Why small businesses matter

To my first assertion – my scepticism that this bonds scheme will actually help small businesses. Remember that the “SME” category is actually a very broad church. The usual definition is a business with less than 250 employees. There are 1.17 million such private enterprises in the UK generating about £1.29 trillion per year in turnover¹.

However, 1.02 million of those are micro businesses (under 10 employees), and such businesses tend not to have the best growth prospects; Britain’s fish-and-chip shops and car garages. The real powerhouse of economic growth is the 204,000 small (10-50) and medium (50-250) sized businesses who have already demonstrated their ability to grown beyond the micro stage. The former account for £470 billion per year (bn/y), the latter for £430 bn/y, further demonstrating their status as the “gazelles” of the economy when compared with those million-odd micro businesses who do a paltry £404 bn/y between all of them.

What I expect is that the proposed measures will help the medium-sized businesses, which is all well and good but that is only 30,000 companies. The real boon to the economy would come from supporting the 170,000 small businesses which have the most growth potential. However, speaking as one of those businesses (we employ 25 staff) I can report that there is no appetite among banks to lend to such companies without asking the directors to guarantee the loan – impractical for those of us whose livelihoods is their business – and I cannot see this approach changing that since it would rely on the existing banking systems to do that, and the banks remain entirely risk-averse.

Memset: a case example

To give some context so that you don’t think we have struggled to get finance for good reasons; we are an extremely successful multi-award-winning, multi-million pound company, growing at ~40% compound annual growth rate while simultaneously accumulating significant cash – impressive in any economic climate. We have had steady, profitable growth for 9 years and are ranked 7th in our industry of ~200 for commercial and financial strength². We want to borrow to bolster our own reserves in order to invest in infrastructure and grow even faster with our sights on global exports. The best Barclays could offer, without us guaranteeing the debt with our homes was a £200,000 loan, provided that we left it on account with them. I kid you not.

Cloud: A golden opportunity for Britain

While this might seem self-serving, I passionately believe is is important for the UK information and communications technology (ICT) industry as a whole, and as an extension to that I believe it is important for UK PLC. Following the demise of financial services, retail and construction as previous “engines of growth” for the country, and a recovery in those sectors looking unlikely in the near term, the country should be looking once more to our strengths as innovators. More than any other sector, ICT has the potential to be a real new engine of growth for Britain.

Further, now more than ever the opportunity is enormous, especially in the cloud space. I pick cloud because it is especially suitable as an export, something which we need in the UK, and because it is the fastest growing area of ICT. Gartner have predicted that the infrastructure as a service (IaaS) global market will grow from $3.7 billion in 2011 to $10.5 billion in 2014³. Currently about a third of that is believed to be Amazon Web Services, so there is lots of room for new players.

Gartner also forecast that the global Software as a Service (SaaS) market will be $12.1 billion in 2011, and that market is growing by 21% annually⁴. If that growth continues the global SaaS market will be $26 billion in 2015. Add in IaaS and an estimate for Platform as a Service (PaaS) at $5 billion⁵ and the global cloud services market could easily be worth over $40 billion by 2015.

Western Europe already has $2.7 billion of the SaaS revenue, predicted to grow to $4.8 billion in 2015. At 23.3%, Western Europe’s market share is growing faster than the global market (ie. we are gaining market share), and most excitingly growing faster than America’s at 18.7% (SaaS growth).

These are serious numbers at any scale, and as a country we are uniquely placed, both literally and in terms of economic cycle, to take advantage of the opportunities for global export of cloud services and the rapid revenue growth that would bring. One could easily envisage us within a few years being a major hub of cloud services, serving the American and European markets.

I’ve seen estimates of Britain’s share of the current global cloud market at about 10%. The source was part of a Chattham House rules presentation, so I cannot share it, but that would mean we have 44% of Western Europe’s market which seems plausible with a little squinting. In that case, if we get our act in gear and merely hold on to our share then by 2015 we could have $4 billion of the global cloud market. If we grew our market share as well then perhaps we could get to $6-$8 billion by then, which would be about 0.4% of British GBP (though there are a lot of “if’s” in there)! Given that the Treasury only expects GDP (the entire economy) to grow by 1.2%⁶ in 2012 these are potentially significant numbers. Further, cloud is just one of many exciting technology areas in which we excel, high-tech manufacturing being another. However, that vision will not come to pass unless some things change.

The high-tech brain drain

The problem is that we keep selling our golden geese! I was recently on a UKTI cloud trade mission to Silicon Valley with a bunch of other cloudy entrepreneurs. That illustrious company reminded me that we as a nation are awesome technology innovators; let’s not forget that (despite what VMware’s propaganda would have us believe) server virtualisation was pioneered with the Xen Hypervisor (hypervisors are a key technology underlying compute clouds) under Dr. Ian Pratt at Cambridge University, UK, in the late 90′s.⁷ Today, Xen is owned by Citrix, an American company, and to my dismay many of my fellow cloud missionaries were intent on seeking US investment – yet more great technical innovation being siphoned out of our shores.

The problem is two fold: First, there is a gap in the UK funding market. Fast growing small businesses (as defined above) usually need cash, but in the £2m-£10m range (roughly 10-50 people for most ICT firms) banks are not lending and the companies are too small to float on an exchange (aka “go public”). This means that those companies have to turn to venture capital, and those institutions almost always insist on a sale in 3-5 years to reap their profits. Those sales are almost always to larger, American firms.

