Earlier this month, analyst Will Forrest of the McKinsey & Co. consultancy argued during an Uptime Institute presentation that for large companies, cloud computing could cost twice as much as in-house infrastructure. His findings are published in a "confidential" report that's been widely available on the Internet.
The main point made by Mr. Forrest is that the economics of cloud computing are attractive for smaller companies but don't make sense for large firms. While the report has been criticized for its flaws, it throws cold water on cloud computing hype and is a good discussion catalyst, especially for those IT professionals looking for a reality check.
With the caveat that McKinsey has an interest in clients maintaining large, complex data centers, the study shares useful data points that are based on a "disguised" client example, which, according to Forbes, is a financial services customer. The example illustrates the following:
The total cost/CPU/month of an Amazon EC2-based cloud infrastructure is 140 percent more expensive -- $366 versus $150 -- than the cost of a large, on-premises data center.
The cloud only cuts IT labor costs by 15 percent, compared to an in-house data center, because most IT roles involve "touch" staffers (those whose work supports clients directly).
At first blush, these figures seem astounding, but a closer look shows that the McKinsey analysis assumes a wholesale migration of all Windows and Linux capacity to the cloud. That's clearly not a strategy any CIO of a large organization is considering, even though many CEOs might dream about such an approach.
The value of the McKinsey analysis, in my view, is that it puts cloud computing into perspective and underscores several important points, namely:
Outsourcing data center infrastructure to the cloud makes most sense for applications where demand is unpredictable and users can avoid spending on IT services they don't consistently require.
Renting is almost always more expensive than owning... yet we still rent movies, cars, and wood chippers. Renting is a good way to get something temporarily that wouldn't make sense for us to buy or to own long-term.
The cloud gives small and mid-sized companies access to high-quality infrastructure that previously was only available to firms with large, highly qualified IT personnel.
Large organizations can benefit by aggressively adopting cloud computing technologies (e.g., virtualization, metering, etc.) and applying them to existing internal applications or on a departmental or line-of-business basis.
This last point is an important takeaway of the McKinsey study. By aggressively adopting technologies like virtualization, internal IT organizations can realize many of the benefits touted by service providers such as Amazon Web Services LLC .
These internal providers may even mark up their services to make a profit, which is not surprising at all. The key is to apply these services to applications where it's sensible and not set an expectation that they will completely replace standing infrastructure.
For CIOs, cloud computing is another arrow in the strategy quiver that can enable new business models, provide faster responses to opportunities and threats, and, in many cases, be used as a catalyst to make in-house IT more cost effective.
— David Vellante spent 15 years at IDC and is a founder of The Wikibon Project. He can be reached on Twitter at @dvellante.
Totally agree...as I've written here, cloud security and privacy is the next 'can of worms' and will create nightmares for organizations. That's why I find the private cloud discussion most interesting. If anything it adds credence to McKinsey's thesis that cloud economics will only be applied narrowly for some time.
One of the things I (and others) have been saying for years is that the trend to consumerize IT (call it saas, cloud, whatever) will clearly spill into internal IT shops. A major byproduct of this trend will be pricing and usage clarity-- that is to say IT increasingly will be under pressure to provide cost transparency and align charges with usage.
Now I understand this opens up a whole big discussion about chargebacks and who has them and why or why not...but the point is that Cloud Computing will serve as a benchmark and consequently a catalyst for internal IT shops to provide transparency that will, I believe, drive increased efficiencies.
This will mean more predictable cash impacts (avoiding CAPEX vs OPEX discussions for the moment) which is a cloud value that the McKinsey study largely ignored.
What the McKinsey studied did underscore however is that internal IT should adopt cloud-like technologies-- e.g. virtualization, metering, grid, etc and that will clearly drive efficiencies.
So while I fully agree the jury is out on how cloud computing will play out in the enterprise, I believe internal IT will take advantage of the very same technologies being used by cloud providers.
The amazing thing about his report is that he does not address "security" one time during his presentation. This is the real problem with cloud computing and will ultimately kill it in its infancy.
Confidentiality, Integrity and Availability (C.I.A.) is the acronym all security personnel currently live by and what most regulatory requirements strive to achieve.
Cloud computing neither addresses nor guarantees any of this in their current models. A company can not guarantee that their data is confidential when they do not even know where in the cloud it currently is. This is the same for integrity, when the company does not control the processing of the data, there is no way to guarantee that the data has not been corrupted. Lastly, availability does not relate to uptime, but to who has access to the physical devices within the cloud.
Government entities are just getting their heads wrapped around this so called phenomenon and once they do, they are going to start asking the same questions that I have raised here. Ultimately, cloud computing in its present form will not be able to address the control questions and will not provide auditors with the comfort they will require to sign off on an audit.
There have been a couple of threads here in the past week on the viability of the cloud, and defining the cloud, and use of the cloud...
One of the observations I made was the same as what Mr Forrest is saying here about "...attractive for smaller companies but dont (sic) make sense for large firms..."
I know some others have disagreed about the need to clearly define "the cloud", but in each environment considering adopting the practice or principle for use, it is imperative they clearly define what the constituent components will be in THEIR instance of the cloud and how it will be used if they intend for it to be successful.
There isa potential for small companies to avoid major investmen ts early on by adopting a cloud model, but they HAVE TO weigh any potential risks against the projected benefits prior to launching forward.
I foresee a problem here. If cloud computing is going to help make IT more cost effective, is that because IT won't have as much work to do, or because it can charge more for what it used to provide for less?
Frankly, the McKinsey report seems to confuse the point. Cloud computing may not save money per se; but online services never really have. The point is that they are supposed to save operational costs.
I think the jury's still out on how clouds will play out in the enterprise. Certainly David's points advance the discussion.
Great article David and you make a great point that clould computing can "...be uses as a catalyst to make in-house IT more cost effective. That is an excellant point.
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I had the opportunity recently to meet with Jeff Kubacki the CIO of Kroll, a global risk management consulting firm and a unit of Marsh & McLennan Companies with more than 50 offices worldwide. Kubacki has been the CIO of Kroll for about three years and seems to have a good process for aligning IT strategy with business priorities.
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