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Wednesday, November 17, 2010

The Cloud Economics : Emerging Signals

Over the weekend, I finished reading the recently released Microsoft paper on the “Economics of the cloud”. As I head to Denver today for participating in the defrag panel on the impact of cloud computing in the enterprise irregulars track, I just wanted to share some thoughts on the theme which I want to discuss while at the conference both on and off the stage.

The Microsoft paper starts by connecting the dots between technology, economics, and disruption:

Economics are a powerful force in shaping industry transformations. Today‘s discussions on the cloud focus a great deal on technical complexities and adoption hurdles. While we acknowledge that such concerns exist and are important, historically, underlying economics have a much stronger impact on the direction and speed of disruptions, as technological challenges are resolved or overcome through the rapid innovation we‘ve grown accustomed to….

The pressures on IT & the engulfing sense of change in the IT landscape are hard to overlook. The pressures would mean more business begin to seriously look at SaaS, re-negotiating license terms, focusing on rapid adoption of virtualization etc. As part of this and beyond, internal IT would be forced more and more to show more bang for the buck and it is my view that organizations would begin to look more and more to question committed costs and begin to aggressively look at attacking them more systematically – earlier sporadic efforts marked their endeavors. This could also unlock additional resources that could potentially go towards funding new initiatives. There are enough number of enterprises going this route and their service partners are also in some cases prodding them to go this way.The emergence of cloud services is again fundamentally shifting the economics of IT. Cloud technology standardizes and pools IT resources and automates many of the maintenance tasks done manually today. Cloud architectures facilitate elastic consumption, self-service, and pay-as-you-go pricing.

The paper starts by highlighting that the basis for the economic advantage in the cloudosphere is the economy of scale available to cloud computing data centers. The paper identifies three areas of scale advantage:

1. Supply-side savings: Owing to scale, Cloud data centers have lower costs per server.

2. Demand-side aggregation: By aggregation, cloud can support an intermix of tenants and therefore directly contributing to higher server utilization rates ( this would be definitely higher than what can be achieved with single-tenant data centers).

3. Multi-tenancy efficiency: Hosting multiple tenants brings administrative cost overheads, and lowers server cost per tenant and by extension cost per data center user goes down.

On the demand side of things, the story is complementary and drives similar conclusions. By aggregating volume of compute usage, cloud service providers enable users to smooth out peaks and valleys. The contention here is that by pumping up large server volumes, corresponding increase in utilization can be achieved and this has the effect of reducing operational costs. Now extend this scenario : cloud service providers can potentially run a number of data centers while administratively support them through centralized NOCs, with the results the costs can get further spread across.

The paper notes,"public clouds are in a relatively early stage of development, so naturally critical areas like reliability and security will continue to improve. Data already suggests that public cloud email is more reliable than most on-premises implementations". In concluding the section on economies of scale, the white paper goes on to state that economies of scale are so significant that the TCO calculated server wise of a 100K server data center is 80% lower than that of a 1K server data center. While there are legitimate opportunities for a set of customers to pursue private cloud in certain periods of time in their cloud journey, strong indicators suggest that over time the cloud efforts would begin to coalesce around the public cloud given significant computing economic advantages – these need to be to be recognized, and in the process of this journey, vital concerns regarding security and reliability will get addressed (gradually melt away) thus feeding the momentum into the public cloud journey.

Clearly economics will begin to weigh its hand if the cost advantage of public cloud over the private ones are of the order of 10X as the paper seems to suggest . The paper also suggests that any SMB would be crazy to factor on-premise or private cloud into their future strategy when these options are going to cost up to 40x more than public cloud alternatives. I would love to see the complete data points on which the benefits have been quantified and inferences drawn - this will be very useful in advancing the body of knowledge and state of practice of cloud adoption inside enterprises. Lets examine from an organization standpoint : As I wrote earlier, setting up private cloud is a motherhood statement at best( in many organizational surveys, one can find setting private clouds is not in the CIO’s top three priorities – if anything virtualization finds a place-) to make this happen in a credible way means re-examining most parts of IT functioning and business –IT relationship inside enterprises. IT teams while conceptualizing private clouds are happy to retain existing architectural designs, happily propose a clasical DMZ/Perimeterized model for providing security and enabling access, too often leveraging a highly virtualized infrastructure. More often than not, it’s enabling virtualization, automation and self service and color it as private cloud. Do recognize the implicit differences in constructing a private cloud and a public cloud. Comfort with the status quo with some adjustments versus an opportunity to rethink architecture, security, privacy,compliance needs in a way summarizes the nature of thought process and expected results between the private and public clouds. Speaking more directly, public clouds present the opportunity for enterprises to review and achieve specific requirements in the areas like agility, flexibility and efficiency at optimal effort Versus a skewed , boxed implementation of private cloud setup. Taking advantage of the public cloud benefits would far outweigh the advantages of getting boxed inside with private clouds.

Most elements of the bedrock gets affected – the processes, culture, metrics, performance, funding, service levels etc. Well thought out frameworks, roadmaps need to be put in place to make this transition successful. These frameworks need to cater not only to setting up internal cloud but eventually help in embracing the public cloud over the years- not an easy task as it appears. A few of those organizations that master this transition may also look at making business out of these – so it’s a journey – that needs to be travelled onto embracing public clouds. Some business may take a staged approach and call it by private cloud, internal cloud or whatever but eventually the road may lead into public clouds!

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