While much of the world has been enamored with the promise of cloud computing—where you can simply rent time from applications and systems maintained by a third party somewhere else, McKinsey & Co., the staid management consulting company, has been sounding notes of caution.

I recall speaking with Dilip Wagle, a partner with McKinsey a couple of years back, who warned that cloud computing still required a great deal of integration work, and end users risk losing customization and flexibility. In addition, the “‘good enough’ functionality provided by Software-as-a-Service (SaaS) applications may not be sufficient for a company’s needs, in some cases,” he says. In addition, there is risk in situations in which customers’ data are stored off-premise in a data center owned or contracted by the service provider. “In the event of data center failure on the part of the service vendor, the customer has no recourse but to hope that data were appropriately backed up and managed in a secure fashion,” Wagle added.

Last week, the folks at McKinsey & Co. poured more cold water on the cloud computing party,speculating that many companies may end up spending more on cloud-based services than on maintaining their own data centers. McKinsey said this is particularly the case in larger organizations, noting that "clouds already make sense for many small and medium-sized businesses, but technical, operational and financial hurdles will need to be overcome before clouds will be used extensively by large public and private enterprises."

It’s not only larger organizations in general that may need to carefully weigh cloud computing arrangements, but also the insurance industry as well. Last fall, I spoke with Michael Goodside, CTO for ISO, about the role of cloud computing for the insurance and financial services industry. He observed that “SaaS is less applicable to the insurance industry than it is to some other industries,” he says. “At a very high level, I just don’t see it as a good mesh. It seems that most of the kinds of things you do as Software-as-a-Service are that applicable to the insurance environment. I’m sure you can find little niches, things here and there.”

Many insurance industry transactions involve large workflow problems, Goodside explained. “For an automobile accident, it could literally take years. You might have medical issues two years down the line, which trace back to an original claim. There are really a lot of steps, and there’s workflow that goes across large amounts of calendar time. Software-as-a-Service favors simple things: low volume, pay for what you use, generic, low security. Insurance transactions involve very specialized tasks, proprietary information, reliability is critical, and volumes of data.”

Joe McKendrick is an author, consultant, blogger and frequent INN contributor specializing in information technology. He can be reached atjoe@mckendrickresearch.com

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