The second part of the problem is culture. I am extremely unusual among my British technology entrepreneur peers in that I have my sights firmly on the big game. My ambition is to take Memset to the global market and have us become the next Autonomy or ARM. That means we eschew VC funding since their goals are far too short-term. My fellow entrepreneurs however, almost exclusively, believe that the way one does business is the above – get going, get VC funding, sell for a few £m, rinse and repeat (if they are serial entrepreneurs, otherwise sit on a beach I suppose). We need to challenge that culture as well and reignite our faith in our ability as scientists and technologists with outstanding skills in innovation.

An alternative

What I would like to see is Mr. Osborne using those £billions to set up a government-owned bank with the specific mandate of lending to small businesses with a proven revenue model who could accelerate their growth with additional capital. I foresee such a bank facilitating the development of our own “Mittelstand” – the German-owned SMEs that are the powerhouse of the German economy. Such a bank should not be run by civil servants, whose track record is no better than the bankers’, but by private sector professionals with expertise in high-growth SMEs.

Measures to get part-publicly-owned banks to lend (project Merlin) have failed in my view. Further, politicians are still, amazingly, operating under the misapprehension that schemes like the Enterprise Finance Guarantee are working. They are not, and similar complex schemes will just once again allow risk-averse banks to hide behind the mechanisms and not actually do what we need them to do: share a small amount of the risk with us, the golden geese, and in doing so allow us to fulfil our potential as drivers of economic prosperity.

Update: Seems I’m not the only one thinking this: “Credit easing plans ‘must go beyond the banks’” – Telegraph

Blogging, microblogging and social networking services are rapidly growing in use by business. Can they be beneficial to businesses or are they a pointless waste of time? I take a detailed, frank (I may rename this post “How to lose friends and alienate people on Twitter by being too open about my calculating approach” ) and balanced look at one of the biggest, Twitter, with some tips on how you can make strategic use of it and blogging.

According to a recent 02 survey, an estimated 700,000 small businesses are using Twitter with 6,000 joining everyday. The numbers certainly suggest that it is more than a craze, but there are plenty of examples of companies just jumping on the latest band-wagon, so is there real value in such tools?

Being human

I’ve found that having a ‘face’ on your business is really important. As the old sales adage goes, “people buy from people”. It might sound a little odd coming from a technologist who is a firm believer in the future of the cloud IaaS market as an automated, interoperable commodity market place much like the electrical power grid is today, but we are not there yet and even then there will always be people and values behind the companies.

Therefore, about four years ago I decided to borrow a leaf from the US IT entrepreneurs and put myself firmly and visibly out there as the face of my company, Memset. That started out with putting a bit of information about me and the management team on our Web site, with pictures, and me starting this blog.

Another part of that strategy was also to ramp up our press relationship effort. I think of my professional blog and PR in a similar vein, and with a similar purpose. Making myself available to journalists was particularly key, since often the easiest way to get some coverage is to get a sound-bite in someone else’s article, and the blog posts often helped with that too. It was a place I could voice an opinion and, slowly at first, I started to get picked up on that.

So, now our new customers were not just buying from a faceless corporation, but from an organisation run by a real, accessible (I also put a direct email address on our Web site) human being, with views and opinions that were starting to gain traction in the technical press as well. While it is not quantifiable, I am confident that contributed significantly to our early success and helped us, as a small company at the time, punch above our weight.

Shorter, faster, more interactive

Today I use Twitter a great deal as well, and in many ways it is achieving the same things as my blog but in a more real-time, bite-sized manner: micro-blogging. I see two purposes to my work Twitter account, @Memset_Kate:

1. A promotional tool
2. A place to ask questions (and get answers)

Here I am mainly looking at the first element, using it to raise your or your company’s profile, but the second element is also very important to me. Twitter is a fast, convenient way to plug into the collective wisdom of people with similar interests, in my case mainly around technology. For example, if I were looking for a new software package for a task, Twitter would be my first port of call. In fact, I value that distilled wisdom so highly that I recently launched Tweet Download™ since I wanted an easier way to preserve my tweets and others’ replies.

Many people also advocate Twitter as a way to plug into news, but personally I find subscribing to a sensible magazine (The Economist and New Scientist being my personal choices) or Web site much more effective and less time consuming.

Twitter is quite different to a traditional blog in a number of ways beyond the obvious brevity and frequency. With a traditional blog it is helpful to engage with commenters, and to get something of a dialogue going, but that is by no means the core of what it is about. Twitter is all about the dialogue though, and if you just post tipbits of information but never engage with your followers you’ll fail to reap the benefits.

As with more static Web content’s ability to humanise an organisation if used correctly, Twitter enables us to again plug into something that people enjoy and which makes them feel more comfortable about other people (and thus organisations): conversation. Also akin to our natural interactions, Twitter is a collective of inter-connected communities, but with the added feature of popularity being quantifiable (ie. follower count), and that is important if you want to use it to leverage your brand.

