With more enterprises adopting cloud computing as part of a comprehensive strategy to drive innovation and profitability, the economics of using cloud become more crucial as their investments in cloud resources grow. Dr. Owen Rogers, a senior analyst of digital economics at 451 Research, helps large enterprises understand the economics of using cloud technology so that they can make informed choices when costing and pricing their own products and services and those from their vendors, suppliers, and competitors.
Prior to launching RightScale Cloud Analytics, a new product in beta that enables you to visualize, forecast, and optimize costs across your entire cloud portfolio, we gave Rogers a demo and also asked him to share his perspective on how enterprises should regard cost when developing their digital infrastructure strategies.
How important will cloud cost and usage analysis tools be in the next 12 months?
A few years ago, cloud was being used for pre-production servers and non-critical workloads. Now enterprise adoption is growing, and consumers are starting to see that those small hourly charges — which weren’t even considered for pre-production workloads — can rapidly mount up when running an enterprise application. As we see more enterprises move to the cloud, CFOs are inevitably going to be keen to understand, reduce, and allocate costs. The use of cloud cost and performance analytical tools is likely to grow in 2014.
What are three things enterprises need to know before developing their digital infrastructure strategies as they relate to cloud economics?
Firstly, the cloud should primarily be considered a tool for increasing profitability rather than reducing cost. The ability to rapidly provision, scale, and implement applications means enterprises can address the demand for their services, reach new markets, and develop new products more rapidly. If the cloud generates new (and previously unobtainable) revenue streams, obtaining cost savings on legacy infrastructure is relatively less important. However, to be profitable it’s important to understand the costs of using the cloud. Secondly, consumers should assess the cost implications of a number of scenarios — present and future — and build a risk assessment that takes into account both cost and revenue in the analysis. For example, if a demand spike causes an increase in cost, this doesn’t matter if there is also a proportional spike in revenue. Finally, enterprises should consider the longer term: What will they do if a cloud provider suddenly raises its prices? What are the cost implications of having to move with regard to such things as bandwidth, for example? Enterprises should draw up an exit strategy detailing costs, and, if possible, get the provider to contractually agree to it. Certainly, a cloud management platform can help from the technical side of switching clouds.
In July, 2013, you wrote that the industry was seeing the beginning of an “oligopoly” where there are a limited number of cloud providers offering the same service. Do you still see this as a trend heading into 2014?
I think it is still likely we will see an oligopoly of huge, warehouse-style providers that offer commodity cloud services alongside a market of smaller, but more value-adding, cloud providers. It might take years to evolve, but I believe that in the future, consumers will need both commodity cloud services for non-essential capability as well as value-adding, enterprise-grade services that will provide niche capabilities.
In 2014, will cloud costs keep decreasing, and will pricing become simpler or more complex?
Cloud costs are bound to decrease further in 2014, but these cuts won’t necessarily be on unit prices. It is likely providers will offer discounted prices (or more services) to customers who are willing to commit, buy in bulk, or sign enterprise agreements, thereby rewarding consumers for their loyalty. My hope is that cloud costs will simplify! 451 Research recently conducted a survey of cloud pricing models, and analyzing the variation in models across the market was a tough task indeed. We managed to categorize pricing in the end, publishing the results and analysis in the Cloud Pricing Codex, but one thing was clear – pricing for cloud services is difficult to understand and difficult to compare.
Do you see enterprise cloud users attempt to chargeback costs to their departments and users? If so, how do you see them chargeback the private cloud aspects?
At the moment, many enterprise cloud users are implementing showback – where departments are shown the cost of the cloud consumption — rather than being charged directly. However, most enterprises that are implementing showback are looking to offer departmental billing in the future. Technologically, cloud management software can be used to provide the capability to monitor and allocate consumption. However, I feel it is the organizational, social, and economic implications of chargeback that are the biggest barrier to departmental billing of cloud consumption.
Do you expect more “custom price books” from public cloud providers?
For cloud providers seeking to address a commodity cloud market, public standardized pricing is here to stay as it attracts the volume that low-margin providers need to stay profitable. For cloud providers playing into niches, custom pricing is still viable as consumers are generally more focused on value rather than cost.
Do you see a disconnect between business and financial managers and technical managers in enterprises when it comes to cloud?
In the days of cloud experimentation, technical staff were happy to use a credit card to buy cloud services and charge it to expenses. As cloud has matured and enterprises are building important (and costly) applications, this credit card approach is no longer suitable, and CFOs are increasingly having to take responsibility for variable (and unpredictable) costs that are not departmentally allocated nor controllable by the finance office. In 2014, financial managers will increasingly make use of third-party tools to understand, allocate, and control costs working in conjunction with cloud management tools.
To visualize, forecast, and optimize costs across your entire cloud portfolio, sign up for Cloud Analytics beta.