Cloud Computing and Costs - Operational costs

Continuing from my previous post on costs i would now look at operational costs and the impact of cloud computing on operational costs.

Operational costs are costs that you incur to run your business. The salaries you pay employees, your electricity telephone bills are examples of operational costs.

From an IT perspective In information technology, operational costs are the price of running of IT services on a day-to-day basis. Operational costs may include expenditures for staffing, hardware maintenance, electricity, software procurement, storage rental and security.

Cloud computing can potentially reduce your operational costs just like any other service provider.

Here are a few factors on cloud computing and operational costs

• Economies of Scale Due to the sheer size of their operations the Cloud service providers are able to achieve a higher efficiency of cost than a small or medium data center.
• Higher R&D spend from the cloud provider. A typical data center has one administrator for 30-40 servers. Amazon/Google through better design have manged to get that to one administrator for a few hundred servers. The service providers will continue to innovate and pour money into reducing costs as it gives them a competitive advantage. These costs will typically be passed on to the customer.
• Costs on security. While the jury is still out on whether the cloud is more secure than the data center or less secure organizations will have to spend more money on security at least in the beginning. Cloud security is fast evolving and visibility on this front is limited. But while security is the number one concern it is not an hindrance to move to cloud computing.
• Networking costs. While the cost of bandwidth has reduced drastically it is definitely not come down to zero. Costs have to be incurred in doing a network analysis of what it will cost you to move and access your applications on the cloud. It is also necessary to know how rapidly your network service provider can respond to increased demand time from your end and what his typical turnaround times are.

You need to consider the tradeoffs as well. While a cloud service provider may provide you lower operational costs you no longer have the luxury of dedicated personnel and a dedicated data center. It is necessary to understand what Service Levels the service provider is committing to and what service levels you are getting from your own IT processes.

Another misconception that gets thrown about in the talk is that capital costs are bad and operational costs are good. What you must really look at is the total cost to produce a service or a product. The decision making involves not just costs but other factors as well. If you are in a price sensitive industry going for the lower cost option will enable you to be competitive. If you are in a rapidly changing , fast moving marketplace where Time to Market and agility are valued then you may go with the higher cost option to gain that competitive edge.

Some Notes from the Google Atmosphere Conference

Just finished viewing most of the Google Atmosphere conference videos.

The talk by Geoffrey Moore was the one I enjoyed most. He is a very eloquent speaker and gave a great perspective on how the IT industry has evolved and what are the driving forces about the adoption of cloud. It's a no fluff presentation on the outlook for the next 10 years.

Mark Benioff the founder of Salesforce.com was pushing cloud 2.0 the next generation of salesforce tools based on social media concepts.

I think there are a lot of mindset changes that come in with the cloud and that was visible in the messages that came out from many of the speakers.

Collaboration is one of the key drivers of cloud com

• If you are collaborating just be Email that's bad and terribly inefficient. As many studies/surveys have established the latest generation of users simply don't use email at all. Social media like Facebook/Twitter are the preferred modes of communication. The Salesforce,com Chatter tool seems to be modeled on this concept . As Marc Benioff put it the new generation of workers would want to use tools they are comfortable with. The challenge of course would be to get the current workforce to change and adapt to the new 'always on' way of thinking and working.
• The idea of 50 persons simultaneously modifying a Google Doc was both impressive and terribly scary. But it is probably a better way of doing things rather than pushing umpteen number of versioned files across email and then trying to reconcile them. This may actually be the biggest driver of Google Docs adoption. Sure Microsoft Office has these features but Google has removed much of the complexity behind sharing.

One thing for sure. The talks reaffirm the growing importance of cloud computing. Whether we like it or not we have to alter our thinking patterns. Our thinking has to evolve to accommodate the cloud. Yes we can use the much maligned phrase of paradigm shift to describe it or we can dismiss it as hype or even diss it like Mr, Ellison but the reality is cloud is here to stay.

Just discovered the Google Cloud Conference Atmosphere videos. There are about 10 videos presenting Google's world view on cloud computing. Halfway through the Keynote and it is quite engaging.

Cloud Computing and Costs - Capital Costs

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."

Cloud computing and Costs

Watching with great fascination on how the discussion on cloud computing and costs is evolving.

On one hand we have the famous New York times case study that every presenter worth his salt talks about in an introduction to cloud computing. And then we do have blogs tell you that cloud computing will end up costing you more money.

Talk to a CFO and he will tell you that he is waiting for a positive ROI from IT right the days of client server computing !

Cloud computing or for that matter all of IT is more than just cutting costs. It is about empowering you to deliver new services and products to your customer in rapidly shrinking time frames. Veterans of the dot com boom/bust will remember the phrase Internet time and how things had to be rapidly done to keep pace with the market place. While we can debate on the real value of the dot com boom and look back with nostalgia on the excesses of that time the fact remains that the Internet has led to a drastic reduction in product and service life cycles. We can see the same leap happening with cloud computing. For businesses IT has gone from an enabling factor to a constraining factor.As this blog from Elli Lilly points out it is all about getting faster responsiveness from IT. The ability to cut the lead times from 90 days to near zero should tell you that it is more than just cost.

Cloud computing allows you to rent IT services v/s having to buy , build and maintain the service. Using a car analogy if you are a periodic user of a car it will be cheaper to rent. If you do use the car everyday then you will probably be better of buying it. Do remember these are not exclusive options. You may choose to rent a car for a weekend trip or a larger car if you have guests visiting you. Same thing with cloud computing. You get an additional option that you can choose from. It gives you a flexibility that wasn't available earlier and trying to quantify and compare the value with what didn't exist earlier is quite challenging.

Stay tuned for more thoughts on cloud computing and costs.