As with any social circle, in order to be liked and make friends you need to do certain things: say interesting stuff, help others out, and engage in the conversation. Most Twitter users want to be popular, and you can therefore gain favour by mentioning them, replying to them or retweeting them in your stream. In return they are more likely to engage with you and return those favours, helping you raise your own profile. In doing so you become more popular, and what happens with to the popular kids? More people want to be their friend.

Keeping it real

Before continuing with the mechanics of online social interactions it is worth mentioning topics. With my blog I found it best to be mainly focussed on a narrow range of topics (green technology, hosting, business, cloud etc), but I still try to write openly and frankly, and I do write the articles myself. I firmly believe that it is important to be yourself – a real person – when using such tools. Too often you see blog posts that are clearly generated by a PR department, or done generically from a company, and I think they are missing that important objective of presenting a personable face.

With my tweets I take it a step further and do sometimes touch on personal stuff. Now I’m not advocating a blow-by-blow account of what you have for lunch, but as part of presenting oneself as a real person (not a corporate suit) I believe it is helpful to let one’s followers in a little bit. Have a look at my twitter feed for examples of what I mean.

Being a bit of a bitch

Unfortunately, however, we can’t be friends with the whole world. I have a couple of thousand followers and little time to spend chatting to them. The key to making successful use of Twitter is to be selective, though ideally without showing yourself to be thus. I have a number of steps in the process, and they revolve around an approximate ranking system for how valuable I think someone is, a lot (but not all) of which comes down to how well-connected they are:

1. Followers:followee ratio – if someone is followed by more people than they follow it is a good sign of a high degree of quality and/or influence.
2. Are they a journalist?
3. Are they someone senior in my field of interest?
4. Do they interact bi-directionally with a journalist or someone senior?
5. Do they talk about relevant topics (vs. “I like cheese!” / political rants / etc.)?
6. Do they know their stuff (vs. “Blah blah cloud, blah blah cloud, blah blah platform”)?
7. Have they helped me out already, eg. by re-tweeting me?
8. Do I feel I could have a rapport with them?

I cannot remember exactly who I should be making the effort with at any one point though, so I have some techniques and tools. First, I only follow back about 50% of people who follow me, and I’ve delegated that task to my PA since I get an awful lot of new follower requests. That gives people a warm-fuzzy feeling of mutual interest, but I must admit that is a bit of a deception.

In reality I rarely look at my “all friends” column, instead I have a private group, “faves”, as a column in Tweetdeck (a great application for those serious about Twitter – the Web site alone is insufficient) to which I add people with which I think it is worthwhile interacting. I then focus my attentions on tweets appearing in that column, as well as my mentions column of course. If someone is talking to you then it is important to reply, and usually not time-consumptive unless you allow yourself to be drawn into pointless debate (“Someone is wrong on the Internet!”).

In terms of choosing who I follow, other than people who follow me first, I use the same targeting rules as above. If there is someone who often gets re-tweeted or mentioned by other people that I deem of high value, then I’ll tend to follow them and make the effort to get into their online social circle.

This may sound all rather conniving, but is it any different to how we act when in business networking situations? We seek out those who are on our social level which can help us be noticed by the people with more influence in hopes of elevating our social position. Also, one has to be a bit hard-headed about this sort of activity, otherwise you risk allowing a highly addictive and fundamentally unproductive diversion to end up costing you a lot of valuable time.

Staying in touch

Unlike blogging, Twitter and such does have another very important ability: to help the dialogue with your customers. If a customer has a problem with our services they are much more likely to moan about it on Twitter or a forum than they are to send in a complaints email, and that is fantastic since it gives us an opportunity to publicly stand up for ourselves or, where necessary, apologise. Equally, when someone praises your business you can leverage that, and often people ask others’ opinions on brands via tools like Twitter, and without a presence you will be unable to react to such queries.

We encourage our systems administrators to assist on some forums partly for that reason. Forums are just another online social network, but with a very specific topic, and they are a great way to gain exposure and demonstrate your expertise if you are willing to put the effort into the interactions.

The future

So, do I believe in the future of social networking as a business tool? In short, yes, but I am unsure as to what extent. I think that it can be very helpful right now, but I think the social networking landscape may be changing. I also use Twitter heavily in a personal capacity, to organise nights out with friends and keep up with them, but that is a very private account. My friends, most of whom are in their twenties, and I are increasingly locking down our Twitter and Facebook accounts, dropping “unknowns”, making them private/”friends only”; keeping ourselves to ourselves.

Therefore, I do wonder whether the novelty will wear off in time; whether we will return to principally interacting privately with people we know in the flesh, using online social networking as an augmentation to those meat-space interactions and largely ignoring strangers. There is a danger that the current Twitter-boom is partly driven by people like the work-me, or those of you reading this article, trying to get a leg up for themselves or their business.

For several years now, we’ve been running all our business systems over the ‘net  (including instant messaging, email, document management, project management & collaboration) by using open source software. Both Nick & I are huge fans of open source, so I thought I’d share why and how we use it within Memset.

As of 2008, 85 percent of businesses were using open source software, according to Gartner. That percentage has probably increased since then as more and more businesses find that they consistently get great value – and the desired ROI – from open source software.

