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McKinsey Doesn't 'Get' the Cloud

The McKinsey report "Clearing the air on cloud computing" is getting some attention. It has some good stuff in it, including the warning that cloud computing is approaching the top of the Gartner hype cycle. However, its claim that cloud computing (in the guise of EC2) ends up being more expensive per server month for large enterprises than doing it in-house seems fatally flawed. In particular, it doesn't seem to be accounting for the costs correctly and it completely overlooks the benefits of cloud automation, which ultimately led to a revolution in the way compute resources are consumed.

The cost equation in the report starts on slide 22 and it's really sketchy. They mix EC2 compute units and cores together (compare 22 and 23). They talk about "$14K/Server (2 CPU, 4 core)" which on my calculator comes out to $97/core/month over three years, but they have a cost of $45/mo/CPU on the same slide (and $97 doesn't even account for the facility or power or cooling).

On slide 24 they suddenly compare an in-house datacenter server with "75% of EC2 Large Standard Windows configuration on Amazon EC2" and nowhere do they mention that the latter cost includes the Windows license. Ouch!

Unless they actually document more details of their cost accounting I can only say that it's flawed. Many business line owners in large corporations come to us and tell us they can't believe how cheap EC2 is because their internal chargebacks by IT are $400+ per server.

The other big mystery is how McKinsey arrives at just a 10% labor reduction when moving to a "third-party cloud provider," and they quote $96/mo of labor for the cloud servers. For what? For the guy who clicks the "launch" and "terminate" buttons on the management dashboard?

Again, the report is so thin on details that it's impossible to figure out what they're really thinking. Clearly a lot of staff is required to run a whole data center, as well as a lot of service providers, from the architects and engineers to build the facility, to the HVAC guys cleaning filters, the folks maintaining the UPS batteries, the genset, and the security crew. 10%, yeah, right.

What the report seems to completely overlook is the possible reduction in sysadmin costs. One of the huge benefits of the cloud is that the entire computing infrastructure can be automated, top to bottom. That saves a lot of sysadmin labor and in the end it means that requisitioning more compute capacity can be done by the end user somewhere in a business unit instead of being an IT chore.

The report also doesn't take into account the cost of the red tape that surrounds corporate IT - things the business can't do because IT can't support them, wasted time spent doing workarounds instead of just launching a few more servers, having to guess six months ahead of time how many servers will be needed at launch. Opportunity cost because projects don't happen for lack of IT resources.

It would have been great to read a report that lays out all the costs and assumptions clearly so one can retrace what is included and what is not. I would have loved to have learned more about corporate IT costs. Alas, the report fails to do that. and it also fails to recognize that cloud computing revolutionizes the way compute resources are consumed, which ultimately is where the bigger benefits will come from.

Comments

Great post. This response is totally in line with the grave doubts I've had about McKinsey's financial and functional comparisons of the cloud vs. traditional hosting. A couple additional thoughts: I read the physical server description - $14K price tag (2 CPU / 4 Core) - as describing a system with a total of 8 cores, not a 2x2 system. This math does pencil out to be ~$45/mo over three years (without depreciation), but it is still totally misleading. In my experience, enterprises frequently double (for on-site HA) or quadruple (for local HA, remote replication and remote HA) their CPU purchase for critical workloads. As you have noted, traditional I.T. shops also open their wallet for O/S licenses, HA capabilities (Veritas Clustering, VMWare HA, etc.), shared storage infrastructure, and, potentially, wide-area storage replication technology. Any comparisons that focuses exclusively on monthly price-per-flop is missing the boat. In the wake of the McKinsey report, it's certain that we will see a wave of more comprehensive financial comparisons; ones that accurately represent the costs of satisfying the functional AND non-functional (performance, availability) considerations in both traditional and cloud environments. This is what truly excites me.
[...] autour du rapport McKinsey (Cloud Computing) - Techcrunch / Cloud Computing Podcast / RightScale / Blog Anshu [...]
Unless AWS has some 'magic dust' then all the costs you ascribe to an enterprise /traditional hosted environment also apply to them - I assume they pay for power, rack space, hardware, cooling, labour? If nobody can achieve $45 /mo, then neither can AWS.The real issue is whether an enterprise or traditional hosting provider can leverage scale, virtualisation and automation to achieve the same unit cost of computing as AWS does. Many will be able to, others won't. This seems a fairly sterile debate. I agree what is really important about cloud is flexibility and responsiveness - low unit cost of computing is not the issue.
Posted by Mark Kerr (not verified)   Ι   April 28, 2009   Ι   05:21 AM
Benson, thanks for your comment. Like you I tried a bunch of back-of-the-envelope calculations to see whether I could arrive at $45/mo. I concluded that all I was doing was hypothesizing more and more stuff. The McKinsey folks really need to be more detailed with their numbers if they want to be taken seriously. And yes, it's funny to see how they completely missed the big picture. I actually do believe that cloud computing will increase the computing budget of many companies, large and small. The reason is that suddenly compute resources become affordable and attractive to solve more business problems. Throwing some more machines or disks at the problem is cheaper than the alternative and suddenly becomes possible, even easy. So do it and save overall!
Great post. Really amazing how the big picture is missing from the McKinsey report. It's not just about monthly cost per CPU, it's about flexibility, agility and variable costs. It seems like some people just don't grasp what cloud is about...
Posted by Luca Fracassi (not verified)   Ι   April 17, 2009   Ι   01:07 AM
[...] is not just me who is feeling about the report this way. The folks at Rightscale also think that there is something messy in their [...]
Krishnan, thanks for the pingback from your blog entry http://www.cloudave.com/link/mckinsey-report-has-fud-value-but-amazon-should-cut-prices, I like your list of issues with their price analysis.
[...] empresas. ¿Por que? Pues la verdad es que los datos que exponen no dicen de donde vienen y no son pocos los que no están de acuerdo con el [...]
[...] Even more confusing is that on the two slides they have separate EC2 pricing conclusions for small/medium companies and large companies, even though they have the same line of demarcation for what is economical – the $45/s month per CPU month.  The boys at RightScale also take exception to the reporting of the numbers by McKinsey. [...]
working at an analyst firm myself, I know that it is always tempting to create a report around numbers, because it sells much better and receives by far more attraction. McKinsey is looking at a very small part of what cloud computing can do for enterprise IT capabilities. We cannot exclude, that some companies´ internal IT departments may be able to compete with current cloud offerings within the functional areas observed, but for sure this will soon change.
[...] Others just put last month’s McKinsey’s report in question, especially regarding costs. The savings you could get by using the cloud are not so clear. The best approach is surely to put priorities and to proceed step-by-step in the migration to the cloud. [...]

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