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Techaisle Blog

Insightful research, flexible data, and deep analysis by a global SMB IT Market Research and Industry Analyst organization dedicated to tracking the Future of SMBs and Channels.

IBM – motivating midmarket firms to think strategically about cloud security

A blog “Big Data in the Cloud - an ideal solution for SMB banks” that we wrote touched a nerve, in a good way. Post blog, in our several discussions with both large and community banks we find that cloud objection is largely based on the size of the bank. In addition, regulatory compliance concerns are huge as most midmarket businesses and banks in particular spend a lot of money being compliant. With the move to cloud they want to make sure that the investment extends to the cloud without being exposed to security breaches and from a regulatory point of view.

What is clear is that migration to cloud is forcing businesses to think differently about security, in very standardized ways because the delivery of cloud service is standardized. It is also pushing them to automate security because utilization of cloud is dynamic, elastic, automated and fluid thus making manual or even semi-automated security processes unmanageable. However, this approach creates multiple vulnerabilities. The bad guys themselves are taking advantage of all the cloud technologies and are becoming a lot faster and more automated than the businesses. Security therefore becomes a moving target and cloud security is a perfect opportunity for businesses to improve defenses and reduce risks.

While most midmarket businesses are reactive, hunting after point solutions when something goes wrong, others are taking a proactive approach to risk and threat so that they have more fluidity in the way they respond when a threat occurs.

IBM security is on a path to help businesses think differently about cloud security. It is moving the businesses along a maturity curve from reactive to proactive to optimized. Optimization refers to the difference between being able to weather an attack and continue with business and how much time could one can shave off and how much cost could be optimized for being able to respond to that event in reducing risk.

As Sharon Hagi, Global Strategist and Senior Offering Manager, IBM Security, said in an interview “the state that IBM is advocating goes beyond reactive or proactive. We call it the optimized state where organizations use automation coupled with predictive security analytics to drive towards a higher level of efficiency. By mixing the elements of proactive approach, automation and security intelligence businesses can actually get to the point where they are a lot more efficient and they actually reduce time and cost to respond to risk.”

IBM is differentiating and trying to distance itself from others in a number of different ways. IBM has a managed security services practice with ten plus security operation centers around the world servicing 133 different countries with 6,000 security professionals and its research lab X-Force provides actionable threat intelligence and insights for business and IT leaders. IBM monitors 10,000 security customers globally, 70 million end-points with 20 billion events per day, has made enormous investments in security intelligence analytics platform that allows it to distill information, identify threats and respond quickly.

But for banks and businesses that come under deep regulatory scrutiny, security goes beyond managed services and is a major psychological barrier to cloud adoption triggering a high level of fear-factor. Recently, we posed a fundamental question of “Why do you want security” to banks and midmarket businesses in general. The responses received could easily be bucketed into five categories:

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WW SMB Cloud Channel partners – builders more successful than resellers

Data gathered through the Techaisle SMB Channel surveys in US, Europe and Asia/Pacific shows that half of channel firms that have launched cloud businesses are primarily focused on “cloud builder” activity, which in many cases is an extension of existing resale business, and which is leading the channel partners down the path of specializing in virtualization and converged infrastructure. This naturally bodes well for channel partners of Dell, VMware and even Cisco although it must be said that VMware SMB channel strategy is yet to take center stage and Cisco is most famously focused on midmarket customers.

The three approaches to establishing a channel cloud business covered in Techaisle study include:

  1. “Cloud builders” who are typically engaged in creating private clouds for customers,
  2. “Cloud resellers” who resell third party cloud capabilities (often, SaaS applications), and who may also integrate multiple third party offerings, and
  3. “Cloud providers” who have built their own infrastructure and are selling access/capacity to SMB customers

Cloud builder, cloud reseller and cloud provider approaches to building cloud practices within SMB channel businesses all address common SMB customer needs, but have unique challenges. Survey data also reveals that cloud optimism and success is highest among cloud builders.

“Cloud resellers” is the second largest cloud business approach. About one-third of US & Europe SMB channel partners with cloud businesses are primarily focused on reselling cloud capabilities but the proportion of “cloud resellers” increases to 39 percent in Asia/Pacific. However, many cloud resellers are still not very successful (see figure below) in their cloud endeavors, again proving the fact that simply reselling cloud solutions is not a viable long-term business.

The third approach, “cloud provider”, chosen by less than 1/5th of SMB cloud channel partners, offers a high degree of control but requires reserves of investment capital and operational expertise that are beyond many channel firms.

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2015 WW SMB IT spend nearing US$600B

Techaisle forecasts that global SMB IT spend could very well reach US$597 billion in 2015 which is an average of US$700 per full-time employee and slightly over US$8K per SMB business. Corresponding US SMB IT spend will most likely be US$180 billion in 2015. Techaisle defines SMBs with 1-999 employees.

At worldwide level, 42% of SMB employees will be mobile by end 2015. US will have the highest percent of SMB mobile employees at 53% and Asia/Pacific excluding Japan will be at 45%.

Going back a year, the 2014 combined cloud and managed services spend by US SMBs was US$48 billion representing 27% of total US SMB IT spend.