We turned to open source for a number of reasons:

• Price. You don’t need to pay licensing to Microsoft anymore, simply download the open source software and install it, and don’t pay a penny. Furthermore, you usually get unrestricted access to the source code enabling you to modify it to suit your requirements.
• Flexibility. Once you have the software installed you are free to host your applications wherever you like. This means you no longer need to put all your information in one basket, say with Google, so instead you’re able to separate the software from the host and own your own data. A good example of how to achieve that would be Zimbra; an open source suite of office applications which can be hosted by any managed hosting provider. We have customers who rent a virtual machine from us and have us install Zimbra on it.
• Improved Productivity. By using open source software and adapting it to suit our needs, with fairly minimal development effort, we’ve been able to build on those foundations to automate a large number of our processes such as account billing, administration, provisioning, maintenance and monitoring activities so that they require very little staff input.
• Desktop Free. Because they are all Web based it makes it really easy for people to work from home, or anywhere for that matter. We have now migrated most of our staff to ‘nix-based systems (mostly Linux, but some of us use MacOS), and all they need is just a browser and an email client. Firefox & Thunderbird are certainly enterprise-strength, for example, and there are plenty of solid open source server-side solutions.
• Increased Security. In my opinion, open source applications tend to be even more secure than their commercial equivalents as open source communities are generally able to find and fix security vulnerabilities much quicker than their corporate counterparts. The very weakness pointed out by software companies like Microsoft (ie. that the source code is visible) is in reality its greatest security strength.

But what if it stops being supported?

Perhaps the biggest objection to open source I hear is, “But what if the solution I’m using stops being supported by the open source community?”. First off, you have this problem with commercial software; what if the supplier fails, or in the case of one like Microsoft what happens when they change version and stop supporting yours.

That is not the real answer though; one of the real beauties of open source software is that it is designed to be, well, open. All the solutions we use (see below) are based on open database architectures (often MySQL) with lots of documentation, so that even in the worst case scenario of the package no longer being supported, all of our business information is available in an open, accessible format, requiring only a little DBA time to extract. Try doing the same with a proprietary software’s internal data base!

Also, because the solutions are self-hosted (ie. you’re getting the software from someone other than the person providing the hosting) you are in total control of your own data. We do not use Google Docs, for example, mainly because I don’t want all my company information to be stored on a random server somewhere in the world with no guarantees of security.

Example: TRAC (Integrated Project Management & Wiki)

We use a mixture of in-house developed system and open source solutions such as Trac (project management & Wiki) and Sugar CRM to deliver an interlinking suite of information management tools which are available to everyone in the company.

Customer information is stored in a master central database, and by using rapid software development platforms like Django we have been able to quickly and cheaply add all the features and tools we need with our own internal development team.

However, the key element in the context of information management is probably our Wiki; it contains all procedural information and the distilled wisdom of the people in the company. You get complete version control and logging for free with the software, and those built-in auditing features helped make getting our ISO9001 accreditation a breeze.

Trac is invaluable for sharing information between teams, keeping track of changes to documents and projects, listing outstanding issues, assigning jobs and creating visibility of each others’ workflow. Being able to have an organised central location where everyone can go is great. It is certainly a lot better then trying to pass around .doc files from one person to the other, or constantly uploading and downloading .doc files to and from Sharepoint and having to worry about out of date versions. And, as its Web-based, you can access your data online from any computer, anywhere, secured and encrypted over HTTPS.

Example: SugarCRM

Sugar OS is an open source CRM application bringing a feature-rich set of business processes that enhance marketing effectiveness, drive sales performance, improve customer satisfaction and provide executive insight into business performance.

At Memset we use SugarCRM to improve productivity and sales effectiveness through the sales lead management functionality.

Example: Request Tracker

RT is an open source issue tracking and workflow platform. We use this software for all our customer technical support. It allows us to keep track of and assign assign tickets and to monitor who is working on which tasks, what’s already been done and when the tasks were completed.

Example: Openfire (chat)

Openfire, is an open source XMPP/Jabber server for instant messaging. Sure, you could use MSN, but we prefer not to have Microsoft listening in on our corporate communcations. We self-host and fully encrypt our internal instant messaging chat.

These are just a small selection of the open source solutions we have implemented at Memset. Also, despite us having a lot of technical know-how, you really do not need to be an expert to use these open source systems.

Even if you do not have the very basic systems administration skills in-house there are plenty of companies like Memset who will happily host and manage these services for you, while still giving you full control and data-ownership. With more and more companies looking to Cloud-based business management services like these, open source really is coming of age, even for the most security-conscious companies; Memset is fully ISO27001 certified and can ensure that your business-critical data remains 100% under your control, within UK borders.

Open source should be considered as a viable option for your business as it provides better value for money, lower costs, increased productivity and improved security.

What is Cloud Computing

Cloud computing can be regarded as essentially the provision of computing resources and/or software as a utility, in the same way that your small business uses familiar utilities, such as electricity, water, gas etc. Cloud computing enables you to pay for computing resources as you need them. These services are provided over the internet, on a consumption-based pay-as-you-use model, with short-term contracts and without up-front expenditure.

Cloud computing enables applications, documents, emails and other information to be hosted/stored and managed online or ‘in the cloud’, making them accessible from any PC, laptop or mobile device, and importantly, in real-time. It also negates the need to download or install dedicated software on your own computer, making home working simpler and reducing the need for powerful PCs (and therefore cost). A more technically detailed definition of cloud computing is here.

