Article Highlights:
- Businesses must adopt cloud-based systems to avoid being buried by their competitors.
- Once a cloud-based platform is up and running, it costs almost nothing to add additional clients.
- The Emerging Cloud Index has dramatically outperformed the major stock market indexes.
About three weeks into my current six-week sojourn in Cape Town, South Africa, I finally managed to have broadband internet installed at my home here.
The local company that set it up for me is overwhelmed with new business from people desperate to get away from the government’s disintegrating telecom services.
The young guys who installed the requisite dish on my roof and set up the router and Wi-Fi extender looked completely frazzled. On the day of their installation at my house — a Friday — they worked past 7 p.m. I felt so bad for them that I bought them a case of southern Africa’s best beer, Windhoek Lager.
While one of them packed up their tools, the other was frantically typing on his cell phone in the front seat of their bakkie — South African for a pickup truck. I jokingly asked him whether he was setting up a date for later that night.
“No, man, I’m logging my work hours and submitting a leave request. We are so busy these days that I hardly ever go into the office, and they want us to do it all through this lekker [nice] mobile app.” He showed me a screen on his iPhone where he entered all these details.
As it usually does, my brain immediately connected what he was doing to what I was doing: working as normal, submitting my articles and complying with our own internal human resources department — all from practically the opposite end of the Earth to Banyan Hill’s head office in Florida.
Like the young chap in the bakkie, modern technology allows me to be part of a complex organization from practically anywhere.
And just like my broadband installers, my own employers are increasingly reliant on internal management tools that are revolutionizing businesses across the globe … tools that are making their creators boatloads of money.
They can make money for you too.
Why We Have Jobs
In 1937, professor Ronald Coase wrote an article called “The Nature of the Firm.” The insights in that article underlie a revolution in the way organizations are run … a revolution that’s brimming with profit potential.
Economic theory assumes that markets are always efficient. If that’s true, asked Coase, why do entrepreneurs hire employees rather than engage contractors? Employment isn’t a market relationship — it’s based on hierarchy.
The answer, he said, was that whenever two people make a contract, there are “transaction costs” involved.
You must gather information about the other party … monitor their performance … protect trade secrets … and if a contractor doesn’t perform, you must take them to court. Those things have a cost.
These “transaction costs” mean it’s usually more efficient to hire people to work for you as employees and place them under your direct control. This produces better outcomes than hiring outsiders on a contract basis.
Management in the Digital Age
The problem is that as a business grows and acquires more employees, it becomes impossible for an individual entrepreneur to manage them all. So it hires managers. When the business gets even bigger, it need more managers to manage all the managers.
Coase’s article showed how the growth of companies shapes their internal structure. Capitalist competition forces companies to improve their internal management systems constantly. If they don’t, their profit margins fall, and they are unable to maintain and grow market share.
In the predigital age, that meant recruiting high-quality managers in areas such as operations, human resources, logistics and other essential tasks, and letting them set up systems to increase efficiency in those areas. Success in these efforts could make or break companies.
Naturally, senior executives were keenly interested in ways to improve these internal systems. That’s why airport newsstands were packed with books on the latest internal management buzzwords.
But this process had its limitations. The general idea might be widely shared, but the impact of new management techniques depended entirely on how they were implemented within companies.
Let the Cloud Do the Work!
The cloud computing revolution has changed all of that.
Cloud computing is the marriage of data servers with software platforms that clients can access remotely. One subgroup of cloud computing providers specializes in remotely accessible software that allows companies to perform traditional internal management functions at dramatically lower costs than the old ways.
My broadband technician, for example, was using a cloud computing platform to log his work hours and request leave. I do the same thing whenever I take time off from writing The Bauman Letter.
There are several critical things that make business-to-business (B2B) cloud computing companies one of the most spectacular investment opportunities today:
- As Coase showed, competition forces companies to find and implement more effective ways to manage their internal affairs. Just to maintain their position, businesses must adopt cloud-based management systems to avoid being buried by their competitors.
- Successful cloud-based management solution providers operate an extremely low-cost business model. Once their platform is up and running, it costs almost nothing to add additional clients. Such companies can maintain low employee headcounts and minimal physical capital but can expand their revenue and profits almost without limit. In other words, they’re just like the Amazons, Facebooks and Googles of the previous digital revolution.
- Once clients buy into a successful cloud-based management platform, they tend to stick with it. It’s expensive and complicated to change. That — plus the reams of data they collect from their many users — allows cloud B2B providers to develop new products that they can upsell to their clients. On top of that, B2B cloud companies typically operate on a subscription basis, which means that their revenue is locked in for years at a time.
The power of this business model is starting to dawn on many investors. So too is the dramatic performance of cloud computing vis-à-vis the rest of the stock market:
Ultimately, the so-called FANGs are cloud computing companies. Facebook, Amazon, Netflix and Google operate platforms that provide services to other people. They’ve been extraordinarily profitable.
But as we all know, those companies are facing increasing pushback against their business models, which involves exploiting our private data for their personal profit. That pushback is going to make it more difficult for these companies to deliver massive gains in the future.
But there’s nothing stopping B2B cloud service companies from conquering their own market — commercial enterprises everywhere in the world. As Coase showed, the nature of capitalist competition means every business on the planet is forced to be a potential customer of a cloud services company whether it wants to or not.
That’s the kind of business model I like … one with a built-in captive market, low costs and limitless potential profits.
If that sounds good to you, keep an eye out for the August edition of my Bauman Letter. I’ve identified a company that is on track to deliver triple-digit gains using just this business model.
Kind regards,
Ted Bauman
Editor, The Bauman Letter