One persistent misconception about cloud computing is that it will reduce IT costs, according to Simon Wardley, a researcher at CSC’s Leading Edge Forum.
Instead, Wardley argued at Information Age’s Managing IT Cost Effectively seminar, by making IT resources cheaper, cloud computing’s real impact will be to increase consumption.
Precedents for this effect abound, he said, from coal production in the 19th Century to the cost of computing in the last two decades. “Since the 1980s to today, you get 1,000 times more computing resource for a thousand dollars,” Wardley explained. “Does this mean IT budgets have reduced in that time? No, it just means we do vastly more.”
He presented data from one organisation for which it used to take two months to provision a server. With cloud computing, it takes three minutes. “This makes an incredible difference in terms of getting stuff done,” he commented.
Cloud computing will open up a long tail of unmet demand for IT resources, he said. “Constraints on IT resources mean there’s a limited amount you can do. If you make IT more efficient, you can do more.”
Cloud computing may not reduce cost, but it will increase the rate of change, Wardley said. It will accelerate agility within organisations by allowing employee self-service, he said, and it will expedite innovation in the IT sector. “The shift of IT activities to standard interchangeable components, provided through utility services, should accelerate the rate of innovation within IT.”
It will also accelerate disruption in other industries, by reducing the barriers of entry. “The commoditisation of computer resources is going to impact other industries, such as insurance, where access to those resources acts as a massive barrier.”
The pattern of spending
Wardley’s view of cloud computing as a profoundly disruptive force might lead one to believe that planning the business impact of a cloud project is an impossible task. But this was not the experience of Richard Castillo, group IT manager at investment firm EFM Group, who recently oversaw a project to replace its entire IT infrastructure with virtualised services delivered by a third party.
Soon after Castillo joined EFM Group in 2009, he wanted to get rid of much of the firm’s IT department. “There was a culture that prevented IT from delivering better,” he said.
Castillo therefore wanted to outsource and virtualise the IT infrastructure, which at the time consisted of seven data centres around the world. He documented all of the firm’s IT contracts and costs, eventually reaching a stage where
he could predict its IT infrastructure spend for the next five years.
That allowed him to build a business case for an outsourced, virtualised alternative, by comparing the yearly contract costs with the firm’s project infrastructure spend.
Critical to the success of the business case, he said, was the impact of the outsourced option on cash flow.
“The net saving was only 10% in overall terms, but what was really compelling was that it removed the cash flow spike that we would have had every time we refreshed our servers,” he explained. “Altering the pattern of spending is really valuable from an accountant’s perspective.”
Indeed, Castillo said that learning the difference between cash flow and profit-and-loss accounting was the single most valuable part of the experience.
