There’s no doubt that cloud computing has received a great deal of interest from companies both large and small over the last couple years.
Gartner Inc. estimates that cloud services revenue grew 17 percent in 2010 to $68 billion. The promises of ROI, cost savings and lower total cost of ownership are some of the major contributors to this trend.
Despite this fact, there are many companies that still aren’t seeing the cost savings. A CIO of a major health care company recently had this to say about moving to a cloud based PBX: “I did look at the cloud solution very carefully and it was just too expensive.”
Smart Business spoke with Mark Swanson, the CEO of cloud communications provider, Telovations Inc., headquartered in Tampa, Fla., to get a better handle on cloud financials.
If you put your financial hat on, how should one look at the cloud?
The easiest way to think about cloud computing is that your technology infrastructure — the servers and software you purchase, run and maintain — is on the Web. Unlike traditional software, which is deployed on-premise, cloud applications are designed for Web deployment — that is they are multi-tenant and users share processing applications managed by the vendor. From a financial perspective the cloud has three basic attributes:
- Little or no upfront costs. Instead of paying license, hardware and/or installation fees, users pay as they go. There’s little upfront capital cost as companies pay per user, usually by a monthly fee. From a financial perspective, you can take advantage of scale, which means the cost per user is less, especially over shorter time horizons like less than five years. In addition, these systems require skilled technicians to deploy and maintain, so perhaps the biggest thing you realize is that the upfront costs include the cost of hardware and IT employees that no longer need to be in-house.
- No hardware or maintenance costs. In the cloud, the vendor takes responsibility for maintaining the software and servers. However, if you just evaluate the ROI of switching from on-premise to cloud products by comparing what they are spending now to what they will be spending if they switch, it’s not really comparing apples to apples. In an on-premise environment, the customer pays for the hardware, storage space and IT personnel to maintain the system, in addition to the software. In a cloud environment, the vendor fronts those costs, so a larger percentage of the total cost of ownership by the customer shifts away from hardware and people and toward software.
- Quick implementation process. Many seasoned IT professionals have heard the nightmare stories about over budget/over time failed implementation projects where you are spending money but getting zero benefit. With the cloud, most applications can be up and running in a few minutes because there is no software to install. The implementation process also is easier for companies with multiple locations or remote workers as everyone can have access to the same version of the application simultaneously.
After you pick an adequate time horizon, a Net Present Value (NPV) calculation can be quantified pretty easily. But it’s really the intangibles that make or break the calculation.
What do you think is an adequate time horizon to evaluate?
I suggest analyzing whether to make the switch as a three-year amortization of upfront costs for an on-premise application including servers, software licenses and installation, plus estimated maintenance and support costs, and comparing that to the cost of subscribing to the cloud version of the product for three years. Some might think that three years is too short, but according to many studies three to four years makes sense for several reasons. What you have to consider are unplanned events: you get acquired, technology obsolescence, you grow too fast, and the big one, how long apps take to test. Gartner also reports that testing consumes 25 to 50 percent of the average application life cycle. That’s a year right there!
What are the intangibles that sway the calculation?
This is where you get into what I call ‘BeanCounteritis.’ Many financial people get wrapped around the axle about the hard cost comparison with premise based systems. The real savings and return lie in the soft costs surrounding cloud based applications, including:
- Office space. Create ways to work remotely, which enables savings on office space through hoteling or home offices.
- Reduced support costs. Rather than having to employ in-house experts for product support, the vendor typically provides support directly for the customer.
- Reallocation of resources. IT staff can focus on more strategic projects, rather than system upgrades and maintenance.
- Easier and more regular upgrades. Vendors regularly upgrade products. In the cloud, those enhancements are made automatically in the background without disrupting work.
- Disaster recovery and backup capabilities. One of the costs incurred by customers who keep their data on-premise is backing it up, typically via tape or a third-party backup provider. This is another area covered by the vendor in a cloud environment.
- Credits from SLAs. Downtime is never good and it is particularly bad for cloud vendors. They spend extra money to make sure it does not happen. And if it does you get a nice credit. You won’t get this from your IT staff.
Any other symptoms of ‘BeanCounteritis’?
Perhaps the biggest threat of ‘BeanCounteritis’ is not considering risk. Often companies become so gun shy about pulling the trigger on large capital expenses that they let others get a leg up on them. The cloud ultimately is a way you can count your beans and eat them too. The cloud makes it easy to change direction without incurring the capital costs and significantly reduces the cost of failure. That’s the great thing about cloud apps.
MARK SWANSON is the CEO of Telovations Inc. Reach him at firstname.lastname@example.org.
Has your chief information officer already mentioned cloud computing to you? If not, he will do so soon. The research firm Gartner estimates global spending on cloud services will hit $68 billion this year, a gain of 16 percent over 2009. That is more than triple the expected growth rate for total IT spending. It will be difficult to avoid the cloud, but as with most hot technology trends, there is more to it than what the gurus are telling you.
Cloud computing offers the opportunity to better utilize computing assets in a shared IT infrastructure environment. Gartner defines cloud computing as “a style of computing where scalable and elastic IT-related capabilities are provided ‘as a service’ to customers using Internet technologies.”
This means that computing resources — hardware, software and communications — are offered to users on demand and are priced on a “pay as you go” basis. In essence, a computing task moved to the cloud becomes a service provided by a third party in its own data center, allowing companies to scale down their huge investments in IT hardware, software and staff.
Quite aware of this trend, the IT industry is expected to step up development of products specifically designed for the cloud. According to research firm IDC, 80 percent of new software offerings will be available as cloud services in 2011.
Beyond the easy access provided by the Internet, the key technology driving the advent of the cloud is virtualization. Virtualization allows multiple hardware components to act as if they were a single system while creating separate logical compartments that empower systems from different companies to run simultaneously. Virtualization tools allow data centers to operate cloud computing services, providing access to IT resources to different businesses concurrently and in a seamless manner.
But cloud computing is not for everybody and for everything. While it is the best alternative for business environments that have significant volume shifts or for one-off computing needs, there isn’t an airtight business case for cloud computing when it comes to day-to-day information processing needs.
The industry has not demonstrated that the complex systems that allow you to sell, invoice, collect and generate your reports can be more efficiently run on a cloud environment. In fact, there are still very few studies that help answer this question.
As with any other business decision, prudence is the best approach. There is no need to be at the forefront of technology until the economic imperative is proven and documented. Your business needs to be a steady operation and that is better served today by your current IT infrastructure, be it in-house or outsourced to a third party.
On the other hand, there may be some situations that are better served by applications that run on the cloud. If your e-mail service is truly mission-critical — as it is to most businesses — and you cannot afford to build the redundancy required to ensure uninterrupted, around-the-clock service, you may want to consider outsourcing it to a cloud provider.
If your CRM requirements are covered by one of the standard software-as-a-service offerings where you do not need to buy infrastructure, you may want to go with a cloud solution.
Be cautious when it comes to your core systems, especially the ones you have been building over the years. An effort to move processes to the cloud that are currently being run by complex, customized applications might present interoperability, migration and other technical issues.
You do not want to be left out of the cloud computing revolution. But at the same time, you do not want to put all of your eggs in the same basket. The economic environment is challenging enough without volunteering to put your company at risk by being the guinea pig for the newest trends in the tech world.
Claudio Muruzabal is CEO of Neoris, a global business and IT consulting company that specializes in SAP and application outsourcing. You can visit the company atwww.neoris.com.