The economic benefits of cloud computing

Many firms are only just waking up to the fact that cloud computing can slash IT costs

Advertisement Feature

As the cloud paradigm matures it is becoming increasingly well understood that companies and organisations of all sizes - from the smallest SME to the largest enterprise or public agency - can realise highly compelling economic benefits by adopting cloud computing solutions. In fact few could now credibly argue that emergence of the cloud model is not profoundly and fundamentally changing the economics of IT.

At a macroeconomic level the Centre for Economics and Business Research (CEBR) predicted in February 2011 that cloud computing could inject some €763bn (£670bn) into the major economies of the European Union over the next five years, with the UK reaping an estimated €30bn over the period. CEBR's Cloud Dividend report identified the cost savings (CAPEX and OPEX) made by companies adopting cloud computing services and measured these against macro and business variables such as business development opportunities; business creation; indirect gross value added (GVA); tax contributions; as well as expenditure on cloud services to estimate the Euro value of the technology in each country.

Elastic consumption, elimination of CAPEX and improvements in agility

The cloud technology model allows organisations to standardise and pool IT resources and automates many of the maintenance tasks done manually today. Cloud architectures facilitate multiple benefits including elastic consumption, elimination (or at the very least a dramatic reduction) of capital expenditure, self-service, and pay-as-you-go pricing.

In most cases migrating to the cloud eliminates CAPEX and replaces these major up-front costs with predictable and manageable OPEX. This transition is crucial as it lowers the risk associated with strategic IT projects, so keeping business agile by allowing for more experimentation and entrepreneurship.

The elasticity offered by the cloud model means that organisations can take on computing projects that would have been completely beyond the capabilities of their in-house IT resources. Cloud means that it is possible to scale up and scale down resource intensity nearly instantly so organisations only pay for the computing power they actually need.

In this world of cloud computing the value-add delivered by IT through enhanced technical capability and improvements in staff productivity derived from providing "always on" fixed or mobile access to central cloud-based business applications can be significant. However, the scale of these potential economic benefits is only just beginning to be understood by business and technical decision makers.

Leveraging cloud economies of scale

Rolf Harms, director, Corporate Strategy Group at Microsoft, noted that many firms are only just waking up to the fact that cloud computing can slash IT costs.

"Our analysis uncovers economies of scale for cloud that are much greater than commonly thought. We believe that large clouds could one day deliver computing power at up to 80 per cent lower cost than small clouds. This is due to the combined effects of three factors: supply-side economies of scale, which allow large clouds to purchase and operate infrastructure cheaper; demand-side economies of scale, which allow large clouds to run that infrastructure more efficiently by pooling users; and multi-tenancy, which allows users to share an application, splitting the cost of managing that application," Harms explained.

"We believe the best way to form this vision is to understand the underlying economics driving this long-term trend. We've done extensive analysis of these economics in Microsoft's Corporate Strategy Group, leveraging Microsoft's experience with cloud services like Windows Azure, Office 365, Windows Live, and Bing."

A Microsoft research report, published in November 2010 entitled The Economics of the Cloud, reiterates this view that cloud is having a profoundly beneficial impact on the economics of IT for companies of all sizes.

The economic benefits of cloud computing

Many firms are only just waking up to the fact that cloud computing can slash IT costs

Technology promoting innovation

"The economics will have a profound impact on IT. Many IT leaders today are faced with the problem that 80 per cent of the budget is spent on keeping the lights on - maintaining existing services and infrastructure. This leaves few resources available for innovation or addressing the never-ending queue of new business and user requests. Cloud computing will free up significant resources that can be redirected to innovation," the report noted.

"Demand for general-purpose technologies like IT has historically proven to be very price elastic. Thus, many IT projects that previously were cost prohibitive will now become viable thanks to cloud economics. However, lower TCO is only one of the key drivers that will lead to a renewed level of innovation within IT."

Case study 1: Royal Mail Group

Royal Mail Group (RMG) is making major savings as a direct result of deploying cloud computing solutions. According to Adrian Steel, head of infrastructure management at RMG, the UK organisation has enjoyed significant economic benefits since migrating in-house systems to a hosted model in 2008. In fact RMG, which was far-sighted enough to invest in cloud computing before the global recession, has emerged from the downturn with more efficient and more cost-effective and more flexible IT systems as a result.

RMG's strategy centred on the virtualisation of up to 400 servers to create a private cloud, which significantly increased the efficiency or the responsiveness of its internal IT systems. The private cloud, which is based on Microsoft Hyper-v, is on target to deliver major savings, according to Steel, while business productivity gains have already been realised through virtualisation.

"The Hyper-V project will pay back the original investment in 19 months, and, over four years, will realise savings of £1.8m compared to the previous operation," he said.

The organisation also ditched legacy in-house Lotus Notes collaboration technology serving its 30,000 staff and replaced it with hosted technology based on the Microsoft Business Productivity Online Standard Suite (BPOS) of messaging and collaboration solutions including Exchange Online and SharePoint Online - a product that has now been enhanced with the recent launch of Microsoft Office 365.

Posting email into the cloud

"The cloud means that I now treat email and the collaboration toolset no differently to furniture - it is just there. Before I needed to design as seat but now I just buy it off the shelf. This means I can focus my time on key line-of-business activities such as mail tracking and parcel systems," Steel added.

"Migrating to the cloud has allowed the Royal Mail Group to achieve a step change in terms of productivity and client satisfaction. In most IT departments there is usually a focus on getting the front end nice and shiny at the expense of neglecting the back end. But with cloud the back end is expertly maintained by Microsoft."

Case study 2: City of London

Adam Hand, senior PC networks analyst for the City of London, which has recently completed a project to facilitate delivery of cloud-based collaboration technology to a third-party organisation, agreed that compelling cost savings can be achieved by migrating to the cloud.

"Email is a very easy win, especially for smaller companies. The cost savings speak for themselves. For example, an Exchange server will cost around £2,000. Then you have to buy the licences, so you are paying £3,000 or £4,000 at the very least before you start to deploy services," explained Hand. "Most companies write off this capital investment over three years, but Exchange is available for a fixed monthly price with no up-front costs in the cloud. So there is an easy win straight away, as the cloud service is almost identical to hosted software - it is seamless for users and much cheaper for the organisation."

This view was echoed by Conor Callanan, CEO of Microsoft cloud accelerate partner Core: "Email is now a commodity, and it makes no sense whatsoever to deploy and maintain severs running email and collaboration systems in-house. There is not a single company that can realistically and cost-effectively offer a 25Gb mailbox, yet Microsoft offers fully managed hosted mail at this level for about £72 per user per year. No organisation can do this - the backups alone would cost much more."

Longer, more in-depth versions of the above case studies will appear on www.computing.co.uk in the coming weeks