The Benefits

There are two major benefits of cloud computing. The first is cost saving. Cloud eliminates the need for major IT infrastructure investment, both in the office (less need for powerful PCs) and in the data centre, improving your cash flow. It is also generally much cheaper than the traditional software approach. This is because cloud service providers are operating at massive economies of scale and are able to pool their resources and provide shared services, reducing their costs dramatically, which are in turn passed on to you the user.

Today there are very few organisations that should need to own and manage their own servers in a colocation facility, and it is certainly much more expensive for SMEs to do that themselves. Moving applications to the cloud can enable you to greatly reduce your upfront capital expenditure and slash maintenance costs.

The second is that you and your staff can access your company data, securely, from anywhere in the world. Both of these benefits will result in a major shift in the way that businesses of all sizes use computers. However initially it will be SMEs that benefit the most.

Many businesses are also now turning to cloud computing as a cheaper alternative to using traditional in-house software packages. Many Web-based cloud software services, hosted in a secure data centre, end up costing a lot less in terms of licensing and save the time and hassle involved in downloads and upgrading.

Cloud computing is also energy efficient. Cloud providers are highly motivated to reduce the power and hardware required to supply their services, and are running at sufficient economies of scale to achieve great efficiencies, which in turn reduces the costs to you. When it comes to ICT, saving money and being green are synonymous. Also, having your software Web-based enables home working and can cut down on commuting.

Worries Over Security, Availability, And Performance

The risks, of course, concern the reliability and security of cloud-based systems. With a number of high profile outages last year by providers such as Amazon S3, Google Docs, MobileMe and Twitter, SMEs are right to be cautious.

A major issue with the Cloud at present is security. However, it need not be a big concern, you just need to apply the same common sense you would to sourcing any other service. Ask questions about your prospective cloud supplier; Are they financially sound? Do they have good security procedures in place? Is the infrastructure your data will be on shared with lots of other users, or will it be in its own virtual dedicated environment?

SMEs need to look very carefully at where their data is going and who is responsible for it and they need to know it is well managed. There are plenty of British companies providing secure and cost-effective cloud based services, so just be sure to ask those questions.

If you do need to store documents, I would encourage you to do it yourself. Simply rent a server with suitable software from someone UK-based that has solid service level agreements (SLAs). You certainly don’t pay more; we can help you get setup with open source Wiki software like Trac for central knowledge sharing, document sharing and collaboration, for as little as £60/month, securely hosted on your own dedicated Miniserver VM^® at our data centre in Reading.

Tips for Moving Into the Cloud

Once you’ve weighed the pros and cons, you may be ready to take your first steps into cloud computing. Before you do, consider these tips for making a smooth transition into the cloud computing world.

Do:

• Think Big. Cloud computing is inherently scalable, which means that you can select your own level of engagement and upgrade at your own pace. Make sure your service provider will enable you to scale up your computing resource as your business grows.

• Read the agreement closely. You’ll most likely be shown an electronic contract at the outset. Read it carefully to ensure that you know what you’re paying for, what the service provider’s privacy policy is, what the availability guarantee is and so on.

• Listen to peers. Seek to learn from the experience of other organisations within your business community who have already achieved successes with cloud computing.

• Think strategically about your applications. You should decide which cloud applications will deliver the best ROI and prioritise these.

• Assess security. Ask direct questions about where your data will be stored and who will have access to it. Some providers also have 3rd party security accreditations which can give you additional reassurance.

• Make use of the subscription model. When applications run in the cloud, services are ‘rolled up’ into a predictable monthly subscription, so make sure you are not being lumbered with up-front costs.

• Consider open-source solutions. Look for ways to use free or low-cost cloud tools instead of more-expensive ones. For example, we use Postfix with Thunderbird for email, Trac integrated project management and Wiki, Sugar CRM for customer interaction and Jabber for secure individual and group instant messaging. By self-hosting these apps we’re not getting locked into paying ‘per-seat’.

Don’t:

• Not know where your data is. Users who do not know where their information is held at any given time, especially when its being stored on virtualisation systems and multi-tenancy storage area networks are making themselves vulnerable to security breaches.

• Get locked in. One of the main benefits of cloud services is that they come with little or no contract term which means you can change should the provider prove unreliable. If you are being asked to sign up for more than a few months at a time, something is wrong.

• Forget to ask for detailed security programs. Avoid any vendors that refuse to provide detailed information on security programs.

• Give in too soon. To realise the cost savings that cloud computing can deliver, you do need to be thinking about using it on a long-term basis. By significantly reducing upfront capital expenditure and management overheads, cloud computing allows SMEs to make IT investment plans, which deliver value and success over the long-term. Sometimes there will be transition pains, but it will be worth it in the long-term.

• Go with the first provider you find. Most services offer a free trial or a short term contract, and you can usually figure out quickly whether the user interface will drive you mad or is easy to use. Evaluate more than one service before deciding.

Now is an ideal time for SMEs across the UK to switch to cloud computing. The traditional software approach of installing local applications without built-in scalability and mobility is becoming out dated, and will increasingly hold back your business by depriving you of the flexibilities and cost savings afforded by cloud solutions. Further, this period of austerity where everyone is seeking to make cuts can be an ideal time to make the case for change to reticent colleagues.

