There is a widespread view among cloud advocates that cloud computing always offers an economic benefit relative to in-house computing. It's not true.
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While almost all companies can benefit from the cloud -- and nearly all markets for cloud services can be profitable -- every application isn't a cloud application.
This is the dominant view, however, among users who have no real cloud experience and network operators that have just begun to look into cloud services. In fact, these groups estimate cost savings in the cloud to reach at least 25%, with the average user expecting about a one-third cost reduction. This is a misconception. Because while almost every company can benefit from the cloud -- and nearly every market for cloud services can be profitable -- every application isn't a cloud application.
Knowing the difference may be critical for providers to target cloud services for optimal profit.
Where are the cost savings in cloud?
Cloud cost savings represent the difference in the net cost of running a given application in the cloud versus running that same application in-house. The cost differences often stem from capital and operating expenses like hardware and software, maintenance and support, and facilities -- all things that both users and operators understand. The source of these cost differences typically comes from the variations in base cost and economies of scale.
Base cost differences in hardware and software are most often associated with volume buying, meaning that a cloud provider that purchases a thousand servers is likely to get a better price than a retail buyer that purchases only a few. Such a case illustrates that this kind of base cost savings is most likely to apply to small and medium-sized businesses that don't have pricing power with their IT purchases.
Many enterprises already have enough leverage to secure pricing similar to that of cloud providers, making providers less likely to be able to bring volume buying into play as a source of savings. This makes it difficult for them to promote hardware and software cost savings as a benefit.
More on cloud costs
Why CIOs have problems with the cloud: Sunk costs in legacy IT
Cost savings, efficiencies lead IT pros to cloud computing
Instead of hardware and software, maintenance and support may broadly explain the base cost difference between cloud and in-house computing. The most substantial benefit of the cloud is often its ability to centralize maintenance and support, as cloud providers can find qualified candidates for support positions and offer solid paths for career development. End users, including some enterprises, often can't achieve either of those things, and that translates into higher labor costs, retention issues, and additional technical training and qualification costs. But in major metropolitan areas with strong, technology-driven labor pools, larger businesses can often match cloud providers in this cost area -- negating the allure of so-called cloud computing cost savings.
The final base cost difference emerges in facilities, which includes the cost of data center floor space, insurance and heating, and ventilation and cooling. A cloud provider can locate facilities where all these costs are low, but enterprises typically locate their data centers in or near the companies' headquarters or major satellite offices. Thus, this area of base cost is where cloud providers can almost always demonstrate a clear benefit.
Continue reading: Find out more areas where cloud providers can demonstrate cloud cost savings to customers.
About the author:
Tom Nolle is president of CIMI Corp., a strategic consulting firm specializing in telecom
and data communications since 1982. He is the publisher of Netwatcher, a journal addressing
advanced telecom strategy issues.
This was first published in December 2012
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