Cloud Native Transformation

Prologue: Evolve or Else

Cloud native is more than just a technology or tool set. It is a philosophical approach for building applications that take full advantage of cloud computing. This new paradigm requires not only embracing new technology, but also a new way of working—which makes going cloud native an extensive undertaking. The payoff is immense, but in order to reach it an organization must evolve not just its tech stack but also its culture and processes.

The story of WealthGrid, a typical enterprise undergoing a cloud native transformation, illustrates this process from start to finish. First, we will look at the factors inspiring WealthGrid’s decision to pursue a cloud migration. Then, as we follow WealthGrid’s migration path, we will witness the problems it encounters along the way—ones that are commonly experienced during the transformation in companies both large and small. Ultimately, we will see how to use patterns to overcome—or even better, prevent—those problems.

Welcome to WealthGrid!

Meet the organizational protagonist of our cloud native transformation tale: WealthGrid, a mid-size financial services company. WealthGrid is a fictional composite of real-world companies we have worked with over the past few years, when we were called in as consultants to facilitate new cloud migrations—or to rescue failing ones. We created this composite in part because we must maintain our clients’ confidentiality, but also so we can illustrate the most common problems companies encounter. Thankfully, no single transformation initiative is likely to endure all of these troubles, but nearly all initiatives will encounter at least some of them.

WealthGrid’s organizational chart looks a lot like most mid-size companies: functional and top-down. In other words, it’s your traditional business setup, with the C-suite and board at the top followed by other senior management, middle managers (including project and/or program managers), department heads, and so on, down the line. Structurally the company is divided into traditional departments like IT, marketing, finance, human resources, and operations based on functional role in the organization. There are specific standards, policies, and practices to govern how things work as well as every decision the business makes. Among themselves, teams may have taken on some Agile methods (like Scrum), but WealthGrid itself is fundamentally a classic hierarchical organization following a Waterfall software development approach (from here on out we will shorten this to “Waterfall hierarchy”).

Overall, WealthGrid is quite rigid in what each specific department is designed, and permitted, to do for the company. Formal and well-documented channels exist to facilitate communication between them. Since each department specializes in its specific area of responsibility, there are numerous handoffs between the many engineering teams working on any given project; project managers are in charge of coordinating between them. Though the company’s hierarchical structure and highly structured communication protocols may sound inflexible and maybe even intimidating, they do confer advantages. At WealthGrid, the chain of command—whether short or long—is always crystal clear. Every team’s function is explicit, and their responsibilities are clearly spelled out, which means they are optimized for proficient productivity.

Sure, this model might hinder creativity and experimentation, but WealthGrid has been around for a long time and this is the way it’s always worked. It takes a lot of managers to keep a well-oiled machine like this one, with so many people and projects to keep track of, running smoothly. Or at least as smoothly as possible.

Sound familiar? Though many companies have taken some steps toward more agile management practices, most mid-size and larger enterprises still function as hierarchies using a Waterfall software development approach. WealthGrid could be almost any company, anywhere. It is presented as a financial company because that industry is particularly representative of the pressures facing many sectors. Competition is high in the financial sector, driving the existential need to evolve and keep pace. Meanwhile, it is populated by a wide variety of companies with strikingly different levels of technological savviness. No matter what your business, though, you are likely facing some, if not all, of the same market pressures.

WealthGrid could be just like your organization: a business in the real world, mid-size or even larger. Not a giant technology company, but big enough to have a real IT department with engineers. And, although yours may not be a software company, you still need to deliver software—as must almost every business these days.

WealthGrid is a well-established company with a good reputation. It’s been successful for years, decades even. It delivers solid products and services, and its internal culture is positive and healthy. People enjoy working at WealthGrid. They have competition, of course, but it’s not much to worry about—the players are all familiar and competing within a stable and steady market. Thus WealthGrid is financially healthy, with reasonable (though not huge) profit margins. Overall, it’s a good company, with a good market. It’s good to be WealthGrid.

Until one day…

A Stranger Comes to Town

All great literature is one of two stories; a man goes on a journey or a stranger comes to town.

―Leo Tolstoy

This is the story of how a stranger suddenly appears in WealthGrid’s nice, comfortable world—and changes everything.

Not a literal stranger, of course, but a brand-new competitor suddenly entering the financial services market. Someone completely unanticipated, completely different from traditional competitors, and very dangerous. There are three types of strangers who might, so to speak, come to WealthGrid’s town.

• The Upstart. The first possible stranger is a company like Starling Bank. Starling is a brash newcomer, a UK-based contender bank that launched in 2014 and essentially built an entirely functional bank in a single year. Starling, which is mobile-only (no physical locations, nor even a web-based interface) has grown steadily, adding business accounts with full mobile functionality and seamless integration of services. The bank is approaching half a million customers, most of them young. It’s very efficient and very effective. Starling is not big yet but it’s growing very, very fast. And, at the time of writing, there are 26 other challenger banks just like this in Europe alone, with a high likelihood of more on the way.

