Cloudonomics: The Economics of Cloud

There are several reasons for organizations to migrate from traditional IT infrastructure to cloud computing. While there are multiple benefits associated to it, yet one of the most distinct benefits is cloud economic equation or rather ‘Cloudonomics’.

While a lot cloud computing resources have pointed out the cost saving that it would bring to an organization, we draw attention to the following distinct denominators through which the expected cost savings and ROI can be generated as enterprises procure or utilize elements in cloud stack:

• Lowering the opportunity cost of running technology–on demand selfservice– improves productivity by delivering services faster.
• Lowering the total cost of ownership (TCO) of technology–multiple standard workloads per system–improves hardware utilization.
• Allowing for a shift from Cap Ex to Op Ex–virtualization of hardware– drives lower capital requirements.
• Incrementing business value by renewed focus on core activities with a topping of innovation in certain respects–automated management–lowers operational and labor by automating offerings. 

Calculating ROI does not have to be complex yet it is not a simple modeling analytics, as the most traditional ROI calculating schemes. In order to truly understand and calculate the returns, it is important to identify the problem domain which needs to be addressed through cloud and within which model vertically aligns with the organization’s concerned areas.

In the next sections, we detail certain mechanisms on how cost metrics can lower enterprise expenditures and what to expect in terms of ROI as per organization’s IT strategy. This will help the chief information officers (CIO’s) analyze the economic value that cloud computing would bring to their organization.

‘Cloudonomics’ and the Secret of Cost Metrics

If we speak of in terms of cloud economic equation, the diverse business elements associated with cloud are revolutionizing with wideranging principles and practical use case illustrations through understandable examples on how cloud computing can create a compelling value–whether you are a customer, a provider, a strategist, or an investor. In whole, it basically depends on how cloud is getting procured or made to integrate with legacy infrastructures and applications. Thus, the main elements associated with ‘Cloudonomics’ include: costs, business cases and expected returns. For aligning these elements with each cloud deployments, there are 4 objectives– readiness of the cloud subscriber for procuring, functionality of subscriber and the provider, cost–beyond acquisition and monthly payments– and provider’s viability. Taking up the notion of cloud computing costs, any cost model basically consists of 3 forms of spending that is upfront spending, which is the money that one may have to spend to get into the game, fixed spending, which does not increase over time but adds up, and variable spending that increases as one gets more and more usage. These 3 factors of cost are critical for any cost analysis.

The upfront costs are generally thought of as capital expenditure and for a lot more enterprises, they may have existing in-house infrastructures which they cannot use, thus building a private cloud on the existing stuff, may channelize new prospects.

Yet again, one of the main reasons that people prefer cloud is there’s no up-front costs–typically referred to as ‘pay as you go’. At the same time, if we look at the fixed costs, these are costs that matters a lot. And there are fixed IT costs that enterprises cannot avoid.

Though by utilizing the cloud one can reduce the fixed cost but if we have IT landscape running in terms of ‘systems’, then it would not be feasible to think of them magically evaporating because of movement or migration to a cloud environment. Factors such as provisioning, managing policies and so on are always going to play a critical role. Then there are variable costs and this is really where cloud takes off. The variable costs of a cloudbased system are different from the internal costs because cloud providers can find much greater efficiency in how they operate things. So a unit of computing from a cloud provider actually costs much less for the cloud provider than a unit of computing from an internal enterprise. There are 3 laws behind this which thus relates to 3 different materials. The first is silicon. If you look at cost capacity tradeoff of computing as according to Moore’s law, every year we get better and better at computing, for the same cost. Think about another form–glass, if we look at cost capacity tradeoff of networking and bandwidth in this context, Netflix1 last year paid 60 cents to send a movie of the internet and this year only 3 cents, that cost is dropping very fast. And then come to think of the third material ie iron. Specifically iron particles on storage that’s dropping just as quickly. If you look at the trifecta of these 3, computing, bandwidth and storage, all of these things are doubling in their efficiency every year and every time some enterprise like Google builds a data center they can do more with their data center than what the last one of their did. Cloud computing is on a breakneck ride to zero variable or marginal costs because of that silicon, iron and glass. These raw materials will be free or too cheap to build. Thus which would also mean, in a rather cynical way that everything may be equated to be approximately free in forthcoming times. So, even if enterprises get really efficient at operating IT, they will not be efficient at the inherent marginal cost of offering that IT, since they are not in the business of cloud computing as a primary form of operation; they are in the business of doing something else and IT is in the service with them. But that is only half of the math because business cases emerge not only from the costs but also the revenues that we get from them and IT is quickly moving from viewing the world of cloud as a set of storage in communication to an underlying IT strategy. So ‘clouds’ like companies become more agile, building and experimenting more quickly, connecting with their customers and all of these things lead to an increase in the top line revenue not just a reduction in the underlying costs. Also, with these facts, the denominator of expected ROI plays a major role depending on certain factors. Thus, when we say cloud computing drives cost down as per our customer experience, cloud has the potential to:

