Analyzing costs in cloud business models

This vendor-written tech primer has been edited by Network World to eliminate product promotion, but readers should note it will likely favor the submitter's approach.

IT leaders know cloud is here to stay, but many are still trying to calculate the potential return on investment. Based on our experience, companies that outsource their infrastructure as a service (IaaS) can expect to achieve 18% cost savings over three years compared to in-house IT.

The stairway to cloud starts with virtualized, on-premise data centers protected behind firewalls, moves up to private clouds cordoned off in dedicated hosting space, and finally and most recently, public clouds hosted by service providers on demand, over the Internet. Experts say most large companies will move to hybrid clouds, which combine public and private services with traditional IT options such as outsourced managed services, colocation and in-house infrastructure.

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The reason is clear: Hybrid cloud offers the best opportunity for organizations to manage costs as they grow. Blending traditional IT services -- such as colocation or in-house solutions -- with cloud services helps companies meet cost and capital constraints while also allowing them to build on current infrastructure investments.

Balancing the cloud equation

As IT executives look to cloud as part of their IT outsourcing equation, they might get caught up in perceptions that public, multi-tenant environments, with costs shared across multiple customers, are cheaper than other options.

That's not always the case. Determining the right balance is key to cost-optimized cloud computing.

For those computing needs that support core business processes (i.e., client-relationship management software), or involve highly regulated workloads, such as those in the financial services industry, it may be smarter to leverage colocation or managed services.

For other computing requirements, such as application development and testing, email or content management, it may make more sense to go with public cloud services that can be scaled up and down as necessary to meet demand.

Colocation, managed services, cloud and other IT outsourcing solutions have unique cost/benefit tradeoffs. Clearly, combining the best of each option in a hybrid solution offers the greatest flexibility for optimized cost models.

For example, when media and technology publisher Saxotech needed to manage its infrastructure in the face of changing publishing trends, reader preferences and mega-content consumption, it looked for a way to combine its outsourced colocation arrangement with private cloud. It found an economical solution that blended infrastructure management solutions, private cloud, managed storage, hosting and hosted area network services.

Cost considerations

Cloud strategies provide flexible, scalable solutions for managing on-demand resource allocation and fluctuating compute power. But what often initially attracts IT leaders is the potential for cost savings.

However, it's important to not go into cloud thinking it's all about cost savings or that cloud will be the remedy to all IT issues. More accurately, think of cloud as a tool to help optimize spending.

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The financial model for cloud revolves around moving to an operating expense model instead of one based on capital expenses, shifting to services from subscriptions, aligning costs with outcomes instead of technology and, of course, paying only for what you need when you need it. The move to cloud-based infrastructure means you can focus your efforts and resources on managing and growing your business.

As cloud changes your IT purchase plans, here are some of the cost factors to consider when evaluating options:

• Hardware and infrastructure. Cloud's obvious advantages lie with server consolidation and resource management. But don't forget to look at cost savings related to reduced data center space, power and cooling, and any networking costs. Hybrid and public cloud options, for example, may involve more extensive wide-area networking than that of private clouds.

• Lifecycle costs. Lifecycle costs lower dramatically when you're not relying on in-house infrastructure. Nevertheless, when negotiating cloud contracts, executives should examine implementation options with an eye toward future growth, basic versus advanced services or a blend of services, service-level agreements, security, and even compliance assurances and monitoring you may need over the course of the agreement.

• Budget and billing arrangements. Flexible billing and service-usage metering are cornerstones of many cloud agreements. These arrangements make it easy for IT organizations to bill business units for resources like a utility company would. This also provides greater visibility into resource usage so that CIOs can effectively forecast their budgets. Public and hybrid cloud providers may also offer pay-as-you-use services, requiring no long-term commitment.

• Long-term strategy. Cloud's promise of compute power flexibility and scalability can enhance the way companies develop and market successful products and services and innovate. Of course, these are not easy to quantify. But they do need to be a part of the equation.

Whichever route to the cloud you take, the approach needs to be carefully measured. To realize cost-optimized cloud computing, you must weigh each application's requirements against existing costs and factor that into long-term IT and business goals.

Cloud isn't a one-size-fits-all proposition. Your service provider should know this and work with you to develop a solution set that meets your specific needs.

Savvis, a CenturyLink company, is a global leader in cloud infrastructure and hosted IT solutions for enterprises.

Copyright © 2012 IDG Communications, Inc.

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