LANHAM NAPIER, CEO OF RACKSPACE HOLDING, DISCUSSES HOW “THE CLOUD” IS INFLUENCING THE WAY WE DO BUSINESS

Lanham Napier leads the way past clusters of desks, each desk overhung by a banner highlighting the interest of its occupier. Most of the banners trumpet colleges and universities. Some herald sports teams. A few highlight states or cities. The clusters of desks fill a seemingly endless floor, but Napier walks to a plain wooden door set into a blank wall and takes out a set of keys. “Here’s phase two,” he says, as he unlocks and opens the door.

We step into the skeleton of the building we had just left. The pale blue and gray light gives a monochromatic cast to the scene. We’re looking at the guts of what used to be a suburban shopping mall – the same platform for the office space we’d just been through. Workers are already doing preparation work for the expansion of Napier’s company – Rackspace Hosting. Rackspace occupies half the available floor space, and eventually will occupy the entire 1.2 million square feet – 28 acres – of the abandoned Windsor Park shopping mall in San Antonio.

Napier is CEO of the 13-year-old company, which built its reputation and revenues as a leader in the cloud computing industry. The “cloud” is another word for the Internet, but specifically refers to applications and services offered online. Rackspace has grown from a “hosting” company providing servers to store customers’ data, to one that concentrates on the platform as a service and infrastructure as a service markets. It runs 70,000 servers in nine data centers, including two in the United Kingdom and one in Hong Kong. Rackspace’s finances have grown along with the company’s customer base. Its profit is up at least 33 percent in each of the last seven quarters, with sales growth of at least 23 percent in those seven quarters.

The 41-year-old Napier is a fifth generation Texan who developed his love of computers as a child, when his father, a computer science professor, let the boy play on mainframe computers at the University of Houston. He joined Rackspace in 2000, after getting a B.A. in economics from Rice and an MBA from Harvard. And although he’s now running a 4,000-person company, he still approaches his work with a sense of wonder.

“Everything we buy in the future is going to be connected,” he said, “whether it’s our car, our refrigerator – everything’s going to be connected. I’ve even got a digital thermometer on my smoker – so I can sit in the living room and drink a beer while I’m smokin’ barbecue in the backyard, then just look at my iPhone and see what the temperature is —and whether I gotta put another piece of wood on the fire!”

But the implications of that connectivity are causing business leaders to approach the cloud with caution. Recently well-publicized security breaches like the one at Stratfor, a strategic intelligence company based in Austin, raise a red-flag warning for other companies thinking about migrating some or all of their enterprises online. Napier says that same interconnectedness that lets him monitor his barbecue should raise our awareness about security.

“You need to stay on top of it all the time,” he said. “Security isn’t a batch process like in manufacturing, it’s a continuous process. This is an insight that a lot of people just don’t realize – they think if you’ve done an upgrade, you’re done for a while. Well, you’re good for 15 seconds.”

It’s vital for companies to pick their security partner wisely, and that involves trust. Napier says Rackspace builds trust with its customers by being transparent about security. “We want every interaction you have with us to be standard setting,” he said. “The only way that’s going to happen is when things are secure, stable and reliable – then we have to humanize the technology experience.”

At Rackspace, security is run by a former military officer whom Napier describes as “rigorous.” The company’s security teams are on duty 24 hours a day, seven days a week. But not only do strong security systems build trust with the customer, they’re also key to Rackspace’s survival.

“If we don’t have a secure environment, we are out of business and the 4,000 families who count on this company every day are out on the street – this is a foundational element for our company,” Napier said.

A recent report by McKinsey & Company forecasts increased spending on IT in the coming year. But CEOs will need to hold their IT leaders accountable for that spending. Napier says the cloud allows companies to have their cake and eat it, too.

“The cloud is faster, cheaper, and you get better performance,” Napier said. “Cloud technology cuts costs dramatically.”

The best way to get a handle on IT performance, says Napier, is to look at TCO – the total cost of ownership – and the quality of information and data. But business leaders often underestimate what their IT costs really are, he adds. Napier thinks it’s best to take a holistic view when considering costs of IT, and then look at that cost relative to performance.

“The average [IT] department spends two-thirds to three-quarters of their funds just keeping their systems running,” Napier said. “That means three-quarters of the dollars are for today and one-quarter is for tomorrow.” That’s where a company like Rackspace comes in. “What we ought to enable them to do is cover a lot more ground with the same dollars they are currently spending, or cover the same ground with fewer dollars.”

Besides, the role of the IT department is changing. The Gartner Group predicts that control of technology and tech-driven decision is shifting away from IT organizations, because of the influence of the cloud, social networking, and mobility. Napier says that’s because consumer products are developing at a faster rate than products geared to the corporate world. He holds up his iPhone. “I have more computing power in my hand with this smartphone than the space shuttle Columbia did in the mid-80s,” he says, with an awestruck expression. So IT departments have a two-pronged challenge. They must provide protocol and architectural structure for security, and they must distribute that computing power to people so they will be able to develop new uses for it.

“Humans are incredibly inventive little critters,” Napier says with a smile, “and we’ll figure out how this type of power and capability can be harnessed to do cool things.”

Companies that are skittish about making the transition to the cloud can take advantage of  hybrid hosting. In this situation, proprietary software that was designed to run on a particular server can now run on a number of servers, through the cloud. Napier says hybrid hosting provides the best of both worlds.