• Reduce IT labor cost by 50% in configuration, operations, management and monitoring.
• Improve capital utilization by 75%, significantly reducing licence costs to hardware costs ratio. Reduce provisioning cycle times from weeks to minutes.
• Reduce end user IT support costs by upto 40%.

How?

When we speak of traditional infrastructure versus cloud-based environment we see (customer’s environment was over private cloud): x86 servers–one application per server versus x86 servers with fully virtualized environment 10% average hardware utilization rate versus 50% average hardware utilization rate Manual operations and maintenance versus service management platform

Thus, for businesses, one of the core precepts of cloud computing is to stay just ahead of actual demand and to avoid the cost impact of overprovisioning and under-provisioning. As we had seen, there is also the opportunity for cost, revenue and margin advantages of business services–enabled by rapid deployment of cloud services with low-entry cost and the potential to enter and exploiting new markets which we will discuss more on further section.

The ‘ROI Jinx’

For ROI over cloud procurements and thus the ‘Cloudonomics’, evaluating the current infrastructure and application portfolios–with those in development or in plan, to identify the workloads that offer the best promise, for running in a cloud computing environment is the bigger challenge which motivates and aligns the strategic players to plan its expected ROI’s. Using 3 elements of cloud to assist in that process can be called as a migrate, consolidate and innovate framework. Through this framework, enterprises planning for cloud or already utilizing any facet of the cloud stack delving in any of the services provisioned; could map their deployment stratagem with the elements specified in the framework for enhancing their vision of cloud offering towards efficient ROI. Although as discussed calculating ROI does not need to be complex yet is also not a simple modeling analytics. To truly understand and calculate the returns, it requires identifying the domains which need to be addressed or transcended through cloud; and also which operating model with certain customized semantics–vertically aligns with the organization’s concerned areas maze. Migrations: Taking workloads that are currently running in one’s server and moving those to servers running in the cloud. Now what is the business case that supports the effective migration in the cloud? It is really about efficiency. What you are counting on is that your cloud service provider is able to run that IT infrastructure at a lower cost than you can run yourself… and mainly that’s due to scale effects meaning from a purchasing perspective, from an operations perspective, and from an engineering perspective they are able to deliver that computing capacity at a lower price point than you could do yourself because they are spreading out over a number of different customers. Conclusion Certainly, there are significant economic benefits to be gained from a move to cloud computing; these benefits aggregate a business in 2 distinct ways–directly through reduced costs depending on cloud models and indirectly by allowing for increased focus on one’s core business functions. Also, calculating ROI for cloud services requires some upfront work to understand business requirements, organizational maturity, control considerations and regulatory requirements, and to quantify benefits and costs associated with the cloud model that the enterprise has selected. strategic benefits could be more subjective and may require additional analysis to measure their financial impact over the investment. Since, there are multiple forces at work leading to the growth of cloud computing, the economics being of these forces, as such, we urge organizations to consider the cloud to look at broader benefits and impacts beyond pure economics. Though, what makes all of this particularly exciting is that its potential effect on business is not just an incremental improvement, but also a transformation through new operating models and innovation at each facet of cloud stack being procured.