Amazon Web Services vs. Traditional IT Models
Management of IT
Dr. Nathan Garrett
According to Metrics2.com, the average business spends 3.4% of revenue on IT, whereas top performing businesses spend 2.8% of revenue on IT. This seems counterintuitive. How can a company that spends less on IT, outperform its competitors who spend more on IT?
This can best be explained by Porter’s theory of Competitive advantage. He defines competitive advantage as an organization’s ability to outperform its competitors by gaining resources or attributes that differentiate that organization from its competitors and allow it to operate more effectively. Competitive advantage is cost advantage, whereby an organization gains competitive advantage by producing more product and better quality product than its competitors at a lower cost (Goodpasture, John, http://www.johngoodpasture.com/2012/03/michael-porter-revisited.html).
All businesses face a huge operational challenge today. This challenge is how to best leverage IT as a strategic resource. The traditional model of IT calls for the spending of massive amounts of money and time to design, procure, and build-out internal IT systems. AWS turns this traditional methodology on its head by allowing companies to outsource their IT infrastructure and resources off-site, reduce capital expenses by replacing them with low monthly operational costs, and thereby increasing operational efficiency (http://aws.amazon.com).
AWS eliminates the need for costly upfront investment in IT infrastructure and personnel. It is also more flexible and scalable than traditional IT models. AWS cost structure gives customers a utility model in which they pay only for the resources they need and use. AWS is able to leverage economies of scale because it is such a huge system. By doing this it is able to realize immense cost savings. This value is then delivered back to AWS customers in the form of low cost, quality IT resources. By reducing overall IT costs, AWS allows organizations to increase operational efficiency and refocus resources towards innovation and differentiation which allows them, in turn, to deliver more value to their customers as well (http://aws.amazon.com)
One of the quintessential success stories of AWS is the billion dollar acquisition of Instagram by Facebook. In April of 2012, Facebook, one of the largest and most innovative technology companies in the world, acquired the Social Media Photo Sharing app, Instagram, for $1B. Facebook viewed Instagram as a competitive threat because the main activity Facebook users participate in is photo sharing. At the time of the acquisition, Instagram was a two-year-old company with 13 employees. The most salient feature of Instagram at the time of the acquisition was that it operated its IT infrastructure solely on the AWS platform. It is quite remarkable that a company of 13 employees could build a billion dollar company from the ground up in a mere two years. They were able to do this because of the competitive advantage they gained through leveraging AWS.
The Instagram acquisition illustrates that AWS poses a huge threat to traditional IT models of onsite architecture and Capital Expenditures. AWS poses a threat to traditional IT models because it provides a huge competitive advantage in the form of radical cost savings and increased operational efficiency. Instagram was able to build a billion dollar company by outsourcing its IT operations to AWS and in doing so, it was able to refocus valuable internal resources on customer-facing innovation and differentiation (http://www.forbes.com/sites/bruceupbin/2012/04/09/facebook-buys-instagram-for-1-billion-wheres-the-revenue/).
Amazon. (2013). Amazon Web Services. Retrieved from http://aws.amazon.com/.
Goodpasture, John. Michael Porter Revisited. March 7th, 2012. Retrieved from http://www.johngoodpasture.com/2012/03/michael-porter-revisited.html.
Upbin, Bruce. Facebook Buys Instagram for $1B. Forbes. April 9th 2012. Retrieved from http://www.forbes.com/sites/bruceupbin/2012/04/09/facebook-buys-instagram-for-1-billion-wheres-the-revenue/.