But Rackspace has a bolder plan in mind. It has developed an open source software platform called OpenStack and has enlisted big name corporate partners for the venture, including Dell, Cisco Systems, and Microsoft. Some might worry that opening up a platform to all comers could hurt a company in the long run, but Napier sees opportunity.

For too long, the technology industry has followed a closed model, says Napier, where a software company develops a piece of code and tries to lock its customers into it. Then it charges high maintenance fees. But Napier says an open source system is just the opposite. The “crowd” adds value to the project.

“Our basic belief is there will be more ideas, a faster pace of innovation, and therefore better technology coming out of it,” he says. “We think open models get to scale more rapidly than closed models, and the way our company’s going to survive and thrive in this, is we’re going to put fanatical support on top of that technology stack and knock your socks off with cool outcomes.”

The open source model is another manifestation of what has been called “Cloud 1.0” – the first version of the cloud. Napier says we’ll be in 1.0 for a while, that it could take 10 years to get everyone connected, and have a truly ubiquitous online environment. He likens where we are now to where the railroads were 150 years ago when they were building out their infrastructure and connecting people and cities, creating new markets and opportunities.

One group bound to benefit from this new interconnectedness is small business, says Napier. He uses Rackspace as an example. Because Rackspace started as a company providing web hosting, it was in the online world from the beginning, and unlike most businesses just getting started, Rackspace was serving customers overseas.

“You look at the average company in San Antonio, all their business is local,” he said. “We were a one-year-old company, and we had 25 percent of our business outside the U.S.”

The challenge for small business, he says, is to figure out how to put interconnectedness to work for it. “There’s no manual,” he says, “so you’ve gotta be creative about it.”

In fact, that’s his advice for CEOs looking ahead over the next several years – especially those with little background in technology. Be creative. Keep an open mind. “We’re at a wonderful intersection, where the new way is much better than the old way,” he says. “Now is not a time to be change resistant, with respect to IT. Now is the time to open our minds and figure out how to use this stuff.” The cloud might not be for every piece of software, he adds, but everybody can use the cloud in some way to make businesses better.

Rackspace handles customers that run the gamut from the Fortune 500 to small businesses. “We serve 160,000 customers,” Napier says. “There are only one-thousand companies in the Fortune 1000, so by definition, they’re all little guys.” The big companies bring Rackspace the most revenue, and Rackspace has set up an enterprise segment to serve them. But another segment serves only small and medium-sized businesses.

As big as it’s gotten, Rackspace likes to play the scrappy underdog when competing against the likes of Amazon and Google. Sometimes that means doing the unconventional, and Rackspace’s headquarters in the once-abandoned shopping mall is a good example. At one time, Napier says, Rackspace was thinking of moving from a cramped, old office building in downtown San Antonio to a new campus on the edge of the city. But the company’s leaders were put off by the multi-million dollar cost of such a venture, and didn’t think a corporate campus would be the best situation for Rackspace’s freewheeling culture. Separate buildings would create fiefdoms, Napier says, and you don’t traverse between fiefdoms.

“We are a relationship based company, like it or not,” said Napier, “so we need to be together. When we’re not together, we’re in a bad mood, so we needed to be all in one space and do it in a way that’s an economic advantage to us.

“The other neat thing about this building,” he adds, “it’s in the wrong part of town. We were able to give our company a sense of purpose by moving here.” That purpose includes “adopting” a school across the street, and providing funding from Rackspace’s foundation for children in the school district.

“Some of these kids might as well have grown up in a third world nation,” said Napier. “They are below the poverty line, they come from single parent homes, and they are starting out way behind.”

Adopting the school illustrates the company’s concern that our education system is not meeting the challenges of tomorrow. “We have to be a country of knowledge workers,” says Napier. “We have an education system that cranks people out to work in manufacturing jobs that don’t exist. That’s why we adopted this school – to help those kids prepare to work at places like Rackspace as opposed to other outlets.”

Now, the once-abandoned mall buzzes with activity. The floors have the irregular shapes of floors that steered shoppers from store to store. These days, so many employees – called “Rackers” – cluster in work areas, it’s easy to get lost moving from section to section. To help navigate around the floors, work areas sport colorful signs – some from businesses in the old mall, such as Gingiss formal wear, to a game show section divided into “Jeopardy” and “The Price is Right” and a breakfast cereal section featuring Fruit Loops and Frosted Flakes. To get from one floor to a lower one, employees get to use an enclosed, curvy slide.

Napier moves easily through the labyrinth, greeting employees by name, pointing at them with a smile, clapping others on the back and stopping for the latest information about family members. He calls his employees the “secret sauce” of Rackspace. “They’re good people. And they care,” he says. The company encourages employees to decorate their workspace any way they want, and quirky knickknacks abound. But happy employees contribute to a company’s greatness, says Napier, “and we’re more interested in building a great business than a big business.”

He pauses, and looks reflective. “I’ve been here 12 years, and we’ve gone from 40 to 4,000 of us. That’s a crazy lucky thing to get to do in life.” At the same time, he worries about Rackspace’s continued growth. While on the one hand it’s a good thing to grow a company, Napier says he worries about Rackspace “losing its soul” on the way to getting big.

“The world’s got plenty of big companies,” he says. “It doesn’t have plenty of great companies. We have to fight like the dickens every day around here to choose greatness first.”