labor law across Latin America tends to favor employees, sometimes leading to significantly higher severance costs. 

No doubt, emerging market SMEs stand to reap more benefit from the cloud than the industry's present customer base as a whole which substantially consists of large cap companies and government and military customers. There are immense opportunities for intermediaries in this market to bridge the many gaps between the needs of potential cloud customers versus the services that bulge-bracket providers like AWS, Azure, and Google Compute Cloud are currently offering. 


The developed world is leveraging the financial and performance benefits of the commoditization of hardware and IT services and the subsequent shift of these elements off premise to the cloud. Meanwhile, a discrete set of practical factors extend the propagation delay in Emerging Markets, especially with regard to Small and Medium Enterprises (SMEs), pushing many potential customers into the "late majority" category. In my view this market has ripened for providers to begin offering large-scale solutions. The next several years in the Emerging Markets IT infrastructure industry are going to be exciting.

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