Establishing cloud computing’s return on investment

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Establishing cloud computing’s return on investment

Cloud computing has been described as a technological change brought about by the convergence of a number of new and existing technologies. But this tells only half the story. Consider the importance of cloud computing’s return on investment for companies that implement it.

The real impact of cloud computing on an enterprise is the rate of change it allows in terms of growth, market change, and the magnitude of cost reductions. Its effect on specific technical performance is not just incremental but also potentially improves performance fivefold or even tenfold. From a business perspective, it’s helpful to know how to build and measure cloud computing’s return on investment and this article will show you how.

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The graph used by Amazon Web Services to illustrate capacity versus utilisation

has become iconic in relation to cloud computing. For businesses, one of the core precepts of cloud computing is to stay just ahead of actual demand and to avoid the cost impact of over-provisioning and under-provisioning. The curve in the graph shows how this compares to the traditional, intermittent, hardware upgrade, which sees capacity updated on an ad hoc basis and that requires a large capital expenditure.

There is also the opportunity for cost, revenue and margin advantages of business services enabled by rapid deployment of cloud services with low entry cost and the potential to enter and exploit new markets.

Years from now, when cloud computing is seen in a historical context, the capacity versus utilisation curve will be seen as an iconic model that had the same effect as previous well-known business models including Moore’s Law.

Return on investmentand quality of service (QoS)

The term race to the bottom refers to the competing drive among participants in a market driven by the need to offer the greatest cost savings. The phrase often conveys a negative context because the lower costs and margins are seen as a detriment to the participants.

However, massively scalable services from cloud computing providers have the effect of driving down costs and prices, and the dynamics of competition are shifted by the presence of potentially rapid cost reductions and huge data centre investments – customers now have more choice. The counter-balance to this is quality of service and the associated cost of that Service (CoS) that characterises the value of the cost per unit of performance provisioned.

What differentiates cloud computing from other services is not just the offer of utility infrastructure computing services, but also of all the higher-level services that enhance and build business value. We see this as the influence and scope of the movement from IT-centric to business-centric services across a wider services continuum, with utility services for infrastructure at one end and with business-centric software and business processes delivered as a service from the cloud at the other.

Building a return on investment strategy

But how do organisations go beyond the initial capacity and utilisation benefits described in cloud computing? The typical view of capacity and utilisation is a technology provider/seller viewpoint, which is essentially based on key performance indicators (KPIs) rather than business benefit metrics.

Effective cost/performance ratios and levels of usage activity do not necessarily imply proportional business benefits. They are just indicators of business activity that are not in themselves more valuable than lower operating cost. So where does that leave us? 

Through extensive discussions we have identified the following eight business metrics that translate the indicators of the capacity-utilisation curve to direct and indirect benefits to the business:

1.      Speed and rate of change. The speed and rate of change of cost reduction can be much faster using cloud computing than traditional investment and divestment of IT assets because the responsibility is transferred to the service provider. While there are challenges today about the portability of cloud service providers, users do have greater flexibility to adopt and remove the service either at the point of use (to scale up and down) or to make choices to use new services or change their service provider.

2.      Optimising TCO. A key aspect of moving to cloud computing is the ability to select hardware, software and services from defined design configurations to run in production. Cloud computing bridges the design-time and run-time divide and optimises service performance. Patches and upgrades or new technology are in theory invisible to end users of the service because they are included as part of the automatic asset management features.

3.      Rapid provisioning. Elastic provisioning to scale up and down to actual demand creates a new way for enterprises to scale their IT to enable business to expand. The provisioning time compression from a week to hours demonstrated by cloud computing providers, for example, is a means to rapid provisioning that is not just about saving time but is also about defining a new business operating model.

4.      Increased margin and cost control. Cloud computing offers cost, revenue and margin advantages. It also allows organisations to enter and exploit new markets through rapid deployment of low-cost cloud services.

5.      Dynamic usage. Elastic computing and service management targets real end users and real business needs for functionality by users and services seeking new solutions. With either fixed usage volumes or variable functional usage, new innovative consumption models enabled by cloud computing allow businesses to consider using IT in a flexible and agile way.

6.      Risk and compliance improvement. Cloud computing green capabilities can be leveraged through shared services.

7.      Enhanced capacity utilisation. IT avoids over- and under-provisioning of IT services to improve smarter business services.

8.      Access to business skills and capability improvement. Cloud computing enables access to new skills and solutions through cloud sourcing on demand systems.

Cloud computing is an important stage for IT systems, comparable with the emergence of the mainframe, the minicomputer, the microprocessor and the Internet. Cloud computing has many advantages over conventional approaches to IT provisioning, which can translate into significant improvements in return on investment. But what makes it particularly exciting is that its potential effect on business is not just incremental improvement, but also a  transformation through new operating models.

Mark Skilton is a director at Capgemini, co-chair of The Open Group’s Cloud Computing Work Group and a contributor to SearchVirtualDataCentre.co.UK.

 

 

 

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This was first published in March 2011

 

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