The role of cloud computing in government IT – an introduction to the large G-Cloud and App Store project under way in the UK; what the UK public sector hopes to gain from a cloud approach, an overview of the proposed technical architecture, and how to deliver the benefits of cloud while still meeting government’s stringent security requirements.

To watch the video of my presentation, click here:
[See post to watch Flash video]
© http://oscon.com Kate Craig-Wood (Memset), “The Government and Cloud” under a Creative Commons license

Following my presentation I joined the panel to debate ‘A Cloudy Feature Or Can We See Trends?’

The panel of experts, including  Dion Hinchcliffe (Dachis Group), Tim O’Reilly (O’Reilly Media, Inc.) and JP Rangaswami (BT Design) discussed what’s next for cloud computing, what implications cloud creates, the role of government and what changes are we likely to see?

Questions

• Is cloud inevitable?
• Will anyone win the cloud?
• What national impacts will cloud have, will there be government regulation?
• Are we heading towards a permission based web?
• Are there any dangers you forsee?
• What’s next?

To see the video, click here:
[See post to watch Flash video]
© http://oscon.com Kate Craig-Wood (Memset), Dion Hinchcliffe (Dachis Group), Tim O’Reilly (O’Reilly Media, Inc.), JP Rangaswami (BT Design), “A Cloudy Future or Can We See Trends?” under a Creative Commons license

1) Corporation tax. I greatly welcome the reduction in corporation taxes; 22% to 20% for the profits under £300k, 28% down by 1% per year to 24% in 4 years. The stated intent was to boost the attractiveness of business in the UK. Also, speaking for myself, less tax will enable us to invest more in Memset, growing the business faster and creating more jobs. However, these reductions in corporation tax will largely be offset by changes to capital allowances.

2) Depreciation & capital allowances (AIA). The limit on deprecation for tax purposes has been changed from 20% to 18% (5 years to 5.5 years). Given that IT equipment depreciates at more like >33% in real terms this is a bit of blow since capital-intensive IT companies will end have to pay more tax up front, which will further reduce our growth rates.

Therefore, while a little esoteric, this is certainly bad news for British managed hosting and cloud computing providers like Memset. It will also makes it harder for us to compete on the world stage, especially when the weak pound and the fact that all computer hardware is imported is taken into account. Our international competitors are allowed to depreciate their equipment at realistic rates and pay less for it. Unfortunately, IT seen as a service sector by government, and they do not appreciate that we are an industry with plant machinery that has a very limited shelf life.

Also, the Annual Investment Allowance (AIA) on investment in equipment has been slashed from £100k to just £25k which will especially hurt small IT and manufacturing companies. It was only increased from £50k to £100k in April, however, so in reality it is only a halving of what was already a pretty small allowance. From my perspective as an Infrastructure as a Service (IaaS) provider, this will probably discourage people from owning their own hardware so not necessarily bad news for us!

3) Loans for small businesses. The Enterprise Finance Guarantee scheme (EFG), which guarantees small business loans to mitigate the risk to banks, is being extended from £200m to £700m. However, the EFG as it stands is broken. It was supposed to help banks lend to entrepreneurs without requiring large personal guarantees, but the banks are not honouring that and still will not share any of the risk. The EFG needs fixing before it gets extended, but there may be a silver lining in the form of a vague promise to lean on banks to lend more to smaller companies.

The newly announced “Growth Capital Fund”, also supposedly intended to fill the growth capital gap, seems far too small a measure to be generally useful at only £25m.

4) Entrepreneur’s relief. As you would expect, I am pleased that the £2m entrepreneur relief being extended to £5m gains over a lifetime. Entrepreneur’s relief is a Capital Gains Tax (CGT) concession, limiting it to 10% when selling a company, up to a certain value over a lifetime, which replaced the old CGT taper relief scheme. Since CGT is being raised from 18% to 28% this is especially pertinent.

Although I’m not looking for an exit any time soon, this scheme is important to encourage new entrepreneurs and investors. To attract bright, talented people away from more normal, safe careers the allowance needed to be in that higher range – the old taper relief scheme was one of my motivators for starting Memset. It is worth noting that entrepreneur’s relief only applies where you own more than 5% of the business.

5) VAT. On a more personal note, I also welcome the VAT increase to 20%. Taxation at the point of spending is one of the fairest taxing methods since people can choose. Most essentials (food, rent, kid’s clothes) are already VAT free, and it is only 5% on gas and electricity. Essentially it is a tax on buying luxuries, and if you want to be a saver you don’t have to pay it.

Also, as we saw with the VAT reduction, a change of 2.5% in the headline price of consumer goods has little impact on consumer spending. It will not affect most businesses significantly either since we can pass is straight through. As for the admin burden of a change, having done it twice recently means we are well-practiced so it should not be an issue.

6) Government carbon commitment. Finally, snuck into the document is a commitment to cut government’s CO2 emissions by 10% between May 2010 and May 2011. I think this is great news; it is about time our government started leading by example. Also, I believe this could be a great opportunity for the IT sector as we enable many carbon-saving technologies (eg. teleworking for car transport avoidance).

