In this talk, Bertil Chappuis, Senior Partner at McKinsey & Company, explores how cloud technology is helping to boost entrepreneurship. Read the full transcript below.

Kirkpatrick: So now I’m going to bring up Bertil Chappuis from McKinsey who’s talking about some very interesting issues surrounding cloud and how to think about that. McKinsey is going to be doing a few of these sorts of briefings about discoveries they have made. They’ve got a really great way of presenting some information. So, Bertil, come on stage. And I look forward to hearing what you have to say.

Chappuis: Good morning. So I’m going to give you some snapshots of what I see as an entrepreneurial groundswell driven by the cloud. And I’m not just talking about entrepreneurs in Silicon Valley and startups, but actually in the enterprise, in small businesses, and at the individual level.

So there are three things driving this. The first is cheap computing. So if you look today in the market at the cost of a cloud server, for instance, versus the cost of actually buying a server and running it in-house, you literally have a 3X difference in cost. In fact, the power cost to run that server in-house is actually the same cost of the full cloud service. This is being driven by massively scaled and efficient data centers.

If you add to that the agility of the cloud, today in an enterprise it takes 60 to 150 days to provision a server. I’m talking now about infrastructure. Takes an incredible amount of time. You can actually go online and self-serve computing capacity almost instantaneously. You can imagine for somebody trying to get something done and needing compute capacity, how enticing it is to go and just acquire that individually. And it’s already happening. You are probably hearing about the stories of people buying compute capacity on their credit cards literally within enterprises and NCIOs coming in and trying to fix the mess.

If you then add to that the fact that the cloud enables new experiences—you know, social, local, mobile, big data—a lot of the things we’re going talk to about in this conference actually require very rapid development iteration, the ability to work across PCs, tablets, and other devices, and they have very bursty computation profiles. As cloud penetrates further, computing gets progressively cheaper and that creates a reinforcing cycle that will enable these cloud environments to propagate in all sorts of environments.

Now, if you take that cheap computing, the agility and the ability to deliver new experiences, I believe this creates a real groundswell of entrepreneurship in all sorts of environments. I’m going to share with you four quick vignettes from actual client situations.

So, a regional sales team within a large pharma company wanted to introduce a new technical sales process that required inputting detailed molecular information into the CRM system. They found it nearly impossible to do that within the existing system. And it would have taken forever to do it, in any case. So they went to Viva, which is an app that is targeted—is CRM targeted—to the pharma and biotech industry built on They did a pilot, it worked, and now they are reconsidering their whole CRM and sales force automation approach.

An HR manager in a large company we’re working with found that he wanted to create a set of reports and analytics based on HR data and found that, again, very, very difficult to do within the existing system. So he did a workday pilot. It worked. And now they are reconsidering their HR systems.

In the small business space, a small business owner with 25 employees started to host their email system in the cloud. Once they got comfortable, they started to port their voice-over IP to the cloud. Once that happened, they asked the question, Why should we have any servers in-house? So they moved to cloud servers with Intermedia, which is a startup in the Valley. And at that point, they were saving 55 percent of their IT cost and they could focus on their core business, rather than run IT.

And then on the [Amazon Web Services] front, an IT infrastructure manager who is facing very long provisioning times to get an app staged goes to AWS, buys the compute capacity to be able to do it in minutes rather than months.

All of these things are driving this entrepreneurial surge. And I’m going to share with you a couple of numbers because Amazon doesn’t typically share a lot of this. But there’s a startup called Newvem that actually monitors the public cloud for its clients. And we’ve been collaborating with them to get a little bit of a view of what’s happening out there. These are cohorts—the bar shows cohorts of Newvem’s clients. And then the numbers to the left are the growth rates of those cohorts.

Now, these are explosive numbers, very clearly. And it just shows the level of groundswell that we’re seeing. Now, granted, Newvem’s clients are very high-growth service providers. But we’re seeing evidence of this growth in the enterprise, also. This McKinsey survey of CIOs shows that public infrastructures of service deployment in the enterprise has doubled over the last couple of years, which actually surprises a lot of CIOs.

Now, the penetration of cloud is not monolithic. It will vary by industry. And as we look across industries, we find there are a couple of dimensions that really determine at the end of the day the level of progression of the cloud. One is the degree of regulation in that industry and the other is the complexity and interdependence of different application domains.

To put it very simply, the pattern we see is in industries with low regs and lower complexity of interaction between these different application environments, you tend to have more at-scale public cloud deployment and more software service adoption. In environments with higher degree of regulation and interdependence, you have public cloud more as a staging environment for applications and more use of private cloud. The example is a bank, right, that has a lot of custom code and transaction systems and regulations that impact things like data residency requirements.

Now, security and regulatory barriers are the top two concerns for the adoption of the cloud. Especially in the enterprise. Between 2010 and ’12, the same survey I mentioned earlier, highlighted security and regulatory exposure as the top two issues. These are issues that can be dealt with by the enterprise, but it requires a fundamental shift in the way security is addressed.

So from very rigid IT policies to more business assessment of risk and the more segmented approach to the way risk is managed across different workloads. Also more of a shift towards securing the data and the process rather than the underlying hardware and software.

By the way, the data from Newvem that I mentioned earlier highlighted for us why the security concern is such a big deal. They showed us that within their client base, literally half of the customers had open database ports to—basically that it created vulnerabilities in their environment.

Now, there are all sorts of reasons for an application to have open database ports to the Internet. But the fact is a lot of these companies actually don’t know that that is the case. Again, because this is being done entrepreneurially and not fully managed within the type of monitoring environments that CIOs are used to in the enterprise.

So although we’re seeing this groundswell in entrepreneurship, there is this concern around security. And I think the thinking is evolving around how to deal with it.

Now, incumbents are in a tough spot. Not only is it hard to port existing products in both hardware and software to this new cloud environment, but the business models are very different. So you go from large up-front payment and almost guaranteed maintenance revenue streams to smaller, usage-based purchases and then the promise of up-sell, cross-sell, and annuity streams, although also the risk of churn. And this creates a trough for incumbents and an—attackers in this industry. But for incumbents in particular, it creates a real pressure around earnings, right, because you have to manage through that initial period.

It’s also going to create—to require fundamentally new skills and capabilities for these players to succeed. So churn management, subscription pricing, the ability to create almost consumer-like experiences are all going to become more important. And there are things—these are things that a lot of the traditional vendors in the enterprise IT space in particular are not used to.

So we’re in the fourth fundamental shift in computing. And there’s going to be a lot of valid creation during this period. We believe there’s going to be billions of dollars shifting between industry players. The pace of adoption is going to be very uneven across industries, companies and functions. But at the end of the day, we think there’s explosive growth happening in all sorts of pockets. Again, based on this entrepreneurship. And that’s going to inspire others to embrace this new order.

So that’s what I had. Thanks a lot. I think we’re out of time. But happy to talk to folks in the corridors about any questions you have. Thanks a lot.