Economics of Cloud Computing
There are many reasons for organizations to move from traditional IT infrastructure to Cloud Computing. One of the most cited benefits is the economics of the Cloud. Yet while many people point out the cost savings that Cloud Computing brings to an organization, we believe attention should be drawn to four distinct mechanisms through which these cost savings are generated.
- By lowering the cost of running technology
- By allowing for a shift from capital expenditure to operating expenditure
- By lowering the total cost of ownership (TCO) of technology
- By giving organizations the ability to add business value by renewed focus on core activities
Basic principles of Cloud Economics
- Economies of scale
- Higher price, for a shorter time
- Utilization/burstiness -> key factors
- Elastic capacity
- CapEx -> OpEx
Traditional IT expenditure has been very capital intensive. Hardware had to be bought outright and software licenses were generally an expenditure that appeared on the balance sheet. For this reason the decision making process for technology spend became very costly affair.
One of the core tenets of Cloud Computing is that it is a recurring expenditure model, it is much like telephone or electricity expenditure in that it is accounted for as a standard operating expense.
Operating expenditure (OpEx) is the New Capital expenditure (CapEx)
OpEx is beneficial for the organization, as it gives it the flexibility to terminate costs at will. With a capital purchase, the server or software being acquired is fully committed to. Regardless of whether it is being utilized, the ongoing costs (by way of depreciation or financing costs) still need to be borne.
Contrast this with OpEx where, in the event that the item is no longer required, payments can cease rapidly. It is for this reason that many companies prefer leasing vehicles in place of purchasing them outright.
Allows Business Units to Decide
Most organizations have relatively strict rules in place for all but the most simple of capital expenditure spending. Operating expenditure however tends to be more frequently delegated to individual business units.
As Cloud works on operating expenditure it gives business unit to flexibility to decide and work on new ideas.
Overcomes Expenditure Limitations
Acquiring capital for large purchases is difficult, for all sizes of organization. This is especially true for smaller organizations. Moving to an OpEx model removes this limitation and allows small scale projects to be undertaken, unconstrained by capital considerations.
Total Cost of Ownership
When comparing costs between on-premise options and Cloud Computing, it is important to accurately assess the true costs of both options. It’s important to remember that, with the Cloud, most costs are upfront and readily calculated; this is due to a number of factors:
- Cloud providers give transparent pricing based on different usage metrics • – RAM, storage, bandwidth, among others
- Pricing is frequently fixed per unit of time. Customers gain certainty • over pricing and are then able to readily calculate costs based on several different usage estimates
Compare this to calculations of in-house costs
- The direct costs that accompany running a server: power, floor space, storage, and IT operations to manage those resources.
- The indirect costs of running a server: network and storage infrastructure and IT operations to manage the general infrastructure.
- The overhead costs of owning a server: procurement and accounting personnel, not to mention a critical resource in short supply: IT management and its attention.
The term “moving to cloud” also refers to an organization moving away from a traditional CAPEX model (buy the dedicated hardware and depreciate it over a period of time) to the OPEX model (use a shared cloud infrastructure and pay as you use it).
How Cloud computing is helping the Industry and business.
1. No Upfront Investment
Just pay low monthly cost for infrastructure you use, instead of big upfront infrastructure investment. It reduces spending on technology infrastructure.
Whether you run a small or big business, you need to invest on infrastructure that can be slow and expensive. There is expensive hardware that needs to be ordered, paid for, installed and configured – and all of this needs to happen long before you actually need it. With Cloud Computing, you don’t have to spend time on these activities; instead you just pay for the resources you consume on a variable basis. Cloud computing maintain easy access to your information with minimal upfront spending. Cloud computing is Pay-as-you-go (hourly, weekly, quarterly or yearly), based on demand billing.
2. Reduce capital costs
There’s no need to spend big money on hardware, software or licensing fees.
Cloud Computing helps you reduce your overall IT costs in multiple ways. Economies of scale and efficiency improvements allow us to continually lower prices, and Cloud vendor’s multiple pricing models allow you to optimize costs for both variable and stable workloads. Additionally, Cloud Computing drives down up-front and on-going IT labour costs and gives you access to a highly distributed, full-featured platform at a fraction of the cost of traditional infrastructure. It also increases volume output or productivity with fewer people. And very important point for your business is your cost per unit, project or product plummets.
3. Globalize your workforce on the cheap
People worldwide can access the cloud, provided they have an Internet connection.
Cloud computing provides various features and resources that enables you to setup your infrastructure world-wide and at the same time you can control your infrastructure sitting on remote location.
For example while sitting in India you can setup your IT infrastructure, run your application and maintain them somewhere in USA, Japan, Singapore or some other location. Physically setup infrastructure and maintenance cost is too high for small business and also it is risky for big business.
4. Streamline processes
Get more work done in less time with less people.
One of greatest feature of Cloud computing is on-demand self-service. With traditional infrastructure, it can take weeks to get a server procured, delivered and running as it has to go through several approvals in company. These long timelines stifle innovation or project sometime. With Cloud Computing, you can provision resources as you need them. You can deploy hundreds or even thousands of servers in minutes, without talking to anyone. This self-service environment changes how quickly you can develop and deploy applications and allows your team to experiment more quickly and frequently.
5. Improve accessibility
You have resource access anytime, and anywhere, making your life so much easier!
Cloud Computing is accessible through Internet. So that sitting in USA you can setup and access your infrastructure from anywhere in world using Internet connection.
Cloud computing provides way to access and control your application, database server, web server, storage server etc.. just sitting at your home using a laptop having Internet connection at any point of time.
We stress however, that there are multiple forces at work leading to the growth of Cloud Computing. The economics is one of the forces and we believe one should look at broader benefits and impacts beyond pure economics while considering Cloud.
Conclusion: These benefits accrue to a business in two distinct ways directly through reduced costs and indirectly by allowing for increased focus on core business functions.
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