Friday, October 1, 2010

Assessing the TCO case of the cloud

This week I was in "passionate discussion" with colleagues in a state of denial on the economics for the cloud. Their impression was that the TCO case for cloud adoption only stacked up in the real short-term and that long-term subscriptions with cloud vendors were more expensive than their on-premise equivalents. There certainly is a break-even point from owning your on-premise solution vs. subscribing to the cloud but where this occurs depends upon how you assess the running costs and this will differ from company to company.

This article on came back to mind as I was passionately arguing the case for the cloud defence. Its definitely worth a read for anyone assessing whether to move to the cloud but for those short on time it pointed out several errrors with a TCO calculation completed by McKinsey. One of the key findings was the following:
The Issue isn't Utilization Rate, It's Cost per Unit of Computing Capacity: McKinsey does not recommend that companies attempt to mirror the characteristics of an Amazon Web Services by creating an internal cloud; instead, it proposes that server consolidation via virtualization be the primary strategy for cost reduction. By aggressively pursuing server consolidation, IT organizations can raise server utilization rates to nearly the 38 percent that Google accomplishes, McKinsey advises.
However, the raw utilization rate is not the point. The main question should be, what does a unit of compute capacity cost me? Google and its cloud brethren run their data centers at around 50 percent of the cost of a typical IT data center, so gaining the same utilization rate as Google still leaves you at twice the cost per compute capacity unit.  
What does this tell us? Properly assessing the cloud business case cannot be done by pure business accountants or operational research math junkies alone. It requires a balanced team that can model the business accurately along with making good technical judgements. The example tore apart just goes to show what mistakes are made when even the very best business consultants are put to work without the technology content.

In the early days of the cloud, many such TCO assessments were completed by trusted advisors to make the best conclusions. Perhaps this has anchored my colleagues minds on the cloud business case at the wrong end of the scale. Time methinks for a revisit.

Disclaimer: The views contained in this post are my own and not necessarily the views of my past or present employers

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