Editor's note: In the second part of this two-part tip dispelling the myths of on-premises vs. cloud cost savings, cloud computing expert Tom Nolle identifies where the actual savings are and how providers can articulate them to customers. Jump back to part one: "Cloud computing cost savings: Fact or fiction?"
The simplistic notion that 'the cloud saves you money' is probably not the best marketing message.
Economies of scale are the other broad source of cost savings. Any given application nearly always under-utilizes a single server, ultimately incurring higher hardware/software costs than necessary. By using various technologies -- virtualization, multiprogramming operating systems, etc. -- cloud providers can raise the average use levels to nearly 100%. That lowers the unit cost for each application, which, in turn, creates savings that can be passed along to customers in the form of lower prices for cloud services.
As with the savings in volume buying, discussed in the first part of this article, these economies of scale are most meaningful to small and medium-sized businesses (SMBs). Most enterprises have adopted technologies like virtualization to reduce their capacity waste and have consolidated their IT resources to improve support efficiency. SMBs have only begun to do either of these things and thus could look at cloud hosting as an alternative to efficiency-driven server consolidation.
The same concept applies to support costs; technical support can use only whole numbers of people, and the staff must be large enough to cover operating shifts and have spare resources for sick days, holidays and vacations. Businesses also often have multiple facilities, each of which must receive support. In contrast, a cloud provider can have a few data centers with large labor pools that efficiently support all of its customers.
Identifying profitable cloud strategies
It's apparent that cloud services are less likely to pay off for larger businesses, but there's another dimension to consider -- the type of cloud services a provider is offering. They can create cost savings by displacing customers' IT internal costs with lower cloud costs because services that displace the most cost have the greatest potential savings. Consequently, low-level services like Infrastructure as a Service (IaaS) that host hardware and offer hardware support present customers with lower potential savings.
On the other hand, Software as a Service (SaaS) displaces not only hardware expenses but also the costs of operating systems, middleware, application software and associated support -- ultimately offering the largest potential savings of all cloud services.
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The moral here is clear: Enterprises are the least likely class of cloud buyers to secure direct savings from the cloud, so cloud services targeted at enterprises must first strive to secure nonfinancial savings from improvements in business processes and agility. They can also benefit from higher-level cloud services that displace more cost to generate higher prospective savings.
SMBs, and small businesses in particular, are likely to save money directly by adopting cloud computing. Even so, the higher the level of cloud service delivered, the higher the savings. SaaS saves more than Platform as a Service (PaaS), and PaaS saves more than IaaS.
For all markets, the simplistic notion that "the cloud saves you money" is probably not the best marketing message. Buyers with perfectly good cloud value propositions built on more complex sets of benefits may be turned off forever by a disappointing cost comparison if cost savings are their primary goal. Although telling customers "the cloud brings both direct financial and indirect business benefits" is more of a mouthful and may take longer to validate, it's also true. Better yet, it's more likely to create a successful customer relationship for the provider.
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