Time To Do The Math On Cloud Computing

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Time To Do The Math On Cloud Computing
 
At the upcoming Cloud Connect conference, we will evaluate a variety of scenarios that determine where and when the move to cloud computing makes financial sense.

 By

Joe Weinman

InformationWeek
Março 2, 2010 03:13 PMIn two weeks, I’ll be in Santa Clara at the industry’s newest event, Cloud Connect. I’m chairing a track focused on Cloudonomics, a term I coined a couple of years ago to connote the complex economics of using cloud infrastructure, platform, and software services. There are a number of great technical tracks planned, but mine is focused on what I consider to be the most important question: “Why do cloud?”This is the question that any business-focused CIO must ask. After all, CIO’s have a small number of projects that they can really focus on in any given year, and major initiatives must have a compelling rationale or won’t get supported by senior leadership, including the board. The technology will only be important if the business value is clear and compelling.

In practice, there are a number of reasons to leverage the cloud. One is agility: Resources and services that are immediately available for on-demand use clearly enhance agility over months-long engineering, procurement, and installation efforts. This can help to introduce new services, test new code, enter new markets, or meet unexpected sales spikes. Another is user experience. Larger cloud providers’ globally dispersed footprint can bring highly interactive processing closer to the end user.But perhaps topping the list is total cost reduction. According to a recent Yankee Group report, 43% of enterprises cite cost control as a rationale for interest in the cloud. So, how exactly should we think about cloud costs? That’s the topic of my track.

Consider this: There’s a range of schools of thought out there right now. Some believe cloud computing will take over all IT and that CIO’s may as well start making plans to shutter their data centers. At the other extreme, there’s a view that cloud computing is currently too expensive and that enterprises should focus their attention elsewhere.

The truth lies between these two extremes. Some applications and data will continue to reside in enterprise data centers. Other services are likely to be purely cloud-resident. And hybrid solutions–sometimes also called virtual private clouds–involving the enterprise data center coupled with cloud infrastructure are likely to offer the lowest total cost.

The key drivers of the economics of the solutions depend on a variety of factors, including the enterprise applications portfolio, demand variability, and user experience requirements. Here are some scenarios:

Cloud Cost Advantages: Assuming that all other factors are comparable, if you assess and benchmark the unit cost of cloud services to be lower than that of your owned infrastructure, then you should switch and save. After all, if gas is thirty cents cheaper per gallon at the station across the street, why wouldn’t you fill up there instead?

Servers As Parked Cars

Spiky Demand: However, cloud services may well cost more than some enterprise data centers on a unit cost basis. One might think that this would imply that you should shy away from the cloud, but that’s not the case. The key reason has to do with the usage-based pricing paradigm of cloud services. The important insight here is that even if cloud services do cost more when they are used, they cost nothing when they aren’t used. This is a very different story than the enterprise data center, where owned resources continue to cost money whether they’re used or not. This is the same difference that exists between an owned (depreciated, leased, or financed) car and a rented one. An owned car parked in your garage still carries costs, whether you drive it or not. The key factor in the economics of the cloud is then how spiky demand is. In effect, if you drive your car every day, it’s going to be cheaper to own it. If you only need a car once a week, renting is probably better. And, if you only need automobile transport for a few minutes each month, maybe you should just take a cab. If the frequency of use is low enough, it can more than compensate for a potentially more expensive unit cost, and a pure cloud strategy, even if more expensive on a unit cost basis, can still offer a compelling value proposition in terms of total cost.

Any Variability in Demand: Interestingly, while both scenarios above lead to a pure cloud advantage, it is often the case that a hybrid scenario is cost-optimal. Virtually all enterprises have some sort of variability in demand. Retailers have Thanksgiving to Christmas as well as Cyber Monday. Tax preparation firms have a peak in February of early filers and a peak on April 15th of procrastinators. Mortgage lenders are at the mercy of seasonal trends in home buying, shifts in interest rates for re-fis, and macroeconomic factors for home equity loans. We can think of all these firms, however, as having a pretty regular baseline, as well as peaks that rise above this baseline. If cloud services have a higher unit cost, a hybrid strategy is typically optimal. The strategy involves using enterprise data center resources to handle the baseline and cloud resources to handle the spikes, and it’s referred to as cloud-bursting. It is often better than using dedicated resources built to peak, which then end up underutilized.//  

Adjustments to all of these strategies must be made depending on the application and the enterprise architecture. For example, the costs of managing multiple copies of data as well as data transport must be factored in.Given the importance of this area, an entire track has been dedicated to the topic at Cloud Connect, where we will address both the math behind the economics and the technical architectural implications of that math, as well as empirical benchmarks from a variety of real world examples. To help conduct this analysis, a number of ROI tools and methodologies have now arisen for the cloud, which we will delve into. (Cloud Connect is produced by UBM TechWeb and co-sponsored by InformationWeek.)Cloud computing is a rapidly changing technology and business model. New dynamic pricing and spot auction markets are arising for capacity, and the future is likely to hold much more in the way of business model and pricing innovation, as well as ecosystem evolution. We will be addressing this topic in depth, and also seeing what the various players in the space are viewing as their advantages and direction.Cloud Connect promises to be a rich event, and I hope to see you at the ROI and economics track sessions.

Joe Weinman is VP of Strategy and Business Development with AT&T Business Solutions.Network Computing has published an in-depth report on the state of enterprise storage. Download it here (registration required). 

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