How cloud computing has helped smaller, newer firms take on giants
Is digital technology a democratising force that allows smaller, newer companies to compete against giant ones? Or does it provide an even greater advantage to incumbents?
That question has received a lot of attention lately, in response to data showing that the rate of new business creation in the US has slowed, and that in most industries the biggest firms have higher market share than they did a decade ago.
Despite those trends, our research suggests that technology can in fact provide an advantage to small and new firms.
We studied the adoption of cloud computing across US businesses. Cloud computing is an information technology paradigm based on remote access to a shared pool of computing resources.
Putting data “in the cloud” essentially means paying people to manage your data, and being able to connect to their servers via the internet to get access to the data whenever and wherever you need it.
Where it all started
The popularity of cloud computing has exploded during the past half a 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, a small Seattle-based health care analytics company, uses machine learning techniques to analyse hundreds of variables about patients’ conditions to provide real-time predictions about mortality, re-admissions and other health-related risks.
By relying on the cloud, Kensci has been able to scale up and offer its services worldwide, without building a sizeable 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 “democratised computing” by bringing it to the masses.
Our research, based on a data set of over a million US firms, confirms this. The data set comes from Aberdeen Information’s call centre, which has been keeping a record of the hardware and software used by US firms since the 1980s. We found three key results: First, cloud computing has seen massive recent growth.
Second, the adoption of cloud computing has occurred across the US, not just in one region — albeit with heaviest and earliest adoption being concentrated in urban and educated areas.
But third, and most striking, cloud computing — unlike other technologies such as personal computers and e-commerce — has been adopted first by smaller and younger firms.
Cloud technology across the US
Cloud computing has been rising since 2010. We see cloud adoption rates rising from 0.3 per cent in 2010 to 7 per cent in 2016, which is an annualised growth rate of almost 50 per cent. Moreover, this rise has occurred in every broad industry group we studied, highlighting how the increase in cloud computing has spanned the US economy.
Our research also shows the geographic spread of cloud computing, indicating a broad adoption across US counties. This is not just a technology used by startups in New York and San Francisco — it is being adopted all across the country.
Small, young and cloudy
Our data also shows that the very smallest firms have the highest adoption rates. Firms with fewer than 25 employees have adoption rates of 10 per cent to 15 per cent on average, while medium-sized firms have lower -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 inhouse systems and cloud services.
The largest firms — those with 500 employees or more — again see rising adoption rates, typically with 5 per cent to 10 per cent of firms adopting cloud computing.
This increase in cloud computing use also turns out to be surprisingly robust. We saw this across industries, firm types and years in our data. Small firms really do seem to be the pioneers of cloud computing adoption.
We compared the adoption of cloud computing to adoption rates for two other technologies: PCS and e-commerce. These show the more classic pattern of greater adoption by large firms. Cloud computing stands out as being particularly attractive to small firms.
But it is not just small firms driving the adoption of cloud computing. Young firms are adopting cloud computing faster than older ones. So, the newest 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. Its ability to provide high-powered computing without the overhead costs associated with inhouse software and hardware provision has driven this.
In this sense cloud computing has been a democratising force for many industries.
Flexible access to computing resources allows small firms to scale up 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.
So, these are encouraging findings, especially in light of the decline in business dynamism and the rate of new startup creation.
Although we do not have data on how cloud computing affects firms’- performance, it is not hard to imagine that lowering computing costs would substantially improve the chances of success for younger and smaller companies.
Cloud computing concept.