How the Cloud Computing ‘Revolution’ Can Save You Money

June 17, 2010 (Vol. 31, No. 12)

Welcome to the next frontier in IT management: the growing movement of major business systems to the Internet. It’s commonly called cloud computing and it’s the difference between renting an application and developing and hosting one.

And it’s saving some small and mid-sized companies tens of thousands in annual costs for items ranging from HR management to sales force automation. “Applications delivered via the ‘cloud’ can come at much lower costs, and in some cases it can be staggeringly lower,” notes Lee Evans, president of Virtual Logic Group LLC in Woodbridge, Va. 

Cloud computing providers deliver common business applications online, accessed through a Web browser, while the software application and data are stored on the service providers’ servers.  The cloud computing vendor is responsible for software upgrades, application development and hosting the application.  

Experts say cloud computing is part of a business revolution. “From a technology perspective, it is part of a pattern, one of the waves, a familiar pattern of centralization and decentralization,” says Lane Cooper, founder and editorial director of BizTechReports.com. “It is revolutionary on the management and business fronts, it changes the way IT operates and moves the model from technology ownership to technology rental,” he says. 

Server revenue for public cloud computing will grow from $582 million in 2009 to $718 million in 2014, according to new research from International Data Corporation. Server revenue for the much larger private cloud market will grow from $7.3 billion to $11.8 billion during the same time period. 

In a private cloud, the applications reside on a private enterprise network. Companies shift applications off the PC desktop and onto shared infrastructure where employees use the applications as needed. In a public cloud, resources are dynamically provisioned on a self service basis over the Internet from an off-site, third-party provider who shares resources and bills on a per-usage basis. Examples include Gmail and Google Docs.

Cloud’s Benefits Can Be a Double-Edged Sword

While there are benefits to using cloud applications, there are also drawbacks. And some can be serious.  So before considering cloud computing at your enterprise, first establish what applications are core to the business. Then weigh the pros and cons of controlling the application development, Evans suggests. 

Small- and mid-sized companies exploit cloud opportunities more aggressively than their larger Global 2000 counterparts because they often have less of an embedded stake in legacy systems and business processes, Cooper notes.  

“Cloud computing lowers costs and enables a company to be nimble and more financially adaptive to the environment. Mid-market companies are the fastest adopters of cloud computing,” Cooper says. 

With simpler organizational structures –and less invested in traditional IT infrastructures – small-  and mid-sized businesses can not only “cost-justify” the change management associated with adopting cloud strategies, they can also more quickly see the path to a return on investment. “The cloud vendors realize this, which is why they have targeted SMBs with their offerings," Cooper says.

Imagine a company that would like to use a standard CRM tool. A premise-based deployment would include the operational costs of a data center, network, servers, storage, ancillary licenses, labor  and ultimately the license of the CRM software.  Procuring the same type of system via a cloud CRM provider typically involves only a monthly subscription fee.  For a CRM system with 10 users, the premise-based system could cost in excess of $100,000 annually, while a similar cloud-based tool might be just $25,000.  “The key message is when applications are delivered via the cloud, hard costs are mostly eliminated from the equation,” Evans explains.

Before migrating applications to the cloud, organizations need to assess their maturity with respect to sourcing and vendor management. Then ensure that you have the processes in place to manage and assess the contract.

“Another consideration falls in the realm of institutional knowledge.  Reducing labor costs also means losing staff, and losing staff means losing knowledge.  Depending on your business and process maturity, that loss can have far-reaching consequences that are not realized for several years,” Evans said.

Weigh the risks of owning versus not owning your technology, Cooper says. “Cloud computing is unique from a business perspective. If you rent the technology, you have to adapt your business requirements to conform to the application offered. You have an 80% solution,” Cooper says. “The non-cloud business model provides for internally developing applications or customizing purchased applications that are adapted to a company’s business requirements.” 

Well Defined Business Processes Key

Still, some companies are moving a large number of business applications to the cloud, says Evans, whose company focuses on process re-engineering and infrastructure and business application modernization.  Among the applications being moved are:  HR processes (recruiting, on-boarding, performance reviews, etc.), learning management systems, customer relationship management and sales force automation. 

“For many small businesses, we are seeing an increase in the popularity of cloud-delivered accounting tools.  On the infrastructure side, email, VPN connectivity and portal systems are the key first moves,” Evans says.  

But do your homework –including reviewing business continuity plans ­– if you are considering deploying cloud-based systems “that are critical to business operations, Evans cautions.

You need a deep understanding of your entire business ecosystem and how to evolve your business processes. It is not just about cutting costs.  Sometimes the cloud can make you very process efficient, and sometimes it magnifies flaws. “It can be disastrous to move a flawed business process to the cloud. When you automate a flawed process, you fail faster,” Evans says.   

“An advantage to cloud computing is reducing the costs of IT Labor.  One of the benefits of cloud-sourcing is that you can directly reduce the costs associated with having internal labor to manage premise-based systems.  Most directly reduced would be tiered support costs associated with daily management of the application.  A rough order-of-magnitude estimate could be in excess of a 50% reduction,” Evans said. 

Is the Cloud a Long-Term Strategy?

As CIO of the Optical Society of America (OSA), Sean Bagshaw constantly evaluates new technology and applications to establish how best to control costs while still achieving the OSA’s business objectives. He is looking to migrate niche applications to the cloud in the short term. “Over the next three to five years we will see a shift to more applications to the cloud. The cloud is like classic outsourcing, so any application that has become a commodity is a natural for the cloud, such as email,” said Bagshaw. 

“There are a lot of applications that are not suited for cloud computing today. I believe that applications that involve customer records and financial information will be the last OSA moves to the cloud.” 

Bagshaw says he is concerned about data security and the safety of intellectual property. He also says moving to the cloud means learning to trust a third party. “The question we ask ourselves is when is the right time to migrate an application to the cloud, and how do I execute?” 

Migrating applications to the cloud is part of a long-term strategy and has long-term implications. Companies need a complete understanding of their whole business operation and must recognize that applications core to their business may not be suitable for the cloud.