Modeling the Cloud: implications from the LSE study

The London School of Economics study investigates what the real economic effects of cloud are likely to be, and especially what that tells us about employment and job skills in the near future.

Back off from the hubbub surrounding cloud computing and there are two things that stand out.  One is the recognition that this is a new way of dealing with the data that organizations use daily and the information technology equipment and software that need to be bought or licensed on a regular basis.  The other is that the jobs associated with information handling, from data inputs to executive information systems, are shifting around.  There are a few studies that demonstrate how both these changes are beginning to take place but still too little understanding of what the likely large-scale consequences are going to be once the transition is made.

We chose two industries, one manufacturing—aerospace, the other in services—smartphone services, and considered what kinds of IT they currently use, what they are likely to be using in the near future, and what effect cloud computing is likely to have upon their business and especially upon their staff.  Given that both these sectors are comprised of a small number of large firms and a large number of small and medium firms, we were able to discern how different IT usage and different propensity to move to the cloud are likely to affect many features of the sectors.  We calculated the cloud effects in these two sectors for the United States, the United Kingdom, Germany and Italy.

Especially for a mature manufacturing industry, we have to take into account that companies that have long invested in their own hardware, software and IT staff are not going to shift their operations quickly.  Many will delay introducing cloud services until the time when they would otherwise want to upgrade their hardware.  Some will wish to take advantage of certain features of cloud computing, such as software as a service, but keep infrastructure in-house.

The situation looks different for the smartphone industry, which would not exist in its current form at all if it were not for cloud computing services.  The rapid growth of this sector will generate many new businesses and account for a significant proportion of new cloud related jobs.  Most of those jobs will be associated with businesses building and operating data centers.  Large data centers are at the core of cloud services and, costing up to half a billion dollars to build, they generate employment for the producers of computer hardware, for the construction industry, and they provide a boost to the economy through their use of energy.  While they usually employ few information technology specialists, they stimulate employment through the efficiencies they generate for customers which in turn are able to grow.

Our study shows that despite new cloud services having the effect of displacing some in-house IT workers, the net employment effect is positive.  While the economy remains in the doldrums it is unlikely to be directly associated with generating a great deal of new employment.  However, when the economy picks up the effect will be multiplied both by faster realization of productivity gains and by the overall growth of the sorts of sectors, such as smartphone services, that are most reliant upon cloud services.  This effect can best be seen in our forthcoming study of a rapidly growing economy, Turkey, where the knock-on effect of cloud usage over the coming years will be a significant contributor to new employment of both computer workers and in sectors whose prosperity is boosted by the effects of cloud-related jobs.

There is one other finding that is especially interesting, in that the character of jobs changes.  Much of the work that is displaced is currently done by middle-level paid computer services workers in large firms.  The trend that will be accelerated whereby higher paid, managerially responsible employees will be regular users of the information processing and analysis services that cloud computing provides.  Firms that are able to improve the qualities of their management to make better use of advanced cloud services will benefit most from the opportunities afforded by these new practices.  Middle management will also need to adjust to take advantage of the best available cloud services providers and to ensure that routine data handling for functions such as customer relationship management and personnel data analysis are effectively used.  We can regard this as a “cloud dividend”, a savings that comes about from shifting the work of existing IT staff towards general administrative responsibilities and strategic management rather than exploiting short-term payroll reduction opportunities.  Herein lies one of the main new skills challenges to the existing labor force.

The research holds many implications for new practices and policies.  The location of the new cloud businesses, and especially data centers, is sensitive to energy costs.  The ability of businesses to adjust to the managerial challenges as well as to exploit the productivity advantages is to some degree dependent on their ability to be flexible and the skills they have in information management generally.  Finally, effective cloud computing depends upon sensible rules that protect contracting parties and allows for innovation.  The cloud will reach across borders and engage people in new ways.  Businesses and governments should be ready to adjust to these new opportunities, to allow for innovative businesses to emerge, and to capture the imagination that new ways of structuring work can unleash.

The report is available for download here .

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