There are several reasons for organizations to move from in-house IT infrastructure set-ups to a Cloud Computing model. One of the most prominent reasons is the concept of cloud economics. Ultimately it all comes down to cost savings that cloud can bring in and below are the major aspects via which organizations are seeing cost reduction and reaping the benefits.
ü By allowing for a shift from CaPex to OpEx
ü Reduces the total cost of ownership
ü Concentrate on core businesses
ü Lowers the opportunity cost associated with running technology
One thing is clear there are several advantages for the customers but is it worthwhile for the vendors as well. Are they reaping as much advantage from this phenomenon?
The public cloud services market is forecast to grow 18.5 percent in 2013 to total $131 billion worldwide, up from $111 billion in 2012, according to Gartner, Inc. There are several opportunities in such a growing market. With total worldwide IT spending amount to 1.7 trillion dollar industry and with cloud shaking up the way traditional IT is being done then we have a tremendous scope of growth.
The 80-20 rule is often used within organizations to find the effects as it is seen that 80 percent of the issues are due to 20 percent of reasons. Information Technology has its own 80-20 rules. In IT, it is in terms of time where we are seeing that 80 percent of the time are being spent on maintenance, patching operating systems, performing back-ups. So rather than concentrating on the core functions IT teams are having to spend time on other routine and non-core activities. This is where the opportunity comes in for the adoption of cloud for consumers.
By allowing for a shift from CaPex to OpEx: IT infrastructure set-ups has always be very capital intensive. Hardware needs to be brought outright. Building server farms, buying networking hardware are all very expensive and can involve a lot of deliberating which is very time consuming and costly. Apart from the hardware there is the cost of buying software licenses which can be substantial as well. Hardware value depreciates over time and the licenses have to be renewed every year. After all the initial expense we need to invest in maintenance and support services to make sure what we have invested in continues to function optimally. Hence it makes sense to go for Cloud which is pay as per use model. No need to invest in costly hardware and have maintenance teams in place. The core selling point here is that Cloud Computing is like an electricity or telephone service that is pay only how much you use.
Reduces the total cost of ownership: It is important to accurately assess the actual cost of the two options – one is keeping it in-house and the other is going for the cloud model. Most of the cost associated with Cloud are upfront and there is clear visibility and control over the budget spending. Cloud providers give transparent spending on RAM, storage, bandwidth etc. On the other hand calculating the cost for in-house is not always accurate as sometimes firms do not take into account the direct costs like power, floor space, storage and IT operations to operate these resources. There are also the indirect costs of running a server like overheads of procurement and accounting resources. All of these aspects make the comparison difficult but despite this the cost savings that Cloud Computing will bring in will be significant and add value to the organization by reducing their cost by freeing up funds that would have be stuck by large capital investments. Allowing organizations to concentrate in their core business functions and making funds available for investments in the core business.
Concentrate on core businesses: A recurring case made for the adoption of Cloud Computing is that Cloud allows a firm to concentrate on their core business. This is same as even though we need electricity we don’t go out and start generating electricity on our own. Similarly there is no harm in following a similar policy for our hardware and software. Netflix the $10 Billion video streaming website recently migrated to cloud infrastructure. Netflix wants that their engineers to concentrate on product innovation and the pain of storage solutions, hardware failover mechanisms, networking infrastructure devices, etc. be handled by the cloud vendors.
Lowers the opportunity cost of running technology: Opportunity cost is a vital concept when understanding the economics of going for Cloud Computing as it allows to assess the true cost of adopting it. With this concept of opportunity cost when taking a decision to either retaining on premise IT or move to the Cloud. We have already seen that 80% of the time is being wasted on procedures that do not create any value for the organization. So the opportunity cost here is that if we are keeping it in house we are not able to optimally use the 80 percent. In simple words the difference between moving to cloud for an organization will be 20 percent efficiency for in house IT infrastructure and 80 percent efficiency when outsourced.
So to conclude from the customer perspective the economic advantages are enormous. Businesses can get advantages from two aspects one from the reduced cost and the other from increased focus on core activities which will lead to higher productivity and growth in the core functions of the business.
The global cloud services provider (CSP)/vendor market has grown tremendously. Today vendors consist of cloud services brokerages (CSBs), cloud services aggregators (CSAs), plus VARs and MSPs. Some of these companies were initially in the same business of providing IT hardware, the only difference is now they are providing it over the cloud. The hosting firms have started to offer these services like a natural extension to their existing business. Cloud is today providing lucrative opportunities to businesses which were providing telephony services, Internet Access etc. So even though we understand the advantages to the customers we must also understand why there would be a push from the vendors to get into this business. Vendors can provide Cloud services via three basic models – SaaS (Software as a Service), PaaS (Platform as a Service) and IaaS (Infrastructure as a Service).
Some benefits seen are:
Market Size: Gartner said worldwide revenue in Cloud Computing has surpassed $68 Billion and the market is expected to reach $160 Billion by 2020. Hence a growing market not just in IT/ITES but as a whole for the Cloud Computing service providers encourages the vendors to enter the business and provide their services.
Additional Revenue Source: Initially many firms provided cloud services as an additional offering, an option that was available. But now the strategy is changing all together, rather than just an offering it is being looked at as a major source of revenue for these service providers.
Increasing Customer Loyalty translates to lower churn: One the adoption has taken place, firms tend to stay longer once they realize the benefits that they are getting. Hence a loyal customer translates to steady income and strong top-lines. A loyal and satisfies customer will stay as well as refer others to adopt the services. Hence vendors are able to gather increasing revenue once they have earned the trust of their customers. Once the customer is accustomed to the services of the vendor there is far lower possibility of switching. As the customer is also benefitting and the vendor is able to get sustained revenue, it is a win-win situation for everyone.
Differentiation of Services: Even though there are many service provides, the SaaS, PaaS and IaaS models provide enough scope for differentiation aspects for the vendors. This leads to a healthy competition which helps the customer as well as makes sure the best service providers survives.
Peer Pressure: Peer pressure is being seen where all are providing Cloud services. The risks are there but if the service is differentiated or of good quality then the customer will stay and the vendor does not need worry about losing the customer.
Market Leadership: Companies which are leading the way now will have the advantage of driving the direction of the market. There are currently a lot of players but ultimately who leads will have great advantages over the other and will subsequently reap the benefits of their leadership and innovation in terms of profits.
Monetization of Available networks: Bandwidth that a firm buys is very costly and ideally it would be in their best interest if there is optimum of this resource. Cloud Computing services can be provided over using this same infrastructure and thereby adding value to the organization by leveraging existing capabilities and resources.
Deregulation of Markets: Regulations are being relaxed and there is now connectivity even in Tier-2 and Tier-3 cities. Cloud computing services are prime and will help customers and well as open up the market for more opportunities. Incumbents are being challenges and dethroned from their old business models.
Extension of Technology: All these vendors are technology aligned firms and already have skills in handling their core networks and running their operations non-stop and also have the necessary monitoring in place to manage these core offerings. Adding cloud computing to their existing services will not be a major headache for these vendors as they have the ability and skills to handle the transition to providing services on the Cloud.
Higher Margins: Cloud Computing comes with multiple opportunities for the vendors in adding value to their customers. They can provide managed services, monitoring of services, maintenance/upgrades of existing services, support services etc. the list is long and increasing in count day by day. Such tailored services allow higher margins than the base services which are now being increasing seen as a commodity and does not matter who is providing it.
These are some of the compelling reasons for vendors to venture into this area of Cloud Computing services. The Cloud Computing fruit is ripe for picking for both vendors as well as customers.