The economics of the cloud

Pro

When it comes to the pros and cons of adopting cloud technologies, there is one argument in favour that reigns supreme-the ability to move IT spend from capital (CapEx) to operating expenditure (OpEx).

For many companies operating in Ireland currently using public, private or hybrid cloud technologies, this argument will have been the clincher when decision time came around. Why spend money on boxes, storage and services in advance, when you can adopt a pay as you go model, accessing the technology and services you need when you need them?

But in the longer term, what are the economic effects of this decision? When IT departments move to the cloud, what happens? Does everyone ride off into the metaphorical sunset, or does going to the cloud bring with it complications as well as cost savings?

It’s difficult to overestimate just how seismic a shift the cloud represents in terms of the way IT works, and many of its future effects have yet to play out. But with many companies already firmly committed to the technology, it is interesting to examine what the short-term effects are from a monetary point of view.

Efficiency driver
"If you have a centralised cloud-based model, you can drive a huge amount of efficiency. That’s a big advantage," said Ben McGahon, sales director for Comsys.

"One major effect is that rather than having an IT department full of specialists-a server specialist, a storage specialist, a database person and so on-you end up with a team of IP generalists who each have a good sense of oversight of what’s going on in the environment. Cloud-based systems require less people, so you have less outgoing costs there, and in a system like this there’s a lot less scope for waste and inefficiency."

In McGahon’s experience, where companies make savings by moving to the cloud, those savings do not automatically leave the IT department. Instead, they’re often used to create further efficiencies.

Savings retained
"What typically happens is that companies that make savings and efficiencies are able to afford products that might have been a little too expensive to justify before. The savings go on products that can be deployed and managed to drive further efficiencies for two reasons-firstly, they can afford it now, and secondly they now have an efficient delivery system in place," he said.

He cites the example of wide area network (WAN) optimisation. Using traditional WAN technology, it’s necessary to have an appliance at every single location on the WAN, specific lines to connect it in, and a technician to go to the location to set it up and visit to make changes.

"It costs a lot of money to increase the efficiency of that kind of infrastructure. Now, new products and suppliers like Silverpeak have appeared that have virtual versions of these products. You can stay in a central location, deploy the whole thing globally across your network and manage the whole thing centrally by spinning up virtual machines and running it in software," McGahon said.

"The cost of doing it the old way versus the new way is so radically different that you can make real savings. We’ve got customers who have actually paid for their storage outright from the savings, and were able to buy more storage and go to the next level of product to give them more expansion capability for the next three to five years."

Budget access
Clawing back cash as a result of a refit in the IT department can give the department head access to a discretionary budget that they may never have had before, according to McGahon.

"Instead of being given money by the business and being told ‘that’s your budget for the period, make it last’, they’re now generating savings themselves. The department can make its own budget and predict its own capital expenditure for the year," he said.

"Where does the money go? A lot of the time it does go outside the IT department, back into the business. If the company has spent a load of money, then it’s expected that there will be a return on that investment. But what we’re also seeing is that where before the IT department was looking at entry level products to drive efficiencies, they’re now able to look at the enterprise versions of those products, to get more out of what they spend."

Spend separation
When it comes to assessing the economic benefits of adopting the cloud, it’s worth remembering that many companies are already at least partly using ‘pay as you go’ for some of their IT needs, allowing them to separate out their operational and investment spend.

"As a result, these types of models have enabled organisations to reduce their operational IT spend and in some cases, leverage those savings to invest in other IT delivery projects," said Paul Pollock, senior executive with Accenture’s technology practice.

"Ultimately, IT departments are trying to deliver more for the business with a reduced IT budget. Take an example where a client has a budget of EUR*5 million, with EUR*1 million of that dedicated to infrastructure. If they can use the cloud to unlock EUR*500,000 of that EUR*1 million, they then have EUR*500,000 in savings to deliver more value to reduce the IT spend."

As to what they do with that saving, that depends, according to Pollock: "Today, all organisations are focused on cutting costs throughout the business. Where IT departments manage and control IT Infrastructure spend, they are under pressure to save costs and they are looking to use the cloud to help contribute to that."

