8. Cloud Computing Is Helping Smaller, Newer Firms Compete – Strategic Analytics: The Insights You Need from Harvard Business Review

8

CLOUD COMPUTING IS HELPING SMALLER, NEWER FIRMS COMPETE

by Nicholas Bloom and Nicola Pierri

Is digital technology a democratizing force, allowing smaller, newer companies to compete against giant ones? Or does it provide even greater advantage to incumbents? That question has gotten a lot of attention lately, in response to data showing that the rate of new business creation in the United States has slowed, and that in most industries the biggest firms have higher market share than they did a decade ago.1

Despite those trends, our research suggests that technology can in fact provide an advantage to small and new firms. In recent research, we studied the adoption of cloud computing across U.S. businesses. Cloud computing is an IT paradigm based on remote access to a shared pool of computing resources. Putting data “in the cloud” essentially means paying someone else to manage it, and then connecting to their servers via the internet to access your data when you need it. It also means you don’t need to analyze this data on your own machines but can “rent” these services on demand. The popularity of cloud computing has exploded during the last half decade. By cutting the fixed costs of computing—avoiding the need to hire IT staff, servers, and hardware—even the smallest firm can satisfy large and unexpected computing needs.

For example, KenSci is a small Seattle-based health care–analytics company, which uses machine-learning techniques to analyze hundreds of variables about patients’ conditions to provide real-time predictions about mortality, readmissions, and other health-related risks. Relying on the cloud, KenSci has been able to quickly scale up and offer its services worldwide, without building a sizable IT infrastructure beforehand. The computational agility of cloud computing has been playing a role in manufacturing as well, fostering the creation of new “smart’ ” products. Pivothead is a firm with 25 employees producing wearable technologies to help the blind and visually impaired. Information collected by the wearable sensors is sent to the cloud, processed through machine-learning algorithms, and transformed into speech or text, in order to help the client navigate the surrounding environment.

These anecdotes suggest that cloud computing has “democratized computing” by bringing it to the masses of firms. Our research confirms this intuition using a massive new data set of over one million U.S. firms since the 1980s. Specifically, we found three key results. First, cloud computing has seen massive growth. Less than 0.5% of firms had adopted it in 2010, whereas 7% had by 2016, which is an annualized growth rate of almost 50%. Second, the adoption of cloud computing has occurred across the United States, not just in one region—albeit with heaviest and earliest adoption in urban and educated areas. But third, and most strikingly, cloud computing—unlike other technologies like PCs and e-commerce—has been adopted first by smaller and younger firms.

The data set for our analysis comes from Aberdeen Information’s call center, which has been making annual phone calls to millions of firms across the United States since the 1980s. It painstakingly records the hardware and software used by millions of firms per year back to 1981. This data set is often used by academic researchers because of its broad coverage and data quality. Surveys aren’t perfect, of course, and one disadvantage of this data is that respondents have discretion over what they consider counts as cloud computing. (Although many internet services these days involve accessing your data from another company over the internet, for the purposes of this survey we expect that firms are responding to a narrower use case: the use of specific enterprise cloud-hosting services such as AWS, Microsoft Azure, Google Cloud Platform, IBM Cloud, Oracle, or Alibaba.) In this chapter we use the records from more than 150,000 U.S. firms with information on their adoption of cloud computing.

The Adoption of Cloud Technology Across Industries in the United States

Figure 8-1 shows the rise of cloud computing since 2010, the first year the database started recording it. We see cloud adoption rates rising from 0.3% in 2010 to 7% in 2016, which is a more than doubling every other year. Moreover, this rise has occurred in every broad industry group we studied, highlighting how the increase in cloud computing has spanned the U.S. economy.

FIGURE 8-1

Cloud computing is becoming more common

Note: 2011 data was not available.

Source: Aberdeen U.S. computing population files from 2010 to 2016

Our research also shows the geographic spread of cloud computing, showing a broad adoption across U.S. counties. This is not just a technology used by hipster startups in New York and San Francisco—it’s being adopted all across the country. Every U.S. county we have data on has seen an increase in cloud computing since 2010.

