The Economics of Cloud Computing

Updated: January 01, 2012

What is Cloud Computing?

According to Daryl Plummer, Managing VP and Gartner Fellow at Gartner, Cloud Computing is defined as "A style of Computing where scalable and elastic IT capabilities are provided as a service to multiple customers using Internet technologies". While Gartner's definition is spot-on, to a business buyer it may leave a bit to the imagination. In deconstructing this definition, one can extrapolate the following:

• Cloud Computing enables organizations to obtain technical infrastructure in a subscription-basis which can grow and shrink with their needs over time
• Buyers no longer need to worry about sizing their hardware appropriately since the workload is likely spread across multiple servers in a data center via virtualization software like VM Ware.
• Multiple companies can utilize the same equipment, providing for greater economies of scale
• As a result of the above, excess capacity to meet peak needs is readily available
• All redundancy, disaster recovery/business continuity, server maintenance, etc is handled by a cloud computing vendor

Layer in the concepts of Infrastructure as a Service (IaaS), Platform as a Service (PaaS) and Software as a Service (SaaS) and it becomes increasingly difficult to figure out what it all means. Fortunately, Microsoft recently published a highly informative white paper which helps to better deconstruct how each of these models operate with respect to the individual elements of what a technology department would typically manage.

What does all this mean to a typical buyer?

1. Capital investment necessary to provide a technology infrastructure is significantly reduced or eliminated entirely
2. Much of this is handled by the vendor.
3. Some companies no longer need to maintain a data center or dedicated server room and instead choose to outsource the entire infrastructure to a cloud computing provider.

Why does cloud computing make sense for a buyer?

Economics are one of the largest factors in a decision to move to the cloud. While it may not always be significantly less expensive, moving to a cloud computing environment often provides greater flexibility from a cost perspective. Highly variable and significant up-front capital costs related to purchasing servers and software can be shifted to a predictable expense item. Many vendors are shifting to a price per employee per month (PEPM) for their cloud-based solutions. For example, Rackspace, a San Antonio-based provider of cloud computing capabilities offers hosted Microsoft Exchange mailboxes on a PEPM model which eliminates the costs related to software licensing and hardware acquisition. Similar pricing models are available from countless software vendors - with some vendors offering their human resources management software for $100 per user per month.

By shifting to a PEPM model, buyers gain more much more visibility into the costs related to adding or losing staff. Since much of the technology costs can be transformed into a PEPM model, the annual cost per headcount for technology is easier to forecast and model based on business & staffing needs. For a modern CIO, this provides much more accountability and transparency into the costs that they manage. For a CFO, it easily provides addition insight into costs to factor into expansion/contraction plans. Additionally as the size of the "cloud" grows, the costs continue to drop due to additional economies of scale.