Financial downpours from the Cloud

21 May 2014

Experts predict strong growth for the cloud computing sector in the coming years, with profits soaring into the billions and a coinciding macroeconomic spill-over onto GDP and the job market. But as far as preparing the way towards a flexible, state-of-the art IT model for flexibly managing business procedures, both decision-makers and CIOs are primarily concerned with cloud services’ efficiency.

From an economic standpoint, companies – especially medium enterprises ¬– will have no choice but to engage with the topic of cloud computing in the future. But to adapt to the new model, IT managers must be willing to squarely assess the current state of their IT’s health with regard to efficiency. This reveals which IT services, depending on the business procedures in which they are anchored and the degree to which they involve sensitive data, can feasibly be moved to a cloud-based model. It also generates insight into which specific set of services are best suited to one’s situation.

Profitability a Key Factor in Choice of Cloud Service

Due to the prevailing financial pressure within the IT industry, assessing the economic viability of cloud computing requires above all rigorously ascertaining its monetary advantages over companies’ traditional in-house IT model. The “total cost of ownership” (TCO) calculation model provides a useful means of determining the direct and indirect IT costs of both models over the total life cycle of the IT services in question. This only works, however, if one can predict one’s own future IT requirements fairly accurately.

If it is not possible to quantify the economic benefits in monetary terms, providers such as Fabasoft can work together with potential adopters of cloud computing and experts to predict future cost/benefit ratios through scenario simulation techniques. They can subsequently conduct further cost-benefit analyses that also take soft factors into account.

Cloud Value Not Only About Cost

Both the financially measurable and the immaterial (intangible) gains often only become apparent years later. Nevertheless, they are essential to selecting the most economically viable cloud computing solution. Cloud computing’s value lies not just in reduced costs, but also in the agility, flexibility, and security that businesses gain from it. Among the related gains are operational mobility, efficiency in the development of procedures, increased flexibility for workers, a more graceful harmonising of the company’s strategic orientation with IT and the ability to devote freed-up personnel capacities to the core business.

Eluding the Perils of Outsourcing Security

At the same time, an extended benefit analysis has to examine the risk of loss of independence, such as a “lock-in,” and imminent dangers related to sensitive data, the loss of control, corporate processes, compliance rules and and the retention of the IT’s ability to react in the case of a crisis.

Investments Become Operating Costs

In light of all these strict proofs of the profitability of cloud computing, companies will quickly grasp the economic superiority of cloud computing to current IT models. With regard to cost, cloud computing’s most obvious strength is that it eliminates the need to invest in hardware and software. This transforms the customer’s capital costs (CAPEX) into operative costs (OPEX). Cloud computing, which is comparable to a kind of “leasing,” offers a way around long-term investment of capital. It also creates financial gains via scaling effects (“economies of scale” for purchasing power, labour expenses for infrastructure, security and reliability, and power costs) as well as through cutting IT costs through the degree of automation in the providers’ data centres, which additionally decreases IT expenditures. In the cloud business, providers who want to stay competitive not only carry the entire financial burden of investing in the construction of future-oriented infrastructures, but also assume the vast responsibility of operating and maintaining IT resources for their customers as well. This reduces labour costs for companies and increases efficiency by freeing resources.

Better Distribution of Resources and Flexible Scaling of Resources

Due to the high degree of virtualisation of data centre capacities and the client capability of the providers’ systems, cloud service providers can react quickly to their customer’s needs even at peak workloads. Thus, cloud users don’t have to set aside reserves for handling emergencies or accommodating seasonal fluctuations. This vastly boosts productivity, particularly in the case of unpredictable user behaviour. This effective allocation of resources according to need overcomes the otherwise inefficient utilisation of servers, which otherwise can operate at a mere 20% of capacity. Basically, the following dictum holds true: cloud computing is lucrative not just by virtue of its affordability, but also because it enables resources to be allocated in accordance with users’ profiles.

Payment According to Actual Use

From an economic perspective, payment models – most of which work on a pay-per-use basis - are especially relevant in cloud computing. The deciding factors in determining costs are the volume of data transferred and the amount of stored data. In cloud computing, the demand placed on servers, which can blow costs through the roof in traditional IT costs, is no longer relevant.

Although the conventional wisdom is that users of the cloud services only pay for what they actually consume, selecting the right provider is of crucial concern. Many models operate with a generic fee and, in addition, with non-linear, sensitive price models, which, in terms of cost, can be very profitable at the fluctuation of usage intensity. The number of cloud users within a company also plays a role, and more often than not, favourable time units for server use are a cover for the actual costs that long-term use can generate for many kinds of use.

In the case of hybrid cloud models and the related division of responsibilities, it is important to remember that a remainder can be obtained on operational costs for security, backup, recovery and monitoring. Moreover, further extra costs can arise through the use of additional virtual servers, load balancing, spam filtering, and the installation of middleware. If you truly want your cloud bill to tally up, you would do well to opt for the most transparent of providers’ billing models.

More Secure in the Cloud

A benefit of cloud computing that should not be underestimated is its superior security. Professional patch management, which enables cloud users to update back to the newest software versions automatically, makes this clear. And as far as hardware is concerned, users can be assured that the technology used is always state of the art.

When changing providers, the following issues must be addressed in the contract with absolute clarity: the secure administration of data in the cloud, the opening of shorter, particularly secure means of transfer via proprietary fibreglass connections that lie outside of the public Internet, exceptional data protection standards, compliance with the highest compatibility norms for integrating multiple cloud services, “commoditing” in the case of highly used services, as well as exit regulations regarding data authority and data return. Thus, cloud computing can overcome this last, huge obstacle to widespread B2B usage. In this arena, too, there is a demand for a community cloud that provides the assurance that sensitive data is stored in local, well-protected data bunkers and made available for web access.

Cloud Computing Pays Off

The full economic viability of cloud computing becomes apparent in light of constantly growing networking within the economy, the ubiquitous interaction between companies in the digital world and the ever-growing mobility of people, content and data. Its targeted use gives companies a tool with which they can measure the success of their business. This refers both to operational goals and the verification of cost efficiency as well as the optimisation and innovation of business models that could foster new market opportunities. Customer expectations can also more easily be addressed thanks to the overall acceleration of the process. For this purpose, however, organisational structures, processes, and company culture with regard to the cloud as a whole must change in tandem with the paradigm shift to cloud computing.

The Next Step to Even Greater Profits

The future of cloud computing will see a shift from a service-oriented business model to a data-driven one. The innovation introduced by the analysis of big data, driven especially by the integration of tons of new data from the Internet of Things (e.g. through sensors in grid applications) and social media translate today’s business intelligence applications to “datability” concepts over the long haul. That term, by the way, was the motto of this year’s CeBIT. Cloud-based environments, which now form the essential technological backbone of today’s IT landscape, will sustainably stimulate the establishment of predictive analytic processes for large, unstructured volumes of data from different data sources (Geo, Context, Web, and M2M, for example). The data business will give rise to new, economically beneficial value chains. Cloud computing is all about economic viability!