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Agility, Not Savings, May Be The True Value Of The Cloud

There are ways to calculate the Return On Investment (ROI) when moving IT from the data center to the cloud, but experts say the savings to the IT budget is only a fraction of the reason to do so. Analysts and proponents of cloud computing discussed calculating the total cost of ownership (TCO) and the ROI of moving to cloud computing at Cloud Connect, a three-day conference this week in Santa Clara, Calif.

Contracting with a cloud provider for pay-as-you-go computing cycles can be cheaper than building and maintaining your own data center, says Bill McNee, founder and CEO of Saugatuck Technology, an IT research firm specializing in large enterprises. But a business that wants to move to the cloud needs to also calculate the "business disruption" cost. McNee says even 30 percent savings could be canceled out by business disruption costs.

Also, while some applications are ideal for the cloud, such as collaboration apps, others are not. If an application operates on on-premise servers at close to capacity, and if the "utilization variability" is low, meaning compute cycles stay relatively the same over time, McNee says, "Leave it alone." Cloud computing is better suited for new applications than legacy ones.

McNee notes that about 70 percent of IT budgets go to supporting legacy systems. Of the 30 percent of discretionary IT spending, Saugatuck forecasts that up to 20 percent of that will go to cloud computing in the next 12 to 24 months. However, as cloud computing takes off, McNee said cloud spending will account for 55-60 percent of that discretionary spending by 2014. "And, over time, the new spend over the next five years will become the old, right?" He concludes that by 2014, cloud computing will consume 25 percent to 30 percent of the entire IT budget.

Deciding which applications to put in the cloud depends on how they behave, says Dianne O'Brien, Microsoft's senior director of business strategy for Windows Azure, the company's new server operating system for cloud environments. O'Brien described four types of cloud-suitable applications: those used only sporadically during the day, such as end-of-day batch processing for a retailer; those whose use grows quickly, such as a popular social networking site; those that have unpredictable spikes in usage; and apps that have predictable spikes in usage, such as an online retailer during the holidays. Microsoft has a TCO/ROI calculator on its Web site. also offers an online TCO/ROI calculator, but has a narrower focus than other cloud providers, according to Ariel Kelman, vice president of product marketing for Kelman says apps can be developed in the Force cloud with fewer people and in less time than in an on-premise setting, which speeds time-to-market for those new apps.

But looking at cloud ROI in terms of savings to the IT budget is too short-sighted, says Steve Oberlin, a vice president and distinguished engineer at CA.  He thinks the improvement in agility, while hard to calculate, is the more important metric. An agile business is one that can quickly ramp compute capacity up or down to react to market changes, develop new products and bring them to market quickly. "We think of ROI in terms of the 'R' and the 'I' taken against the IT ledger book. We're not thinking about the larger business," Oberlin says. "I think agility is worth a lot more than people are thinking about."

IT budgets average just two to four percent of revenue, he notes, but the improvement in productivity can be an order of magnitude greater than the cost of going to the cloud. Oberlin says that the cost of one server instance from a cloud provider comes out to only 12 cents per hour. Meanwhile, the cost to a company for one employee paid $160,000 per year, including salary, benefits and an office for them to work in, comes out to $76.92 an hour or two cents a second.

"If you can save an employee six seconds out of every hour that he might be waiting for an application to run by adding a server instance, you could conceivably be breaking even on the cost of that service," Oberlin concludes. "So this is nuts. You pretty quickly get to a point of ridiculous metrics here."

Cloud Connect was hosted by Techweb's conference production division of UBM, which also publishes Network Computing.