• The Rogue Giant. The second potential stranger is a bit more familiar: Amazon acquired a banking license in 2018. No one knows what the company is going to do with it―it’s not saying―and there is much speculation that Amazon will be entering the retail banking market. Studies show that, if it does jump in, Amazon could quickly become the third largest bank in the United States, eventually drawing an estimated 70 million customers.

• The Reinvented Competitor. The third possible stranger is, in a way, even more well known: a traditional competitor, but one that is rapidly reinventing itself. For WealthGrid this means a traditional bank that is investing heavily to modernize both its technologies and the products and services it offers. Someone like ING from the Netherlands―a bank that these days doesn’t call itself a bank, but a tech company with a banking license.¹

All three of these strangers are cloud native entities. Starling Bank was born in the cloud and optimized from the start to take advantage of the velocity and inherent scalability that cloud native confers. Amazon is literally one of the inventors of significant cloud native technologies, and ING is well on its way to transforming itself from a traditional bank to a fully optimized cloud-based operation.

Why should WealthGrid worry about any one of these, though? After all, the company has done a pretty good job building its functionality, keeping up with customer demand for online and mobile banking features. What do any of these “new” strangers offer WealthGrid’s customers that it does not already also provide?

Stranger Danger

The danger at this point is still somewhat subtle. WealthGrid is a profitable company, and so much of its annual earnings go to shareholders. Some might go back into the company to invest in innovation and research, but if so, it’s a tiny portion of profits. The problem is that WealthGrid’s technology growth has been pretty much a straight line: the value it is building for its customers is growing, yes, but in a linear way. This is exactly what a company like WealthGrid likes. Linear also means predictable and stable. It’s easy to do long-term planning with linear growth. It has worked well for decades, why stop now?

If you are a traditional company, however, and a competitor using cloud native technology advantages comes into your sector, that competitor’s growth is not going to be a nice, straight line. It’s going to be a steep exponential curve. Figure P-1 shows the comparative growth for a traditional company versus a disruptive newcomer who enters the market later, but with a cloud native advantage.

Figure P-1. Traditional linear enterprise growth curve versus the exponential growth curve a disruptive new competitor using cloud native technology will bring

At first the stranger is brand new and very small, taking only a tiny portion of your market. It’s easy to feel complacent. Do not be fooled: they are still genuine—and serious—competition!

It is understandable that you and your usual competitors, the traditional vendors in a given market, may not be too worried at first. After all, you still own the majority of the market. But those newcomers will be growing exponentially. They, after all, don’t carry baggage from decades of previous development and so are able to operate at a significantly lower cost. Worse, once they do demonstrate (even a little) growth, they will also have access to more or less unlimited investment funding. And they will take this money and plow it right back into ever more technological advancement, driving their growth curve ever steeper and ever higher.

So how are these newcomers so successful so fast? The main reason they are able to so quickly establish themselves in your market is because they deliver faster and more frequently using modern technologies. They have a rapid cycle of building functionality, delivering it to the market, getting immediate customer feedback and, based on that feedback, delivering even more feature innovations and improvements. They can do this very, very quickly.

Some of these high-performing development capabilities are also used by companies following Agile and Lean practices, and those are definitely a good start. Cloud native, however, was born to take full advantage of cloud computing. For example, Agile teams may do continuous integration, but typically still deliver in one- or two-week sprint cycles. Cloud native teams add continuous delivery to create CI/CD and the ability to do new releases every day, or even multiple times each day.

The technology enabling this serious competitive advantage? Cloud native.

So these newcomers are on public clouds like Amazon Web Services, Google Cloud, or Microsoft Azure, taking advantage of the ever-more powerful services integrated with these platforms. They have optimized their architecture for microservices and containers, and use Kubernetes to orchestrate everything. Those technologies and tools and cloud-centric processes allow companies to move very fast and deliver functionality every day … or even many times a day.

Worse, they aren’t entering to compete with you wherever you happen to be right now. Instead they enter the market with a serious head start, thanks to their superior technical position. They use customer feedback to iterate quickly on new features, and then get them in front of users fast.

No matter which stranger comes to your town—they may not be there yet, but they are definitely on their way—they will be jumping in way, way ahead. The simple truth is, once they do, you will not be able to catch up. They are going to leave you behind in your own market. You have to start now, before this competitor shows up. Because they are coming—and this way, you can be ready for them.

(If you wait until they are already here, you’ll have to contend with the exponential growth curve we showed you in Figure P-1. If this disruptive stranger is already in your town, it very well may be too late for you to catch them!)

