The financial benefits of cloud computing are still to be determined.

There is a significant movement today towards cloud computing; come consider it the panacea to all their IT woes. Well, it is not. In fact it may well cost you more than are paying now. There are benefits and drawbacks to cloud computing and these are explicated below. From a financial viewpoint cloud computing may cost more than the traditional computing model.

Benefits of cloud computing are touted across the Internet, and many of these pundits are from the cloud vendors themselves. Of course, it is natural that they should echo the benefits and ignore the shortfalls of the cloud model. These benefits may include financial ones as well as operational advantages. Here is a touted advantage that impacts both areas.

Time to application deployment is often cited as a major benefit. One can simply go online and voila, instant compute power for a new application. The traditional path to deploy a new application is to petition the IT department for capacity that is a guess at best, and hope for a system within a few weeks. Yes, this is true; however, it illustrates poor project management.

The PM should know the status of the software project and as it approaches the launch date the PM should order the system in advance. If one requires capacity for a short term and there is no excess capacity in the data center, e.g., software testing, the cloud may be an appropriate alternative. The cloud may also be suitable for an application where capacity requirements are unknown; once known, the app can be moved in house.

Understand that even in these circumstances the cloud is not a cheap solution. The advertised price is low, however, when one adds on the necessary services, e.g., backup and technical expertise, the price rises with each amenity to the premium plan fee. Remember, someone has to buy the IT equipment and operating the data center requires people and electrical power. And, they need to make a profit on their cloud services. Thus the costs, although operating expenses, may truly exceed the traditional capital and operating expense model.

Understand that many public cloud projects fail, see Iland, “Casualties of Cloud Wars: Customers Are Paying the Price”, June 2014. Private cloud implementations are also subject to failure, see http://blogs.gartner.com/thomas_bittman/2014/09/12/why-are-private-clouds-failing/ for several reasons. A lot of money is being spent for no reason at all.

The best advice is do the math. Start with a blank spreadsheet and list the costs of the cloud solution and compare it to the costs of an in-house solution. Be honest with the numbers and follow proper financial modeling methods. The NPV method is required to do a proper analysis of both capital and operating expenses over time, and it is taught in a majority of finance programs at universities. The text I employ is “Principles of Corporate Finance” by Brealey, Myers and Allen, and it is used at many universities.

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