Wednesday, June 24, 2009

Could cloud take out one-third of your processing costs?

I make you two promises.

First, this blog will have more dollar signs and numbers with commas in them than any other blog about cloud computing. This space is all about the business end of cloud. I leave the technological discussions to others who can do them more justice.

Second, even as we discuss the numbers, we won't get bogged down in them. My goal is to help you frame the justification for earnings-accretive cloud projects, and maybe even find the flaws in the business cases propping up ill-conceived proposals. So we'll show the numbers, we'll discuss the numbers, but we'll keep it at the strategic level. This blog does nobody any good if it's too dense.

So how do I come up with cloud being able to take out more than a third of your processing costs?

As an industry average, let's say that 40% of your infrastructure directly supports your test, development, and other pre-production enviornments. (We can quibble about the precision of this number; one survey of self-reporting companies might report higher, another lower. But 30%-50% is the range I've seen in print and, after taking a few minutes to go through my old customer files, I can validate that based on my own experience.)

Next, let's say that these servers are 10% utilized. Here, I think we're being generous. This is a key business driver for cloud: that you only need to pay for the horsepower you're using, so you're by definition 100% utilized. Even in a virtualized domain, you're always going to have that "white space" or "headroom" requirement. You'll also have load balancing issues and a hypervisor layer adding extra complexity (read: labor costs) to your software stack. In the cloud, these latency and complexity issues are spread around to the point of being negligible to the individual firm.

Back to the math: The difference between 10% and 100% utilization is 90%. And 90% of 40% is 36%, or more than one-third.

To put it in dollar terms, if you're spending $10 million/year on server depreciation, server maintenance, operating system support, middleware support, sys admin labor, floorspace and the 3Ps (power, pipe and ping), then $4 million of that supports your pre-production. Of that, 90% is essentially wasted due to inefficiency. With the efficiency promised by cloud, you'd only have to spend 10% of that $4 million, or $400,000. That means you'd save $3.6 million -- or 36% of your $10 million budget.

And that's enough math for now.

Of course, we're assuming a perfect-world solution. No cloud will be perfectly efficient. And let's remember that this is a business, and your provider is going to want to negotiate: "Hey, we can save you $3.6 million -- we'll charge you $2 million for the service and you'll still come out ahead."

And some costs aren't going away. The data center isn't going to shrink just because you got rid of a few servers, so the rent or depreciation on the building -- not to mention the taxes, insurance, contractors and critical systems maintenance that are part and parcel -- aren't going anywhere. (You should save some on utilities.) Some machines, due to regulation or intramural politics or whatever other machines, will need to be kept in-house. And The developers and DBAs on the application labor are just as much a fixture of the data center as the front door. At some point, IT will become such a commodity that your whole ERP system could fit on a machine the size of the ThinkPad I'm writing on now. When that day comes, your entire apps team will still be showing up Monday morning and expecting to be paid on Friday.

We haven't even considered the cost to implement. True, there's no capital expenditure, but the providers might come up with some "initiation fee" that could drop on you like a six-digit quantity of bricks. There's the depreciation writeoff. And there are the costs associated with resource actions should you, after an organizational assessment, determine that enough of the sys admin and machine operator workload has evaporated into the cloud. The cost part of the cost-benefit analysis needs to be well understood before greenlighting any project -- cloud plays being no exceptions.

Still, the benefits are there to be had. To be more granular, IBM's cloud CTO Kristof Kloeckner estimates that cloud can save you:

- 73% on utilities for end-user computing,
- 40% on support for end-user computing,
- 50%-75% on hardware capex and software licensing, and
- 30%-50% on labor (largely by reducing re-work stemming from config and modeling errors).

For more on IBM's value proposition, click:

Have a better day,



  1. Hi Bill, I really appreciate that approach. As we are being asked about the ROI on that topic, these figures give an overview of what a client could expect.These figures should be pass onto the ITO core team and down to the ITO consultants..

  2. Hi Bill,
    Very interesting article and definitely a hot topic ... IT having moved towards exciting computing models such as Cloud, great financial benefits can be obtained but the management of overall costs is also more challenging ...

  3. I do believe that Cloud, Grid, SOA, SaaS, S+S (ops .. .this is Microsoft stuff) are all a mix of technologies, news business models and philosophic approaches to develop solution trying to assemble what you have and what the market offers. Unfortunately, as for my everyday experience, the ISV/SI, especially the small ones, are miles away from these concepts. The marketing people of the big IT companies should rethink the way these innovations are communicated.

  4. Excellent topic of discussion. Very timely. I have been seriously contemplating setting up a consulting practice dedicated to the "cloud", for both new implementations and migrations. Would love to brainstorm further on issues relevant to the consulting world.

  5. It has been stated in the materials I have read on cloud computing that cloud users can avoid capital expenditure on hardware, software, and services when they pay a provider only for what they use. That may be true, but someone pays.

