A great analogy for cloud federation is the petrol station industry which is an entirely commoditised industry. A driver, when looking to fill their car with similar grades of petrol, will normally go to the cheapest nearby garage. These petrol stations are competing on price alone as they are not offering any service of additional value to the driver.

Image provided by crabchick Petrol Station

Now consider a cloud federation, where cloud service providers join forces to offer organisations the ability to move workloads from cloud provider A, B or C, for example, offers the customer choice and freedom in various geographies. As cloud becomes more prevalent, the basic cloud services will inevitably start to commoditise i.e. the basic offerings from each service provider will become more similar. Indeed this is the very change that enables federation and as a result, is an inevitable consideration any cloud service provider will face whether or not they federate.

To compete effectively and retain customers, cloud service providers must differentiate their products, yet the federated cloud model can limit a service provider’s ability to do so. This is because to ensure a federated offering is supported by all the participants in the federation, the federated cloud product must offer the ‘lowest common denominator’ service across the federation. Price therefore becomes the point of differentiation.

To take an extreme example, consider the situation where a cloud service provider focuses on federation for its entire growth strategy. If forced to compete primarily on price, the cloud service provider will only offer customers a commodity. Now the federation is competing in a price war, rather than through differentiation. This will ultimately require cloud service providers to sustain operation on low margin models.

Smaller cloud service providers, without the capital and cash flow available to those of larger organisations, will be unable to protect and sustain their business in this low margin environment. This makes it difficult for smaller organisations to use federation as a core growth strategy.

Instead, these smaller organisations need to find ways to secure and maintain revenue streams with healthy margins.  One way to do this and protect against commoditisation is to offer a differentiated service to improve the value delivered to customers.

Download Why Federate When You Can Differentiate? for 12 other business and operational challenges that cloud service providers need to address to make a cloud federation model work.


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