Service improvement
When it comes to reinvesting saved cash, Pollock suggests that clever organisations try to use it to improve the quality of the IT services they offer.

"This gives them the opportunity to reinvest and/or use it as a means to reduce operational or project delivery costs. For example, we have worked with clients who have leveraged the cloud to enable development and test environments, rather than making the necessary capital investments to acquire new infrastructure," he said.

"Some of these realised savings have been used to fund the delivery of an enhanced solution which enables the company to deliver more business benefits and a superior customer proposition."

Public opportunity
While the private sector has been quick to embrace the economic benefits of using cloud technologies, the public sector has been slower on the uptake, with the notable exception of education sector. But according to John Lynch of Unit4, the public sector is currently looking long and hard at the cloud for a variety of reasons.

"The cloud isn’t always right for every organisation. There’s a lot of pressure to drive cost out of the equation in the public sector, where the cloud is becoming a topic of discussion. If it’s right for the client it’s worth considering, but it’s not always right," he said.

"The economic argument is important, depending on who you’re selling to. The chief financial officer will always find it compelling but there can be a perceived loss of control from some IT people-they sometimes see it like turkeys voting for Christmas, so change management is important from that point of view. "

There is a lot more to the decision on whether or not to move into the cloud than the economic argument, according to Lynch.

Harder sell
"In the private sector it’s easier to sell that argument, but in the public sector, it’s harder. They’re under pressure as a result of the Croke Park Agreement-often there are less people around to do the same work because of the raft of retirements that have taken place," he said. "In some cases it’s an option they have to go with because they don’t have the people to support any other way of doing it."

When companies that Unit4 have been involved with have achieved savings in the past through moving their technology to the cloud, the savings have almost always been kept in-house.

"Generally savings made are used by the department head to reorganise the way they do things. Often legacy systems are organised around business processes that are no longer optimal, as there has been a lot of change in the last decade. The savings from that are generally reinvested around the area of business processes, generating efficiencies and also reporting," said Lynch.

"Reporting is a big one, because it allows organisations to get more value out of their systems to help them increase revenue, track trends and get involved in predictive analysis techniques. That’s becoming more commonplace as well."

Small benefits
While the CapEx to OpEx argument will always carry weight at the boardroom table, there are other reasons for companies to consider moving to the cloud. According to Martin Cullen, Microsoft Ireland’s supplier management and procurement director, this is particularly true for smaller and newer companies.

"If I’m a small business starting up today, traditionally I’d have had to go out and buy a number of servers, get them installed and configured, have all my applications put up on them and so on. That would cost me upwards of EUR*50,000 upfront, but now I don’t need to do that. Instead, I can take that money and invest it in areas of the business that are going to drive revenue for me-that might be an extra salesperson, a marketing person or an additional person in some other part of the business that’s critical to generating revenue," he said.

"The ability to move spend from CapEx to OpEx is one key element of the cloud proposition, but it’s not the only factor-it’s a more multifaceted issue than that. Some companies still have a lot of cash and don’t see cash flow as the be all and end all. But Ireland is predominantly made up of small businesses, and indeed even larger companies sometimes have cash flow challenges, trying to get paid by their customers and having to make suppliers wait in turn.

"There’s pressure at all levels, and you can have a growing business but not have the cash to support it. Going cloud to facilitate cash flow management has some strong logic behind it."

Time to revenue
For start-ups and IT companies pushing themselves in new directions, Cullen suggests that cloud technology can have other benefits, including shortening dramatically the time it takes to take a project to the point of generating revenue.

"Let’s say you have an idea and you want to build out a new application to sell across an international market, or even a local market here in Ireland. Historically you would have spent a lot of money buying, configuring, designing and implementing a technology environment to facilitate you selling your product," he said.

"If you were to develop your application on our Azure platform, your time to market would be expedited massively. You can get there quicker and generate sales and ultimately revenue much faster. Ireland is now an export economy and we’re seeing a lot of tech companies setting up here, for a variety of reasons. These guys can go straight to the cloud and avail of that time to market advantage."

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