The economic benefits of cloud computing

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As the cloud paradigm matures it is becoming increasingly well understood that companies and organisations of all sizes – from the smallest SME to the largest enterprise or public agency – can realise highly compelling economic benefits by adopting cloud computing solutions. In fact few could now credibly argue that emergence of the cloud model is not profoundly and fundamentally changing the economics of IT.

At a macroeconomic level the Centre for Economics and Business Research (CEBR) predicted in February 2011 that cloud computing could inject some €763bn (£670bn) into the major economies of the European Union over the next five years, with the UK reaping an estimated €30bn over the period. CEBR's Cloud Dividend report identified the cost savings (CAPEX and OPEX) made by companies adopting cloud computing services and measured these against macro and business variables such as business development opportunities; business creation; indirect gross value added (GVA); tax contributions; as well as expenditure on cloud services to estimate the Euro value of the technology in each country.

Elastic consumption, elimination of CAPEX and improvements in agility

The cloud technology model allows organisations to standardise and pool IT resources and automates many of the maintenance tasks done manually today. Cloud architectures facilitate multiple benefits including elastic consumption, elimination (or at the very least a dramatic reduction) of capital expenditure, self-service, and pay-as-you-go pricing.

In most cases migrating to the cloud eliminates CAPEX and replaces these major up-front costs with predictable and manageable OPEX. This transition is crucial as it lowers the risk associated with strategic IT projects, so keeping business agile by allowing for more experimentation and entrepreneurship.

The elasticity offered by the cloud model means that organisations can take on computing projects that would have been completely beyond the capabilities of their in-house IT resources. Cloud means that it is possible to scale up and scale down resource intensity nearly instantly so organisations only pay for the computing power they actually need.

In this world of cloud computing the value-add delivered by IT through enhanced technical capability and improvements in staff productivity derived from providing "always on" fixed or mobile access to central cloud-based business applications can be significant. However, the scale of these potential economic benefits is only just beginning to be understood by business and technical decision makers.

Leveraging cloud economies of scale

Rolf Harms, director, Corporate Strategy Group at Microsoft, noted that many firms are only just waking up to the fact that cloud computing can slash IT costs.

"Our analysis uncovers economies of scale for cloud that are much greater than commonly thought. We believe that large clouds could one day deliver computing power at up to 80 per cent lower cost than small clouds. This is due to the combined effects of three factors: supply-side economies of scale, which allow large clouds to purchase and operate infrastructure cheaper; demand-side economies of scale, which allow large clouds to run that infrastructure more efficiently by pooling users; and multi-tenancy, which allows users to share an application, splitting the cost of managing that application," Harms explained.

"We believe the best way to form this vision is to understand the underlying economics driving this long-term trend. We've done extensive analysis of these economics in Microsoft's Corporate Strategy Group, leveraging Microsoft's experience with cloud services like Windows Azure, Office 365, Windows Live, and Bing."

A Microsoft research report, published in November 2010 entitled The Economics of the Cloud, reiterates this view that cloud is having a profoundly beneficial impact on the economics of IT for companies of all sizes.