Overall, I am pleased with this budget. It was tough enough to hopefully get us out of our enormous national debt, does not dramatically cut back on the public services from which we all (as opposed to just those supported by the state) benefit. It also supports businesses small and large, giving us a real chance to be the engine that will lift us out of financial troubles.

1) Pushing RBS and Lloyds to lend to small businesses. Despite a healthy, profitable and growing business, we have not been able to get borrowing from any banks under the EFG without providing personal director’s guarantees. We need banks to be willing to share at least a tiny portion of the risk, otherwise we may as well just extend our mortgages even more. As a cloud computing provider we are very capital intensive – our growth rate is limited by cash availability more than anything else. Without borrowing our growth rate is capped at what we, the directors, can afford to leave in the business.

2) Tax breaks for entrepreneurs. I’m pleased to see the increase in tax allowances, however the only significant of those is the freeze on capital gains (we feared it would return to 40%). Doubling the entrepreneur’s allowance to £2m is pretty feeble (Labour capped the old taper relief scheme at £1m, and it was one of the main reasons I started a business – it was a way to avoid 40% tax). The investment allowance doubling to £100k is also only really going to help micro-businesses. The increase in R&D enhanced allowance from 150% to 175% is also helpful, but pretty minor. However, overall the set of allowances means it financial sense for me to keep investing most of my personal wealth back into my business to help it grow as fast as possible rather than sticking it in BASIC countries.

3) More STEM places. I’m pleased to see that they are hearing our (high-tech sector’s) desperate need for science & maths graduates, but that must not come at the expense of university-based “blue sky” research! At present the budget states an intention to create 20,000 new STEM (science, tech, engineering & maths) places, but it looks like most of the money for that will have to come from further cuts to already-overstretched university budgets.

4) Tax breaks for the games industry. It is fantastic to see support for our computer games industry. I have long been frustrated with how much of our top computer programmer and design talent gets poached by foreign companies operating in friendlier environments. Online entertainment is undoubtedly one of the big industries of the future, and among a number of high-tech areas of growth like those identified in Intellect’s Making Britain GreaIT Again publication. It is vital that we support this technical-creative hybrid sector.

5) £6/yeay levy on phones towards superfast broadband. Nice concept, but no where near enough. Only 70% of British homes have broadband at present, and to get high-speed broadband to the majority of homes will cost in the region of £15-25bn pounds according to the likes of BT and the broadband stakeholder group. A fast digital infrastructure is vital to enable turn Britain into a innovation haven, supporting out high-tech industry

6) 15% increase in government contracts to SMEs. This is good news, especially since government contracts all too often are dominated by a small number of very large providers who deliver debatable value for money! However, government procurement processes are vastly over complex and often prohibitively expensive for smaller companies, which is often why the public sector end up paying a premium to the usual suspects. A change to this, at least in the ICT world, is the G-Cloud programme. It should enable smaller, more agile companies to interface with government and provide their services without the usual massive sales-admin burdens (I hope!).

In short, I was fearing that the baby would be thrown out with the bath water in this budget, with a drive to increase taxes and cut costs accidentally crushing the one area on which we are likely to depend for innovating our way out of national debt (high-tech SMEs). Given the likelihood of a hung parliament that was all the more important, so overall I think we can breath something of a sigh of relief.

An impressive amount for a technology startup with no clear means of generating revenue, so I thought I would do some calculations of my own:

Twitter has about 18-20 million users in the US, according to Mashable

Earnings, earnings, earnings

There are 300m people in the US and 750m in Europe. Let’s assume that the ratios are the same for Twitter users. Therefore, the total number of Western Twitter users (ie. people who would potentially pay for anything) in 2010 is:

(20m / 300 ) * (750 + 300) = 70m users

To justify a $1bn (£625m) valuation they need to be able to realistically generate at least 5% of that as profit (20x earnings multiple, which is basically unheard of outside blue chip corporates) ie. at least $50m/year.

Therefore, in round numbers, they need to be able to realistically expect (in future) to generate earnings (profits) of $0.70/year from each user.

So far, perhaps not unreasonable; once micro-payment systems start working properly one could imagine users paying a notional $0.10/month to use Twitter, or advertisers paying that per user, at least so long as Twitter is the only one of its kind.

Twitter ain’t so special

That is where we realise the valuation’s big flaw: Twitter is not doing anything special. To build another system that replicates their functionality would, in my opinion, take 2 good coders, 2 good system administrators and one good web designer 6 months, tops. Add in some management and marketing capability for operational running and if you are a generous employer your wage bill might be £500k/year ($800k).

What about hosting costs? Well what it boils down to is a large and very active database:

Assuming 100m users
100 reads & 10 writes per user per day
= 10 billion reads & 1 billion writes per day

Squeeze into 16 active hours (just looking at the West)
= 120,000 read & 12,000 write transactions per second

To host a system which is capable of those transaction levels you would need at most 100 1U quad-core machines loaded with RAM (eg 24GB), costing £200/month each, or £240k/year ($385k).

So, I reckon that Twitter’s operational costs should be under $1m/year. But what do I know, right? I’ve only been designing, building and hosting massively automated online business systems for a decade, not to mention being one of the UK’s leading tech entrepreneurs.

A more rational valuation

So why are Twitter’s investors valuing such an easily-and-cheaply replicable business so highly? I suppose that they are banking on a land-grab effect and user stickiness, but we have seen what is happening to MySpace’s diluted popularity faced by new competitors.