At this point you may be thinking, This won’t happen to me. Our sector is completely different, we aren’t high tech, disruptors would never bother with us. And we don’t blame you; nobody likes hearing that their world is about to be upended. But think about the taxi business—global in scope, granular in implementation. Who could have imagined the disruption of such a widespread, low-tech industry? Yet Uber and Lyft, using a ridesharing model made possible by cloud technology, have done just that. Airbnb did the same thing in the hotel industry. And in both cases, once these new companies entered, the speed of change in the market was very dramatic.

Cereal Killer

Maybe you’re still thinking you’ll be OK, that your sector just isn’t compatible with that kind of disruption. So another aspect to consider: What would happen to your business if Amazon suddenly bought your biggest competitor? Or even a small one, and then used their serious technological advantages to turbocharge that competitor? No matter what sector they may elect to enter, Amazon brings a massive innovative advantage in IT that traditional companies cannot replicate.

Case in point: in 2017, Amazon made an unprecedented move into the US retail grocery market by purchasing the Whole Foods chain of stores. On the surface, this was an utterly counterintuitive thing for Amazon to do. Supermarkets―you can’t find a business more basic than that. They are everywhere, and everyone needs them, but profit margins are historically razor thin. Markets are very much fragmented by region, and studies have consistently shown that food is the one thing the vast majority of shoppers prefer to buy in person rather than order online.

Nonetheless, Amazon is now actively building its presence in the retail grocery world. The company has announced rapid expansion plans, including opening new checkout-free grocery stores in a dozen cities across the United States by the end of 2020.² Suddenly there is a serious challenger in a very stable, even stodgy, and low-margin industry that never saw it coming.

Amazon (along with other tech behemoths like Google and Facebook) created the cloud revolution in the first place to serve their online business needs. Now they are completing the cycle by moving into analog infrastructure, which is easy to do, and very available to them: the company has announced that one possible expansion route could be for it to buy up bankrupt supermarket and other retail chains that failed to compete and move new Amazon-run food stores right into that ready-made infrastructure.³

Amazon may not be in your market right now. But when it does come, it will be instant. And the competition may well be lethal.

You Say You Want an Evolution

This story is happening in the world right now. Even if WealthGrid is hypothetical, all three of these strangers actually exist.

Companies are beginning to wake up to the existential threat. They are responding slowly, though, in part because of the lingering belief that cloud native is only accessible to giant tech companies. That belief was true just a few years ago, but now it’s seriously misguided. Tiny young companies like Starling are starting small in the cloud and making it work for them. ING, an old-guard financial company, recognizes the existential threat and is seriously working to reinvent its legacy systems. Cloud technologies are maturing and becoming mainstream, and any company can “do” cloud native these days.

Like so many others out there, WealthGrid is a healthy company. It has been successful for years; it delivers a good product, and people enjoy working there. Truly it has done nothing wrong. Inevitably, however, its environment is changing. It is time to evolve, or risk extinction.

In nature, the only reason species ever adapt is to gain a benefit (survival being a pretty major benefit). If there is no benefit to gain, they simply won’t change: evolution, after all, is a costly process. This works exactly the same way in the business world. If a company is not exposed to pressure, it also will never adapt.

The catalyst or pressure may not be there yet, but the very high likelihood is that it is coming to your industry. How do you know when just such a disruptive stranger will come to your market?

The answer is, you don’t.

Which Evolutionary Stage Are You In?

In our experience it takes two to three years to truly undergo a cloud native shift and adjust to this new way of working. After that, it takes five more years to truly internalize the change—you can’t succeed in an entirely new paradigm like cloud native without understanding the tools as well as how to transform your organization so it can best apply them.

Smart companies recognize that technology is always advancing, and they strive to innovate right along with it. Those that fail to adapt will fail, period. Some companies, even entire industries, will disappear. This is all part of the evolutionary process, and it will not destroy the world—it will build a better one. Cars did not destroy the world when they replaced horses; they just changed it. People switched from riding horses to driving cars. It’s all thanks to technology that we now have things that even kings couldn’t afford, or even imagine, 200 years ago.

This may all sound terribly dire, but it’s really not. In crisis lies opportunity. If WealthGrid wakes up in time to the stranger’s impending arrival and takes steps to adapt, it will emerge a stronger, more resilient and innovative company.

Change is inevitable, and the fittest species respond and adapt accordingly. Let’s watch as WealthGrid gives it a shot.

¹ ING CEO Ralph Hamers during a video interview with British financial affairs publication The Banker in August 2017.

² Here is a good overview of how and why Amazon got into the grocery business and their plans for the future.

³ Amazon exploring bankrupt or vacant retail infrastructure to house new brick-and-mortar Amazon Fresh and Amazon Go stores.