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The global small and mid-market businesses, SMB (1-999 employee size) market has been the growth engine for the IT industry at large. The reason is quite simply that SMBs account for over 80 percent of businesses in any country – developed or developing. And over the last few years there has been an ongoing change in SMB IT priorities – Techaisle calls this as “Value Shift”. It signals the change in priorities from Enablement to Empowerment and refers to the new priorities among SMBs to invest in tools and technologies that allow their employees to make better business decisions, improve market reaction time and better serve their customers. In other words, SMB business executives are looking to improve return on Human Capital as a way forward.

No doubt the trend is towards increased spending on cloud and mobility but there are some other key spending trends to note:

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Big Data in the Cloud - an ideal solution for SMB banks

Wall Street Journal carried an article on how regulatory burdens had made community banks “too small to succeed” despite performing better than larger banks regardless of being better capitalized and having lower default rates.

The advent of cloud technologies has the potential to change WSJ’s dire prognosis.

Cloud may have first been introduced as a means of reducing CAPEX and/or overall IT costs, but today, it is viewed by small and midmarket businesses as a means of increasing business agility and of introducing capabilities that would have been cost or time-prohibitive to deploy on traditional technology. Complementary to cloud, big data analytics presents the possibilities of connecting together a variety of data sets from disconnected sources to produce business insights whether for increasing sales, improving products or detecting fraud. SMB banks are a specific segment of SMBs who can derive the benefits of customer insight while meeting their mandatory regulatory requirements.

Techaisle classifies SMB banks as those below $10B in assets and medium sized banks as those between $10-100B in assets. SMB banks below $10B in assets often called “community banks” play a very important role in the ecosystem of SMB businesses. Although FDIC, OCC and FRB have different definitions of community banks, it is important to note that these smaller banks not only accounted for nearly half of the total of about $600B outstanding small business loans at the end of 2014 but also play a disproportionately major role in the $1.8 trillion residential mortgage origination market.

Unlike large banks, SMB banks are characterized by George Bailey in “It’s a Wonderful Life”. These banks usually have keen insights on their customers based on personal relationships and carry a tremendous amount of tribal knowledge about their customers which they use to make business decisions. While this corpus of knowledge may not be codified it does make a difference in their business operations. But is that enough in today’s hyper-competitive economy where the relationship is being increasingly controlled and dictated by customers?

Then there is another question, are these smaller banks doing enough to detect fraud? High-risk businesses that have been denied services by large banks tend to move their business to smaller banks who are less equipped to analyze these risks. These smaller banks are unknowingly exposing themselves to fraud as well as compliance risk. Regulations are agnostic to bank size and equally unforgiving of SMB banks as they are of large banks. A cloud-based analytics solution may just be the recipe for success for the smaller banks. In fact, these banks are no different than midmarket businesses (or even small businesses) in their objectives of adopting big data.

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Monitoring, analyzing and reporting very large volumes of data are typically the largest components of regulatory costs for SMB banks. Many often use antiquated technology and manual processes to manage their compliance requirements. Banks that are able to automate the process of managing data for regulatory requirements can have the added benefit of getting a unique view of their customers through one single technology solution.

According to Shirish Netke CEO, Amberoon, a provider of Big Data solutions for banks, “A lot of the data that is required for regulatory compliance can also be easily parlayed into getting insights on the banks customers and improving business”. Amberoon has built a banking solution for SMB banks provisioned on the IBM SoftLayer cloud.

Security & privacy (especially FFIEC requirements), traditional inhibitors of cloud adoption, are a legitimate concern for banks. After all, banks are the custodians of individual’s money, facilitators of trade and commerce and life-line of businesses. However, it may be argued that these inhibitors have already been successfully addressed by service bureaus. A very large percent of SMB banks outsource their core banking system to service providers such as Fiserv and FIS Global who have built very large scalable service bureaus with the economies of scale afforded by centralizing technology resources.

Aptly put by Noor Menai, CEO of CTBC Bank. “Outsourced technology services are nothing new in the banking industry. There is a compelling reason to use big data technologies in banks if they are available at an affordable cost in a secure manner. Cloud has the potential to provide both”.

Big data analytics in the cloud can be an execution advantage, and may even propel the SMB banks to leap ahead of larger banks on solutions that address both regulatory necessities as well as gain competitive edge from customer analytics. Historically, Siebel, an on-premise solution, was usually deployed in large enterprises and was out of reach for smaller businesses. Salesforce, a cloud solution, changed the perception, adoption, usage, affordability and provided immediate business outcomes. Today Salesforce is used by both SMBs as well as large enterprises.

Combining the benefits of cloud with the advantages of big data analytics may just be the prescription that SMB banks need for business growth (cross-selling, upselling services), meeting regulatory requirements such as KYC/AML/BSA and deep-diving into fraud detection.

One should also not forget that big data implementations require a unique combination of technical, operational and business skills to be used in a sustained manner. Needless to say, these skills are in short-supply but affordable by deep-pocketed larger banks. While some smaller banks including community banks can spend the money to experiment with big data pilots, they do not have the capacity to go through expensive iterations to get it right. While larger banks have the luxury of choosing between on-premise big data versus cloud big data, for smaller banks the choice could very well be between either doing big data on the cloud or perhaps not doing it at all. The remaining question therefore is – which big data cloud supplier will take the lead in educating, evangelizing and then executing on the needs of SMB banks.

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