When faced with such valuations I fall back on common sense and base the valuation on a cost-plus revenue model, ie. “what would it cost to provide the service, plus a modest profit margin”? All businesses and markets eventually commoditise down to that price point after all, and such commoditisation can happen very rapidly in the online world.

Viewed from that perspective I estimate that Twitter’s services are probably worth about 1.4 cents per user per year at present (estimated $1m/y running costs divided by 70m users). Lets be really generous and assume that they are able to generate 50% profits on that (first-mover advantage etc), so we get $500k/year profit, which at our mentalistic 20x valuation ration would give a valuation of a whopping $10m (£6.25). Hmm.

But that can’t be right?

I admit, I am taking an extremist point of view, and commoditisation of this very new and innovative sort of service is almost certainly several years away. However, defaulting to a cost-plus business model does demonstrate the likely value of such services when the competition have all caught up, and in Twitter’s case it is not a terribly exciting outlook.

Further, the valuation is being extrapolated from a $50 million purchase for a minority share holding. That investment was possibly more about getting a seat on the board than about a real valuation of the company.

Finally, and call me a cynic, but most investors are in the business of making a large return on a high-risk investment with a short time-horizon. One of the ways that happens all-too-often in the technology sector is less about yields and more about a business’s price getting hyped as high as possible before the savvy investors get out. Some some poor sap is then left holding the baby when commoditisation or better-competition comes to bite, exposing the lack of substance behind the valuation and causing the valuation to tumble.

Eye of Google

That is Twitter’s fundamental problem, to repeat myself: It is nothing special. Google (for example) deserves its outrageous share capitalisations because they have a unique technology which gives them an indomitable lead in the market place. Twitter is little more than a non-realtime Web-based chat room, and its technology would be trivial to replicate. Expectedly, the behemoth that is Google has indeed turned its lidless eye on chat-like status-updates in the form of Buzz.

To my eyes, their strangle-hold on the consumer Web-services market remains unchallenged by the likes of Twitter. The only interesting thing I’ve seen, however, is that their master-plan to crush Microsoft by making the browser the new platform was perhaps hiccoughed by Twitter in the form of software like TweetDeck – an example of Web services reverting to local software clients. Perhaps the browser is not quite ready for everything we want to do just yet after all, but I doubt that will save Twitter from eventual relegation to the Web-stars twilight world along with the likes of friends reunited.

The panel session was lively, and I raised a few eyebrows with my predictions that the Big Corps in software & broadcast were under major threat. I was particularly pleased when I managed to astound Mr. Paxman with some stats on women in technology – here is an excerpt from the Intellect blog on the conference:

In the final panel session, Jeremy Paxman (probably for the first time in his career) was stuck for words when Kate Craig-Wood, MD of Memset, indicated that there was a 23% gender pay gap in the IT industry. Paxman expressed a little scepticism over the statistic, but rest assured the figure is one oft quoted by Intellect and comes from an equalities and human rights commission report.

http://google.co.uk/search?q=the+definition+of+cloud+computing

Lets face it, Google is near omniscient (and probably already has a band of worshipers preparing for the birth of its sentience) so I must know my stuff! </gloat>

Ahem, anyway, when you get down to it, there are only really three differences between Cloud Computing and traditional IT infrastructure outsourcing:

1. Shorter contracts: Hours, days or weeks (at most one month) rather than months or years (usually at least 6 months for traditional outsourcing).
2. On demand: Near-instant scaling / adding of resources.
3. No up-front costs: The CapEx and installation is absorbed into the rental charges.

Modern “managed hosting” providers like my company are largely synonymous with “Cloud Computing” or “Utility Computing” providers; companies like mine will give customers anything from a virtual machine to a large dedicated cluster with a contract of one month and no setup fees. We are blurring the line between traditional IT infrastructure outsourcing (eg. EDS / HP at the big end, Rackspace at the small end) and “pure” Cloud providers like Amazon EC2.

Cloud Computing has been enabled by the ubiquity of Internet connectivity, since companies are no longer tied to owning their own data centre with hard-lines back to offices. Instead, the infrastructure can be pretty much anywhere, although usually you want it in the same country as your main operations.

So what becomes of the old-school big-corp IT outsourcers?

As for the impact on IT outsourcing businesses, that is simple: Cloud Computing is exposing the true cost of computer / server resources, which thanks to Moore’s Law is tiny. Cloud / Utility Computing providers are driving the comoditisation of compute & storage resource, thus eviscerating the outrageous profit margins enjoyed by the old-guard of IT outsourcing providers.

The Cloud movement has the potential to finally deliver on IT’s long-oversold promise of shared services and cheap, highly scalable process automation. In doing so, Cloud also threatens the livelihoods of the big IT consultancies / Systems Intergrators who have become better at selling their highly-paid peoples’ time than actual IT services.

The proof are the likes of Google, Xero online accounting and Zimbra Desktop (Outlook- & Google docs-like functionality, but open source and Web-based): They are delivering most of the IT services that businesses need at an extremely low price, thus demonstrating that:

1. Most of us want the same, simple things in terms of IT services.
2. IT resources are actually really, really cheap.

Sorry chaps, but it looks like the jig is up.