The Contextual Value of Cloud Computing

Businesses stand to benefit financially from cloud computing in several ways, but the actual value in each case depends on the circumstances.

Cost Reduction: Many assume that cloud computing reduces cost, and it might, but this assumption requires verification. Outsourcing IT services, like outsourcing any service, may or may not save money. It depends on many factors, such as the efficiency of the internal service organization and the competitiveness of the outsourcing market. The vendor must earn a profit, which will always add an additional cost to the outsourcing of services.

Cost Flexibility: Even if cloud computing does not reduce costs, it might change the nature of these costs from fixed to variable. Cloud computing removes the need for long term investments in infrastructure. All things being equal, flexibility adds value. If the demand for the service declines, consume less and save. If the demand exceeds expectations, consume more and seize the opportunity. But if the costs of cloud computing exceed those of on-premise, the investment in fixed assets to reduce operating expenses might be worthwhile, the determination of which boils down to a capital budgeting decision. And many organizations have large sunk costs in infrastructure, which may well tip the scale against cloud computing.

Moreover, not all costs associated with cloud computing are indeed variable. Some SaaS vendors sign clients up for long-term contracts, making cloud computing something more like a long-term lease than a variable cost. Fixed too are the not inconsequential costs of configuring a SaaS or a PaaS system.

Transparency of Costs: IT spending in many organizations lacks transparency; the infrastructure that absorbs the costs maps poorly to the services that generate revenue, making calculations of ROI difficult. Cloud computing, especially SaaS, enable business units to purchase services directly, paying only for that which delivers revenue or cuts other costs. While substantial, this value of cloud computing depends on the situation. Although difficult, an organization certainly could charge business units for internally delivered IT services, which is just a function of traditional cost accounting. And signing up for cloud computing does not guarantee transparency, since political inertia may lead to an organization to hide the costs within an opaque IT budget.

Scalability: If a market opportunity demands a rapid scale out of IT services, a scale out that is either impractical or cost prohibitive through on-premise infrastructure, cloud computing offers obvious advantages. Again, this value depends on the circumstances, on the actual occurrence of a spike in demand that requires IT services to fulfill.

Rapid Implementation: IT projects that require new hardware may face delays as new equipment is purchased, shipped, and configured. Cloud computing, whether Iaas, PaaS, or SaaS, cuts through these delays, enabling a project to more quickly deliver its benefits. This, however, only holds true when hardware acquisition lies on the project’s critical path and the value of accelerating the project outweighs any additional costs.

Services Level: If the business requires a certain service level, it may well achieve that more easily through cloud computing, with its diversity of vendors and service options. Improving service levels through on-premise computing may require investments in infrastructure and increases in staff to levels impractical in the short term. Determining whether the business value of the service level merits additional costs requires an analysis of the circumstances.

This all neither proves nor disproves the value of cloud computing, but points to the contextual nature of that value. Businesses have always had to choose between the in-house provisioning of services and the outsourcing of services. Cloud computing creates new options for the outsourcing of IT services, but the need to calculate the value of outsourcing remains.

Let me know if I’ve left out categories of value and if you have developed specific means of calculating the value of cloud computing.