The cloud offers business agility and cost optimization. Organizations are increasingly shifting to cloud services so they can focus attention on their core business. Cisco predicts that 94% of enterprise workloads will be in the cloud by 2021.
Rather than tying up your cash in a computing infrastructure investment that will be overprovisioned or underutilized, the cloud will fit into your capacity and its expenses will track with actual demand. This could save you significantly.
Reducing operating leverage and improving cash on hand frees up resources for other investments. The cloud also offers the ability to ramp up new initiatives quickly, simultaneously reducing the cost of failed experiments, so you can accelerate innovation and achieve disruptive improvements in business process efficiency, productivity, and competitiveness.
Cost of cloud adoption
But as we previously noted, the cloud isn’t best in all scenarios.
Just comparing the cost of cloud vs. on-premises infrastructure is tricky. Much of the cloud’s promised cost efficiency comes from on-demand scaling; does your business have that variable workload and variable need for services, or a relatively high and stable load? Alternately, your organization might be big enough to benefit more from building your own cloud with custom technology optimized for your needs, just like Dropbox.
Cloud costs lurk in unexpected places. When you move existing applications and services to the cloud, there is the up-front expense of adapting them to actually achieve cost efficiency and high availability. Once data is in the cloud, providers tack a bandwidth toll on using and moving it. Often some resources must stay on premises, entailing the cost of a hybrid environment. To avoid the dangers of vendor lock-in, the cost of a multi-provider strategy is required.
Expensing non-essential items to a service provider who can do them better/faster/cheaper than you can in-house is familiar. But outsourcing parts of your technology infrastructure entails less visibility into and control over business-critical operations. So the cloud provider’s guarantees and reputation must be carefully assessed.
You give up sole control when you move valuable and sensitive data and applications — potentially your crown jewels — from your own servers to a cloud vendor. Security, privacy, and compliance must be factored (while recognizing that a cloud provider usually has better security resources than you do). Security in the cloud requires specialized expertise and becomes an ongoing division of labor between you and your cloud provider(s).
Further, as the Harvard Business Review has noted, the extent of change and the risks entailed by embracing the cloud’s “pay as you go” economic model can be overlooked.
The implications of pay as you go
The cloud promises a “pay as you go” model where expenses track your actual usage. The nuance is that what once was capital expenses are now operating expenses.
The established model of paying for technology was procuring hardware and software from a vendor as capital expenses, and assuming the ongoing cost of maintenance and service. Before taking that step, you had to assess that your long-term business would support the new investment.
Now, the money is not locked into a big upfront investment. With pay as you go, the costs are spread out, as the cloud services are used.
What were constant expenditures become variable. Reducing your proportion of fixed costs can reduce your organization’s risk, but you must also factor in that the expanded operating expenses are likely more volatile and difficult to control. Your cash flow can become more unpredictable. You need a greater focus on managing operating expenses.
Risks of the Cloud Economic Model
Thus there are risks associated with the “pay as you go” services model. The cloud provider and the customer must reach some agreement on who bears what share of the risks.
For the customer, cash flow becomes more volatile. For the provider, “pay as you go” means there’s no guarantee of future business. When the business cycle takes a downturn, customers get to hold onto their cash and the cloud provider takes the hit.
Customers want guarantees for performance and availability if they are to move critical applications to the cloud. Providers know that if they assume the bulk of the risk, the liability to cover losses to multiple customers could be unaffordable. Providers have reason to try to dictate a customer service agreement in their favor, but customers asked to assume most of the risk will find the cloud unattractive for most cases.
Your goal is to negotiate a relationship for mutual risk sharing so that both you and your provider(s) have a stake in each other’s success.
The Last Word
The cloud is in your future if you aren’t there already.
Coping with the costs and risks will involve evaluating the costs, benefits, and guarantees of cloud providers, and balancing the use of public cloud providers and on-premises infrastructure. Intel sees a future where your business relies on an automated hybrid multi-vendor cloud, moving data and applications frictionlessly from vendor to vendor to private cloud, launching ideas for new products and services nearly instantaneously via the public cloud and migrating them into your private cloud when their demand becomes predictable. We’re not there, yet.
Wherever you are in leveraging the cloud, you must aim to develop a cloud procurement and governance strategy that’s cognizant of the costs and risks, and balances agility with sufficient predictability.