The Economics of Business and the “Cloud”

It is well known that Henry Ford did not invent the automobile or the assembly line, but he did develop a production process that allowed motor vehicles to be produced in the most cost effective way.  In actual fact Henry Ford’s strategy was relatively simple; reduce production costs and take a lower profit margin per motor vehicle.  The end result was that it made the Model T more affordable, and in exchange this significantly increased sales. “In 1914 Ford produced 308,162 cars, which was more than all 299 other auto manufacturers combined.  By the time the last Model T was built in 1927, the company was producing an automobile every 24 seconds.”

We have seen this with Dell in the PC Industry as they have continually re-invented themselves to take advantage of inefficiencies and opportunities in the market whether that has either been streamlining products, introducing new distribution channels or targeting new segments of the market.  The premise was based upon how could Dell take advantage of an industry’s inefficiencies, be more strategic and more effective than the competition.

We saw this with Steve Jobs when he returned to Apple in 1997.  As a strategy he reduced the number of PC and Notebook models from 40 to 4.  This allowed Apple to channel their vital financial resources into these models thereby striving to improve the innovation and quality within these existing products.

In each of these cases these companies have used their perspectives and insights to take advantage of their precious capital to re-cast the direction of their company to better support their markets.

We now see this with the true emergence of cloud computing in the enterprise market, and that this will provide organizations with significant opportunities to re-direct their precious resources into other areas of the business.  This direction is fundamentally shifting the economics of IT, and providing business with a great opportunity here.

Therefore what we do understand from this is that economics is a powerful force in shaping industry transformations. In today’s article we want to examine the economics of the cloud for business.    So what does “cloud computing” do to IT resourcing and management as we know it today?  Well simply put it does the following:

1. Standardizes and groups IT resources and automates many of the functions that are done manually today, i.e. software upgrades, changes to server capacity, and overall maintenance; and
2. Allows for variable consumption and self-servicing in supporting evolving and changing business needs.

So where are the improved economies of scale for your business?  Well under “cloud computing” your business applications and supporting data now reside not on your local servers but in large data centers provided by your Cloud Provider. In Microsoft’s article “Economics of the Cloud” in November 2010 they identified three areas:

1. Supply-side savings;
2. Demand-side aggregation; and
3. Multi-tenancy efficiency.

Supply-side savings

The creation of large data centers by cloud computing is not taking us back to the days of the mainframe. Today in our world there is far greater scalability and agility in business and personal computing.  Therefore “cloud computing” provides savings in the following areas:

1. Energy costs per server;
2. IT costs involved in maintenance and with upgrades;
3. Expertise of the cloud computing provider as a specialist supports security and reliability;
4. Cloud computing providers have greater buying power in sourcing hardware to support this environment.

These will directly and indirectly pass on all important savings to your business.

Demand-side aggregation

This is not just about savings, but it also about how to deal with vagaries of utilization, capacity management, which can increase your IT costs.  In business there will be peak times and there will be quiet times throughout the day, month and year.    If a business is not in the cloud it has to make investments in infrastructure to address the issues:

1. Time of the day, industry, differing computing needs and general randomness – variability of users needs and access patterns; and
2. The overall growth pattern of your company.

Cloud providers address this through the pooling of resources, be it hardware, software and personnel across multiple clients, across multiple geographies and time zones.

Multi-tenancy efficiency

Rather than operating an application for each business as an “on-premise” solution does, multi-tenant applications allow multiple businesses to use a single and common application, like Office 365, on a shared basis.  For your business this has two important benefits:

1. The labor cost associated with managing this on-site is now allocated across your business and others; and
2. The server costs are also allocated across your business and others as well.

The greater use of multi-tenancy the greater the opportunity to generate real economies of scale for your business.

Key take-aways

As a business owner capturing these savings and benefits is not as simple task.  Demand-side aggregation and multi-tenancy are difficult to implement on their own, so it is important to remember that the economics of the cloud is different for packaged applications as opposed to customized applications.

As identified in Microsoft’s article “Economics of the Cloud” in November 2010 they identified three important economies of scale:

• Larger datacenters can deploy IT resources at a substantially lower cost than smaller ones;
• Demand pooling improves the utilization of these resources, especially in public clouds; and
• Multi-tenancy lowers application maintenance labor costs for public clouds.

To discuss the issues and opportunities of shifting into the cloud please make time to meet with your IT Services Manager to discuss this in more detail as to how it relates to your business.