Enterprising Developments

Economies of Scale for Clouds, Calculated

Joe McKendrick
Insurance Experts' Forum, November 23, 2010

As the popularity of cloud computing has grown, so has the consternation and hand-wringing over the security of putting data and applications into the hands of someone outside the firewall. That's why the notion of “private cloud” has gained such traction – it is seen as a secure way to offer online resources, but controlled by your resident IT department, versus Big Cloud Company somewhere in the ether.

The economic proposition of public cloud is compelling, since you only rent resources on as as-needed basis, but does private cloud make economic sense?  Some believe it delivers little economic benefit, since a company is paying for and maintaining a full data center infrastructure, just as it was doing before.

Some Microsoft analysts, for one, believe that there is little economic benefit in adopting private cloud, and recently published a paper, titled "The Economics of the Cloud," to make their case. Microsoft has money on both horses in this race, by the way. They are aggressively promoting Windows Azure and Mesh as platforms for cloud service delivery, and maintain large cloud data centers for clients. But Microsoft's server, desktop, development, virtualization, and ERP products are a huge piece of on-premises shops.

The authors of the Microsoft paper, Rolf Harms and Michael Yamartino, note that public cloud offers three important economies of scale, that are making it difficult for companies to continue justifying having their own data centers – including the ability of cloud providers to deploy computational resources at significantly lower cost, offer infinitely large demand pooling, and spread the cost of application maintenance labor across multiple tenants.

The economies of scale emanate from the following areas:

Cost of power. “While the operators of small data centers must pay the prevailing local rate for electricity, large providers can pay less than one-fourth of the national average rate by locating its data centers in locations with inexpensive electricity supply and through bulk purchase agreements.” Cloud data center providers can also locate facilities where power is cheaper and more abundant, such as near hydro-electric sources.

Infrastructure labor costs. “While a single system administrator can service approximately 140 servers in a traditional enterprise, in a cloud data center the same administrator can service thousands of servers.” This frees up IT staff from mundane, routine tasks. .

Security and reliability. “Large commercial cloud providers are often better able to bring deep expertise to bear on this problem than a typical corporate IT department, thus actually making cloud systems more secure and reliable.”

Buying power. “Operators of large data centers can get discounts on hardware purchases of up to 30 percent over smaller buyers.” Plus, cloud providers often run on a single type of systems architecture, versus the entanglement of operating systems and platforms that constitute many of today's corporate data centers.

Harms and Yamartino state that private clouds, on the other hand, still present the same maintenance and hardware costs that companies have been struggling with all along. For example, they calculate that companies attempting to build out private cloud infrastructures still may pay 10 to 40 times what a company tapping into public cloud services will pay for the same capabilities. 

Joe McKendrick is an author, consultant, blogger and frequent INN contributor specializing in information technology.

Readers are encouraged to respond to Joe using the “Add Your Comments” box below. He can also be reached at joe@mckendrickresearch.com.

This blog was exclusively written for Insurance Networking News. It may not be reposted or reused without permission from Insurance Networking News.

The opinions of bloggers on www.insurancenetworking.com do not necessarily reflect those of Insurance Networking News.


Comments (2)

Cloud computing is being used as a third-party service to perform computing needs on a publicly-accessible IP basis. Cloud computing allows users to access their applications from anywhere by means of any connected device.
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Posted by: Johnson S | March 10, 2011 7:28 AM

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