    Someone pays for and builds the computing centers, hardware, software and networks. If we look at cloud computing like any service you buy, say cable service, the consumer pays the cost of the investment made my the service provider. The consumer pays; the consumer just does not have anything tangible left at the end, except their data, which may be the most valuable asset of the consumer’s business.

    Signing on to cloud computing is akin to the decision making that goes into determining whether or not to lease a car for 3 years; it’s a buy verse rent decision model. For some it’s the right decision for others it’s a no go.

    Managed data service providers have long provides services that fit this model. Managed data service providers operated the facility, provided the hardware and operating systems, network infrastructure. They also insured the systems are maintained, remained patched and in some cases perform hardware refresh. Yet the cost for this is built into the cost the consumer pays.

    With advances in computing in the form of virtualization, managed data service providers will be able to achieve better economies of scale and thus for many of their clients tehy may reduce the cost they charge. Now that is where everyone wins.

  6. Jeff, some great points. I'd also add that in a managed services model, you know exactly where that "most valuable asset" is parked.

    The distinction, IMO, is the net. Which is safer and more cost-efficient: having a known physical site or having a contract that the service will be provided -- don't sweat such details as "from where"? Another question: Does quality suffer -- or can it actually be enhanced -- through the cloud?

    Cloud providers will have to discount their offerings compared to traditional outsourcers unless and until they can make the case that their solution is better.

  7. Question: “Which is safer and more cost-efficient: having a known physical site or having a contract that the service will be provided?”

    If you are just a consumer of general available services that you subscribe to then you are correct that cost-efficiency is King.

    However based on past experience, clients who turn over corporate computing resources such as applications, and data; well they want to know how safe it is, and are they getting what they paid for. These people will sweat the details.

    Question: “Does quality suffer -- or can it actually be enhanced -- through the cloud?”

    How about saying this way; has your cable service improved with competition, or do you now just have more choices in competing service providers who provide poor service?

    Quality depends upon the supplier of the service. The key is service; and supplying services your client bases wants and needs, verse what you think they need. Its about not being nicked and dimes over every little item but being providing services at a price that people feel they are getting their monies worth, having open communications and the means for clients to contact the service provider, and responding and resolving issues quickly and efficiently.

  8. Bill,

    Cloud's the term of the moment, but strikes me as something that's been happening in various forms for many years. At Compuware we've long offered customers an ASP option alongside the conventional license sales. I know, ASP is not exactly the same as cloud but the concept is still basically "rent versus own." While your analysis was focused mainly on hardware savings, my own experience has been that the main benefit consists of little day-to-day tasks going more smoothly. I attribute it to the fact the ASP guys are doing the same thing (in our case, administering the Changepoint application) day in and day out. When an incident occurrs, changes are the ASP team saw it last week with another customer. I estimate an ASP deployment of Changepoint requires about 10% less effort than a customer-hosted one of the same size and complexity, just because of this "knowledge concentration" effect.



  9. Bill:

    Very timely subject and some thought provoking questions. I look forward to seeing more on this.

  10. Since my interest is in offshoring, it would be good to write, in some future post, where the cloud will be scattered geographically.

  11. Stay tuned, Dr. Carmel.

    We'll be examining where the cloud infrastructure is concentrated now, then we'll look at where expansion is likely to occur.

  12. Our dev/test/preprod environments are about 80% utilized because we continuously run automated tests during the off hours.

  13. Hi Bill, good job getting this going. I'd like to offer some additional context, based on my own experiences, that your bloggers may find helpful.

    If we think in terms of a cloud environment being a new solution approach (or at least a new dressing on an approach the industry has been trying to move towards in recent years) then it is useful to think of it as a target environment that changes some element of the existing environment. The key word here is change.

    Why would any IT management team today consider change? There are costs and risks associated with any departure from the current state. Presumably they are missioned to provide a certain set of services to their end user community. This change would need to be orchestrated in such a fashion as to maintain service levels during a period of change and utlimately arrive at a target state that delivers value to these users, with minimal if any disruption.

    If we accept that cloud computing represents a change, then it becomes very important to understand the current state of the IT environment, the target state of some portion of the IT environment (assuming a wholesale change to a cloud based delivery of IT services is too big a sea change to manage), and the process by which this change can occur.

    One important aspect of this change is the justification for it. This is really an exercise in looking at the business value of this change and associated with this the financials that support change. This can not be done without an understanding of the current environment, the issues that need to be addressed, and how the new cloud solution addresses these issues.

    There are other equally important aspects to consider such as selecting the right environment (application, funtion, department) for a cloud approach (whether it be a private or public cloud model); having the right sponsorship for change at the executive and management levels of the IT department and in the end user lines of business; and developing a plan to obtain necessary information and approvals that will be used to design the solution and implement it.

    I mention this because the excellent work you do in building the financial story is really in support of a change the business wants where cloud computing is a potential solution. It is a very necessary aspect of successful change but there are other dimensions to consider as well. The good news is financials tends to be an area needing the most help so your blog is very interesting to me and I plan to follow it!