One of the biggest marketing pitches about the cloud is how it will dramatically reduce the cost of IT spends and how businesses will be freed from the tyranny of big name hardware vendors and the software vendors. The truth I am afraid is far from that. Cloud computing being a disruptive technology will impact the industry. We will see a shakeout and a new order will emerge in the due course of time. I will leave the impact that Cloud computing is having on the industry to another blog entry and focus on costs.
Borrowing from Wikipedia cost is the value of money that has been used up to produce something, and hence is not available for use anymore.
There are various kinds of cost and we will see what impact cloud computing has on them.
Capital costs. These are the costs you incur for fixed equipment or assets. With respect to IT we can consider the cost of servers, real estate space, cooling equipment, network gear and cabling to be all part of the capital costs. Apart from the cost of buying capital goods there is an associated cost called depreciation. Depreciation very simply put is the expense that reduces the value of an asset as a result of wear and tear, age, or obsolescence. With continued innovation the rate of depreciation in the computing industry is very high. Thanks to the hyper competition and high degree of investment by the computing industry in R &D Moore's law continues to be sustained. The value of your equipment falls dramatically with each passing day and that does reflect in your balance sheet.
Small and Medium Enterprises
Cloud computing has the biggest impact on capital costs especially for small and medium enterprises. You don't own or build all this equipment except for the client machines and minimal networking equipment. You are able to free up capital to grow your business. Put more towards marketing, hiring more people or towards other measures to grow the business.
Animoto and SmugMug are two examples of startups having successfully leveraged the cloud. All these firms have been able to rapidly bring out new products and services with minimal or close to zero capital investment on IT equipment.
Venture Capitalists
Cloud computing is also a big hit with the Venture Capital community . As per industry figures going around for quite some years only 5% of the startups succeed and last beyond 2 years from opening shop. Given the reduced capital spending and the rapid time to market that is possible with the cloud for the VC's Cloud computing is probably the best thing since sliced bread!
Large Enterprises
For large enterprises that have large investments in existing data centers the savings in capital costs may not be significant. Also given that these companies get the best volume discounts from suppliers like HP,IBM and Oracle setting up in the cloud may turn out to be more expensive. That does not mean the large companies are shying away from the cloud. Reducing the capital costs is always welcome for a company irrespective of the size. It makes the company more agile and responsive to fast changing market conditions. With a slow down in demand a company using the cloud can simply reduce their consumption of services from a cloud provider and in case of a fast turnaround they can ramp up as quickly. In a traditional data center setup ramp up and ramp down is not easy. Long procurement cycles (typically varies between 2 weeks to 3 months), high setup and configuration costs, ongoing maintenance costs and low utilization of resources are factors can make data centers seem very inefficient as compared to a Cloud computing setup.
As Nicholas Carr wrote way back in 2003 IT does not have strategic value anymore and is moving towards being a commodity. So far large enterprises cloud computing can also be seen as the next logical step in outsourcing. Running Data centers is not their core competence so outsourcing them would be logical. All the major hardware vendors (HP,IBM,Dell) have service offerings around outsourced data centers and there are a lot of hosting providers as well. Cloud computing brings about some more abstraction and a higher service orientation.
To summarize I think Amazon has put it best in this eweek article
"There is a big savings in capex and cost but what we find is that one of the main drivers of adoption is that time-to-market for ideas is much faster in the cloud because it lets you focus your engineering resources on what differentiates your businesses."
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