Cloud Computing Financial Fundamentals: Leveraging Economies of Scale

Ask most information technology (IT) specialists and they’ll tell you that choosing to include “cloud computing” services is more about finance than technology.

Imagine that you acquired an apartment building or an office tower and you rented the entire thing to one tenant.  Their rent would have to cover all of your costs including debt service, maintenance, operations, insurance, and a reasonable profit for you.  If the building contained, say, 70 rentable units you could split that cost 70 ways and charge each 1/70^th of those costs.  Simple.

The exact same analysis can be applied to cloud servers.  Originally when a company purchased a “server” it was to run one operation that all employees could share.  There was a server that enabled users to share files, another to share communications, another to share email, others to share specific software applications.  Over time many companies built an entire “server farm.”  Many developed what is referred to as “server sprawl” where there were just too many servers making it difficult and expensive to operate, manage, and support them all.

Virtualization

What would happen if you could have a server run more than one operation?  What if you could run file, communications, email, applications, and more server operations inside one machine?  Yes, you’d need to have much more memory and more powerful processors in that machine, but think about the benefits!

• First and foremost you wouldn’t have to buy so many servers!  Reduced capital expenditures (CapEx).
• Having bought fewer servers, your cost to power servers would be drastically reduced.
• Your cost to house fewer servers would be far less than to house a large server farm.
• Having reduced your physical plant for server operations, you’d pay much less to cool the smaller space.
• You would no longer have to pay to maintain and service so many machines.
• You wouldn’t need as much staff to manage and support servers.

Not only would you reduce CapEx, you’d reduce operating expenses (OpEx) too!

This is what “virtualization” is; software that allows you to run many server operations in one server machine.  Right now the technology allows the running of dozens of server operations.  There’s already technology that can run hundreds and the costs are coming down.

Cloud Computing – Created by Cost-Cutting Concepts

When personal computers and local area networking first became popular in the 1980’s servers, storage, workstations, and other peripheral devices would all be integrated and installed on the company’s premises with cabling that would connect all the workstations to the servers.  Every service needed would be produced right there, including administrative as well as productive services.

At some point, an enterprising technology company realized that certain services could be produced more efficiently in their own data center, and by doing so could be sold to many different companies rather than just be serving one.  The cost of operations could be spread among all companies purchasing that service, dramatically lowering the cost per company.

One excellent example is data backup.  While it is a simple enough service, copying the company’s data from the servers onto another storage medium regularly just in case the server fails, it is also one of those services that require user intervention on a regular basis; someone has to change and rotate the backup media frequently.  This is often forgotten, sometimes with dire consequences.

Connecting many companies to a remote data backup service over the internet or leased lines is a simple enough task.  That remote data backup service is focused on that service and performs it better than anyone else.  With reduced cost to have them backup the data, removal of the mechanical responsibility to change media, and the comfort of receiving confirmation reports regularly the argument to use a remote data backup service is compelling.

Apply the same concept to other IT services.  While a company of 25 people could hardly justify the expense of installing their own email server, they can now rent or subscribe to that service and pay a very reasonable fee per user per month.

This is the heart of cloud computing; an alternative way of delivering traditional IT services that is less expensive, with higher services levels assured and delivered by professionals who do nothing else but deliver that service.  Better service at lower price.  Extremely compelling.

How Simple Financial Analysis Tells Us How Secure Cloud Computing Is

More and more articles are being published regularly reporting how secure cloud computing truly is.  Fiduciary responsibility requires us to closely examine this, but a simple common-sense observation strongly votes confidence.

There are some very large companies betting their businesses on cloud computing.  Microsoft, Google, Amazon, Verizon Terremark, Apple, HP, Dell, IBM, Rackspace, and more have all invested billions in building data centers to deliver these cloud services to corporate and consumer customers.  They simply cannot afford to have their customers’ data be compromised.  The risk is the loss of their credibility and their entire business.  As a result they continue to invest far more than any customer company could invest in assuring the security of their customers’ data and networks.

Next Post

Of course, the fact that these cloud behemoths invest so heavily in security doesn’t belie the fact that the customer company still owns responsibility to its stakeholders to assure the safety of their critical high-value business data assets.  In our next post we’ll focus in on measures companies should make sure are in place as they take advantage of the cost-savings and service improvements available from cloud computing.

Questions?

Don’t wait for our next post.  If you have any questions about cloud computing, how to best implement it in your company, or how to go about determining which cloud services would serve you best, give Genesis10 Managed Services a call. We’ve helped many companies identify and leverage their best cloud opportunities.  We’re objective, informed, and experienced with cloud computing technologies and ready to share all of that with you.