Cloud computing has been "the next cool thing" for at least the past 18 months. The current economic climate, however, may be the thing that accelerates the maturity of the technology and drives mainstream adoption in 2009.
This economic crisis is very different from the normal ebbs of the business cycle we have grown accustomed to. The difference lies in how rapidly sources of capital have dried up—whether that capital is coming from venture capitalists, angel investors, or banks. Capital markets are frozen, and companies needing to make capital investments to continue operations or grow are facing a daunting challenge.
A lack of capital creates a lack of flexibility in leveraging technology to operate and grow a business. If you can't get access to a bank loan, you have to use your company revenues to buy new servers. Using company revenues can damage cash flow, harm valuations, and put otherwise healthy businesses at risk.
Typically, when a company wants to grow its IT infrastructure, it has two options:
- Build it in house and own or lease the equipment.
- Outsource the infrastructure to a managed services provider.
In both scenarios, a company must purchase the infrastructure to support peak usage regardless of the normal system usage. One Valtira client, for example, has fairly low usage for most of the year, but sees usage equalling millions of page views/month for about 15 minutes each quarter. For both of the above options, they are faced with paying for an infrastructure necessary for only about 1 hour each year when something much more minimalist will support the rest of the year.
Let's assume for this customer that two application servers backed by two database servers and balanced by a load balancer will solve the problem. The options look something like this:
|Internal IT||Managed Services|
|Cost Over 3 Years||$149,000||$129,000|
For this calculation, I assume fairly baseline, server-class systems with a good amount of RAM and on-board RAID5 such as a Dell 2950 and a good load balancer. The 3-year cost assumes a 10% cost of capital. I also assume a very cost-efficient managed services provider. Most of the big names will be at least three times more expensive than the numbers I am providing here.
Under this scenario, managed services saves you a nice 13.5% over the do it yourself approach (assuming you don't get taken to the cleaners by one of the big managed services companies). Of course, it does not consider at all the impact of a server outage at 3am, which is where managed services will shine.
What is particularly appealing about managed services, however, is the lack of capital investment. The $40,000 up-front for an internal IT approach is a terrible burden in the current economic environment. Even if you can get credit, the cost of the loan makes that $40,000 much more expensive over three years than $40,000.
Good argument for managed services? Yes, but a better argument for the cloud.
The cloud enters the picture looking like this:
|Managed Services||The Cloud|
|Cost Over 3 Years||$129,000||$106,000|
Cloud savings over internal IT jump to 29% without getting into the discussion of buy for capacity versus buy what you use!
Between managed services and the cloud, the cloud provides 18% savings.
While 18% and 29% savings are nothing to sneeze at, they are just the start of the financial benefits of the cloud. It goes on.
- No matter what your needs, your up-front cost is always $0
- As the discrepancy between peak usage and standard usage grows, the cost difference between the cloud and other options becomes overwhelming.
- The cloud option essentially includes a built-in SAN in the form of the Amazon Elastic Block Storage. The internal IT and managed services options would go up significantly if we added the cost of a SAN into the infrastructure.
- Cheap redundancy! While the above environment is not quite a "high availability" environment, it is very highly redundant with systems spread across multiple data centers. The managed services and internal IT options, on the other hand, have single physical points of failure as the application servers and database servers are likely located in the same rack.
Let's say, however, that you need 10 servers to handle peak usage for 1 hour each year and just 2 to operate the rest of the year. Ignoring the impact of the cost of capital:
- Internal IT adds another $40,000 in total costs over 3 years.
- Managed services adds another $144,000 in total costs over 3 years.
- The Amazon Cloud adds about $24 in total costs over 3 years.
No, that was not a typo. That's forty THOUSAND dollars against one hundred forty-four THOUSAND dollars against 24 dollars. And as I mentioned earlier, this setup is based on an actual Valtira client that was considering a dedicated managed services option before Valtira began deploying customers in the Amazon cloud. It is not some contrived example.
Obviously, most organizations have either seasonal peaks or daily peaks (or both) with a less dramatic cost differential; but the cost differential is still quite dramatic and quite impactful to the bottom line. In addition, the ability to pay for what you use makes it easy to engage in "proofs of concept" and other R&D that requires dedicated hardware.