Small, Young, and Cloudy

Our next chart is the most important. Figure 8-2 shows that the very smallest firms have the highest adoption rates. Firms with fewer than 25 employees have adoption rates of 10% to 15% on average, while medium-sized firms have lower adoption rates. Indeed, adoption rates are lowest in firms with about 100 employees, perhaps because they have enough scale to adopt in-house computing systems but not enough scale to be able to afford both those in-house systems and cloud services. The largest firms—those with 500 employees or more—again see rising adoption rates, typically with 5% to 10% of firms adopting cloud computing.

FIGURE 8-2

The smallest and largest companies are the heaviest adopters of cloud computing

Source: Aberdeen U.S. computing population files, 2016

This cloud “tick” also turns out to be surprisingly robust. We see this across industries, firm types, and years in our data. Small firms really do seem to be the pioneers of cloud-computing adoption.

For contrast, we compared the adoption of cloud computing to adoption rates for two other technologies: personal computers (PCs) and e-commerce. These show the more classic pattern of greater adoption by large firms. Cloud really does stand out as being particularly attractive to the very smallest firms.

But it’s not just small firms driving the adoption of cloud computing. Young firms are adopting cloud computing faster than older ones (see figure 8-3). So, the most nimble, youthful, and entrepreneurial companies are the pioneers of adoption. Again, we did not see that with other technologies—older firms tended to be the first adopters of PCs and e-commerce.

All of this suggests that cloud computing is an unusual technology that appeals to smaller, younger firms. We believe its ability to provide high-powered computing without the overhead costs associated with in-house software and hardware provision has driven this. In this sense cloud computing has spread computing out to the masses, democratizing computing.

Flexible access to computing resources allows small firms to scale up (or down) rapidly and to experiment with new products and features. This operational agility can be particularly valuable when facing uncertain demand or a fast-evolving competitive environment. Recent evidence from the University of Toronto’s Kristina McElheran and MIT’s Wang Jin shows that the ability of “renting” IT resources has also aided young firms to survive and increase productivity.2

FIGURE 8-3

Younger companies are more likely to have adopted cloud computing

Source: Aberdeen U.S. computing population files, 2016

These are encouraging findings, especially in light of the decline in business dynamism and the rate of new startup creation documented by economics professor John Haltiwanger and his colleagues.3 Although we don’t have data on how cloud computing affects firm performance, it’s not hard to imagine that lowering computing costs would substantially improve younger and smaller companies’ chances. Despite statistics suggesting a decline in U.S. dynamism, technology has been known to disrupt incumbents when they least expect it. Cloud computing may ultimately prove to be one of those disruptive forces.

TAKEAWAYS

The computational capacity to analyze big data sets comes with a price tag—one that smaller, newer companies may not be able to afford. They can compete by placing their computing efforts in the cloud.

  Putting data “in the cloud” means you’re paying someone else to manage it, and you connect to their servers via the internet to access your data when you need it. Doing so means you don’t need to analyze the data on your own machines but “rent” these services on demand, saving you the overhead costs of hiring IT staff or purchasing servers and hardware.

  Cloud computing has seen massive growth in recent years. Research indicates cloud adoption rates have increased drastically over the past decade across the United States.

  The smallest firms have the highest adoption rates. Younger firms, too, are adopting cloud computing faster than older ones.

  Flexible access to computing resources allows smaller firms to scale up or down quickly and experiment with new products and features. This agility is especially valuable when facing uncertain demand or a fast-evolving competitive environment.

NOTES

  1. 1. Ian Hathaway and Robert E. Litan, “Declining Business Dynamism in the United States: A Look at States and Metros,” Brookings, May 5, 2014, https://www.brookings.edu/research/declining-business-dynamism-in-the-united-states-a-look-at-states-and-metros/; David Wessel, “Is Lack of Competition Strangling the U.S. Economy?” Harvard Business Review, March–April 2018, https://hbr.org/2018/03/is-lack-of-competition-strangling-the-u-s-economy.

  2. 2. Wang Jin and Kristina McElheran, “Economies Before Scale: Survival and Performance of Young Plants in the Age of Cloud Computing,” Rotman School of Management Working Paper no. 3112901, December 2017.

  3. 3. Ryan A. Decker, John Haltiwanger, Ron S. Jarmin, and Javier Miranda, “Declining Business Dynamism: What We Know and the Way Forward,” American Economic Review 106, no. 5 (May 2016).

Adapted from “Research: Cloud Computing Is Helping Smaller, Newer Firms Compete” on hbr.org, August 31, 2018 (product #H04ISD).

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We thank Toulouse Network for Information Technology for funding for the data.