Economics of Cloud Computing

We've spent a lot of time developing Windstream’s cloud product strategy and talking to customers interested in our new cloud offerings. One thing that we've noticed is that many customers are sure they want to move to a cloud based model for a sizeable portion of their currently in-house IT services but they aren’t quite sure what the value proposition is.

A typical mid-sized enterprise has historically been in the habit of making six to seven figure investments in physical IT, network software, and telephony infrastructure, and then supporting it with a range of recurring expenses including maintenance, support, upgrades, the hiring of staff to support systems and infrastructure. Often this staff is non-core to the company’s line of business – for example a law firm, a medical practice, or a genetics research firm who would rather invest in more attorneys, physicians, or geneticists respectively.

Cloud based services transform these non-core capital and operating expenses into utility-like monthly payments. They allow businesses to focus investments on core assets and pay for and manage computing, software, systems and other IT just as they have been paying for other utilities. This IaaS (Infrastructure as a Service) and SaaS (Software as a Service) model allows businesses of varying sizes to better align cash flow with the growth (and contraction) of their business. This leaves many mid-level IT directors wondering why their CIO and business executives are so eager to move to cloud solutions that seem to clearly and permanently lock-in new IT paradigms. The problem is that there is an incomplete understanding of true cost of the status quo that many CIOs and CFO’s inherently recognize.

At a macroeconomic level, the more significant benefit becomes apparent when one calculates the theoretical cost of a single business implementing a set of servers, systems and telephony infrastructure to support its IT infrastructure, and  models several hundred similar businesses (or businesses with similar needs) operating on a single shared infrastructure with pooled resources. Between efficiencies gained with shared staff operating the infrastructure, shared use of the infrastructure making it more effectively used, and the overall benefits gained by better and more consistent operating practices, each of those several hundred businesses gains from those efficiencies and ends up with a more reliable and better supported infrastructure at a lower cost.

The other challenge is that currently utilized tools for calculating cloud vs. traditional infrastructure Total Cost of Ownership (TCO) and ROI are very primitive. The economic benefit of cloud infrastructure is much more significant than simply the depreciation, power and maintenance costs of the replaced server infrastructure. The enterprise IT community has largely yet to figure out how to assign a value to the flexibility that comes from a cloud procurement model where we can upgrade (or perhaps downgrade) capabilities without losing a capital investment and gain significantly enhanced agility to respond to rapidly changing business conditions. Lastly, a small or mid-market business, in a cloud environment, now has the ability to leverage capabilities and investments that were previously only available to large enterprises.

Looking at infrastructure TCO it is clear that for larger cloud opportunities customers are having trouble finding and associating all the hidden costs of their infrastructure. We’re all very good at identifying the costs of the infrastructure and cables going into it (power, network) but the human cost is sometimes most significant and hardest to manage, especially when operating infrastructure and servers is not the core business of the company

A smaller but still significant part of the economics of cloud is enhanced flexibility. Although data center outsourcing will still require some degree of commitment for attractive pricing, there is still significant flexibility that comes from being able to purchase additional storage and compute as needed without worrying about running out of storage space, network or computing capacity requiring major new investments. Storage growth rates in particular have proven very difficult to predict with many Storage Area Networks (SANs) suffering pre-mature obsolescence.

Finally we have the value of new capabilities that come in a cloud environment. At cloud scale many new technologies become economical. Large-scale replication of and continuous data protection over fiber between redundant data centers is perfectly economical for a cloud provider like Windstream. Just the architectural implementation costs to make it happen (to say nothing of the network and equipment costs) would absorb the entire IT budget of some of our customers if not partnered with a cloud provider like Windstream. Yet these are exactly the solutions our mid-market customers are seeking as they provide a simple, painless solution for their business continuity needs. The same story repeats itself for automation, security and archiving. Many enterprise technologies actually work better for mid-market needs than they do for enterprises, and cloud providers have the scale and design resources to make these available and affordable to customers with very modest IT budgets.

A different way to look at it is to ask yourself whether if you were able to generate your own electricity for your home, with windmills, or a small hydroelectric plant operating off a waterfall that happens to run in your backyard, would you be able to do it at a lower cost, with more reliability, and get the same innovation as soon as its available without additional investment as you would from your utility electric supplier?

There is no quantitative shortcut for valuing some of these new capabilities. This creates an opportunity to initiate a strategic discussion among the business and IT leadership to determine their value. For many customers the best option will be small initial cloud deployments focused on specific uses such as business continuity or hosting applications that need a different performance characteristic than the IT environment is designed to offer. This provides an opportunity to evaluate providers, test new features and determine the value to your specific business.

And of course it lets you tell everyone that asks that yes, you are using ‘the cloud.’