Will your business lower costs by using cloud services? That seems to be a key bottom-line question that CIOs — and their bosses — want to know. Why then is it so hard to get a simple answer?

Writer Doug Bartholomew reports in his article, Costing out the Cloud, that, “understanding cloud economics is sort of like going for a swim in a hidden lake” — you never know the depth before you take the plunge.

While that sounded true, I was left wondering why. How can a model designed to ease complexity be so complicated to price out — especially when nearly every department from HR to sales is jumping into the cloud computing pool?

When I investigated further, I found lots of research, analyses and case studies that I will share with you here. Most concluded that there is no one-size-fits-all ROI calculator that tells you when to go to a cloud model and how much you will save or pay; the most definitive answer about lower costs seems to be you probably will see savings; but as with warning labels on medicine bottles, results will vary with the situation.

Cost savings may be one of the prime reasons companies are flocking to the cloud, but as Steve Phillips, VP and CIO at Avnet, told us: It is “only part of the story. At Avnet, it’s more about adding new functionality more quickly and affordably than we could do it on our own,” he says.

Some analysts are comparing cloud economics to the outsourcing of a decade ago. In an Accenture report, “Cloud and the Future of Business: From Costs to Innovation,” issued earlier this year, the consultancy — which also provides IT outsourcing services — says that shifting computing and storage capabilities into the cloud offers economies of scale in terms of IT support, energy consumption and speed.

However, it also says that cloud computing is unlikely to result in huge transformational shifts “if it is understood solely in terms of cost savings arising from data centre consolidation and virtualization.” Indeed, just as business found that “the most effective forms of long-term outsourcing tend to have a perspective that is diametrically opposed to concerns about cost-minimization,” cloud computing has to be considered from a broad perspective as well.

Accenture’s conclusion? “Long-term cost benefit modeling for cloud computing is immature and demands much further attention.” So that puts you back where you started from.

James Staten, VP and Principal Analyst at Forrester, has also studied cloud economics, and asks in a recent blog: “Is your cloud strategy centered on saving money or fueling revenue growth?” Where you land on this question, he says, “could determine a lot about your experience level with cloud services and what guidance you should be giving to your application developers and infrastructure and operations teams.”

According to Staten, “the majority of CIOs would vote for the savings, seeing cloud computing as an evolution of outsourcing and hosting that can drive down capital and operations expenses. In some cases this is correct, but in many the opposite will result. Using the cloud wrong may raise your costs.”

Staten offers other insights in another blog about which applications to move to the cloud. He advises that: “For enterprises to make the most of a public cloud platform, they need to ensure that their applications match the economic model presented by public clouds. Otherwise, the cloud may actually cost you more.”

I also recommend reading a comprehensive white paper, “The Economics of the Cloud,” issued late last year by Microsoft. It offers models and criteria to use as a framework when making decisions about cloud economics. It is a very in-depth analysis of cloud cost considerations and includes discussion of infrastructure, data center and utilization; multi-tenancy options; support and maintenance costs; capital versus operational budget expenditures; private versus public cloud costs, and new application development costs.

It also notes that the emergence of cloud services is different from previous outsourcing and virtualization efforts and is “fundamentally shifting the economics of IT … cloud architectures facilitate elastic consumption, self-service, and pay-as-you-go pricing.”

The report cites four areas that may yield economies of scale and cost savings:

• Cost of electrical power

• Infrastructure labor cost

• Buying power

• Elimination of capital expenditure

So, what are the takeaways for budget-conscious CIOs and their business-unit partners from these experts? In my view, it’s to jump in and test the waters, but carefully. Conduct your typical due diligence by analyzing contracts, negotiating with providers and starting small. Know what type of cloud is optimal for each applications before you sign on. Are you looking at pay-as-you-go public clouds to offload peak capacity from your servers, or for a small, dedicated application hosted in a private cloud for one business group? The total cost of ownership (TCO) will be very different for each.

I’d like to know more about how you approach cloud economics at your enterprise. Does the pace of business allow for thorough cost analysis for each application? Are you saving money? Please share your experience and tactics by commenting on this blog and also take our poll here to compare your strategies with your peers.

Paula Klein

Editor and Community Manager

Smart Enterprise Exchange

As the new year begins, we’re all looking for reasons to celebrate. Although there are some positive signs, with business outlooks still uncertain, I tend to take a cautious approach toward many predictions I read.

Yet I was drawn to the findings of a recent Accenture study— based on feedback from 550 global, senior executives — which concluded that 72 percent of business and IT executives place greater value on the IT function today than they did before the economic crisis. What's more, these executives view IT as an important part of their economic recovery efforts. The study, conducted jointly with the Economist Intelligence Unit, shows that not only are businesses willing to spend more on IT, it is viewed as a tool to gain competitive advantage.

In particular, one area that clearly seems to be gaining traction is virtualization. “By far the most pressing priorities of IT chiefs are for server virtualization and consolidation (44 percent),” according to the report.

At Smart Enterprise Exchange, we view virtualization as a key strategy going into the new year and new decade, too. This month we cover the topic in all three of our topic tracks: from the Business Technology Strategy, Business Technology Execution and Professional Development perspectives. Our emphasis reflects the fact that virtual machines are moving out of pilot programs into production environments. Early adopters can now offer best practices — particularly about their server and storage consolidation efforts. And virtual desktops are a nascent sector with tremendous growth opportunities. Many CIOs are recognizing that virtualization efforts will have a greater impact on the enterprise than they first realized.

We asked Roy Illsley, a veteran industry consultant and Ovum’s Senior Analyst in the U.K., for his perspective on virtualization implementation. In his Smart Insights column, Illsley drills down to some of the tactical issues CIOs are confronting. He says that “development of new capabilities for infrastructure virtualization will continue to unfold rapidly this year,” although three key factors — proprietary technologies, security and questions arising about cloud computing options — must be addressed.

In our Smart Practices article this month, Brad Manning, CIO at Quaker Chemical Corp., views virtualization as more than a tactical maneuver to reduce expenses: “It should be part of a longer-term strategic plan and architectural road map that is aligned to business strategies.”

Manning adds: “Your roles and organizational design will need to change. IT processes will need to be revisited, including change management, backups and disaster recovery.” To help in this aspect of virtualization, Smart Resources offers reports and events to help you assess your own career as well as your staffing needs.

All of the efforts seem to be worthwhile. Ovum’s Illsley notes that virtualization may be the linchpin to gradually transform the role and responsibility of the IT department into “true business technology leaders.” And based on Accenture’s findings, Keith Haviland, its Global Managing Director for Systems Integration Consulting, is quoted as saying: “While other operational budgets are being slashed, global firms look toward IT as a way to rebuild strength.”

Now that’s something to celebrate.

Let us know about your virtualization experiences and begin a discussion with your peers in our virtualization community group.

Paula Klein
Editor and Community Manager
Smart Enterprise Exchange