Why You Should Move To Cloud? Economics Behind Cloud Computing

With the changing business needs, companies has to spend significant time and budget to scale up their Information Technology (IT) infrastructure. The Cloud Computing bring a paradigm shift in the manner businesses acquire their IT capabilities. Companies now just have to connect to internet and make use of available services on pay-as-you-use basis. This helps in avoiding upfront capital expenditure on the IT infrastructure and helps in instantly scale-up or scale-down based on actual business requirements. Further, there is no need to invest in buying upgrade of software licenses or rebuilds and no need to manage data-centers.  

So, What is Cloud Computing?

Cloud Computing is a culmination of many previous generations of distributed systems and builds on the technical knowledge/wisdom of the same. It has revolutionized the way computing power, network, storage, management solutions and applications are delivered to the users. It’s been made possible by very large scale data center connected to high-speed low cost broadband network. Cloud Computing system typically has one or more of following four characteristics:

• Massive scale: Massive scale essentially means that datacenters are very large, they contain tens/hundreds of thousands of servers. The massive scale further enables the shared economy of resources. 
• Data-intensive nature: Data that needs to be stored and processed, further, needs to be served in real-time. The data might include daily logs of certain web services or might include end-user web data which is getting generated at fast paced and need to be interpreted to deduce actionable in real-time. 
• On-demand access: On-demand access essentially means that pay-as-you-go or subscription models of contract are built to avoid upfront purchase of resources by users/companies. 
• New clouds programing paradigms: New clouds programing paradigms are required to store and process data more efficiently, this might include key-value storage such as Cassandra, and NoSQL storage such as MongoDB and MapReduce algorithm such as Hadoop or Spark.  

Underlying Economics

The underlying cost of IT infrastructure typically involves following elements:

• Infrastructure cost: This might include the cost of hardware, software licenses etc. 
• Telecommunication cost: This might include the cost of internet connectivity etc. 
• IT Skills cost: This might include cost of the people, management etc. 
• IT Data Center Facility: This might include the cost of facility, electricity HVAC system etc.  

In the accounting books, majority of the above cost elements are categorized as Capital Expenditure (CAPEX) for the useful life of the assets and are typically incurred upfront at the time of acquisition. The vendors of the Cloud Computing can aggregate the demand and can enable the economy of shared resources by offering the same as a service at low cost. For example, Infrastructure as a Service (IaaS), Platform as a Service (Paas) and Software as a Service (Saas) vendors can offer, measure and bill their services on following factors:

• CPU per hour Network 
• Usage or Data Transfer (in/out/zone) per gigabyte (GB) 
• Storage in GB 
• Number of IP Addresses or DNS 
• Number of instances monitored per month by system-administrator 
• Load Balancing in hours per GB

All types of the cost including CAPEX, Depreciation, Tax, Application licenses etc. are already factored in the above measures. By adopting to Cloud Computing, companies can outsource their IT needs to the service provider and can smartly convert their CAPEX to operational expenses (OPEX) incurred over hours/weeks/months based on the usage. Also, due to the outsourcing nature, Cloud Computing allows companies to focus more on their core business.
The Cloud Computing allows vendors to spread fixed-cost or CAPEX of the infrastructure over multiple customers. The Cloud Computing also permits rapid ramp up or ramp down of infrastructure for the customer at click of a button. Both the shared economy and optimized scale of Cloud Computing, enables the vendor to offer to short-term contracts. This in turn helps customer companies to gain flexibility in terms of time without incurring much additional overheads.

Summing Up!

Cloud computing is not only allowing companies to rapidly address the unpredictable ramp up or down of their IT needs but also helping them avoid upfront cost of IT. They have capability to bring new servers fairly quickly and further save money of managing the same themselves. Furthermore, the impact of reduced lead-time can fuel the top-line growth of the companies. So, the reasons for attractiveness of cloud computing are:

• Reduced lead-time to fulfil IT resources 
• Optimized utilization of IT resources 
• Rapid scale up or scale down – offering on-demand / Agility to business 
• No upfront investment on IT resources - conversion of CAPEX to OPEX 
• Fueling top-line growth 
• Improved bottom-line economics due to low-cost of service 
• Flexibility due to short contracts Improved focus on the core business

Reference: https://gigaom.com/2008/09/07/the-10-laws-of-cloudonomics/