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.