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Questionable costs efficiency of pure cloud

As any overcentralised approach pure cloud can't be as efficient as distributed solutions. You need to provide for peak loads and that increases the costs dramatically.

A lot of issues at this area are still in the state of flux but costs advantages of SaaS approach in many cases proved to be questionable.  Centralization has its costs and usually costs are rising faster then capacity.  So savings from cloud model may well be fake. Here is an interesting observation  'Carbon cost' of Google revealed (BBC News)

This link added by CHS:

US physicist Alex Wissner-Gross claims that a typical Google search on a desktop computer produces about 7g CO2.

However, these figures were disputed by Google, who say a typical search produced only 0.2g of carbon dioxide.

A recent study by American research firm Gartner suggested that IT now causes two percent of global emissions.

Dr Wissner-Gross's study claims that two Google searches on a desktop computer produces 14g of CO2, which is the roughly the equivalent of boiling an electric kettle.

The Harvard academic argues that these carbon emissions stem from the electricity used by the computer terminal and by the power consumed by the large data centers operated by Google around the world.

Speaking to the BBC, he said a combination of clients, networks, servers and people's home computers all added up to a lot of energy usage. End of BBC excerpt.

Recent developments of server technology (virtualization) as well as laptop technology actually suggest quite an opposite direction: local computing can be price competitive and thus may even increase its share ("cloud in the box" in IBM terms or "datacenter in the box" in Sun Microsystems terms concept).  Mobile trailers that are now produced as "portable datacenters". While they are not very successful they can serve as a good illustration of the opposite trend (Microsoft, Sun).

Existing companies even is more flexible models then pure SaaS are not exactly flourishing. If you look at Salesforce.comís second quarter 10K, 6-month revenues for the first half of 2007 were $339 million, up from $223 million the year before. Marketing and sales costs were $174 million, slightly over 50% of revenue. Profits were negligible.

Cost-related problem is one of the most serious obstacle on the way to wide adoption of SaaS approach: high "per seat" price is often sited as the major problem is SaaS customer satisfaction surveys. And price trends are not favorable to SaaS. They run in direction completely opposite to Carr's vision.  Other things equal SaaS proved to be great for infrequently used applications. As application usage increases, the return on investment shrinks and might move to the point of negative returns. This is true even for simplistic mail filtering and load redistribution services like Postini: it is one thing to use Postini (now owned by Google) for the encrypted mail and the other as your global email service provider.  In the latter case paying per seat costs you so much money that for half of this price you can have a dedicated IT staff using open source applications with approximately the same quality of spam filtering (using, for example Spam Assassin). In addition you have the ability to customize your solution to better suit enterprise needs (Postini loses too many non-standard mails like automatically generated invoices, confirmation letters, etc; often those have non-standard, spam-like headers).

That means that for enterprises there is no big incentive to switch over: it order to be attractive from financial standpoint "in the cloud" services should be considerably cheaper then "in house" solutions. This is pretty difficult to achieve worth the current trends in hardware and "off the shelf" software cost. If Microsoft can low cost of Office Professional to less then $100 per seat you have Google applications hosed no matter how hard they try.  And even if it looks expensive (and in Eastern Europe it sure still is) the main competitor to Microsoft Office will be not Google applications but free Open Office.  You probably can still run office applications in Google for universities as nobody especially cares about anything but the email and Microsoft Office will be on each student's laptop anyway.  But that's about it

In order to be competitive SaaS providers should maintain substantial pool of unused resources to accommodate the spikes.  That squeezes the profit margins.  If you think about the ability to provide the same amount of resources that a regular corporate laptop has (and for a particular application they all can be used)  for many applications long term profitability of "in the cloud" software services are far from being obvious. Currently a modest one CPU virtual image from Amazon with 1.5G of RAM and 160 G of disk space costs approximately $100 a month: five time the cost of the lease of Vostro 1500 with T5270 CPU, 2G of RAM and 250G hardrives with 3 year warranty (cost $700, lease $20 per month).  And to survive as a business you need to provide a steep discount as for many applications users prefer a software installed on the laptop ;-). Just think about cost to the company for 'entertainment-oriented" users, for example daily playing their workout videos from your "in the cloud" datacenter... I would say that currently the idea of application streaming to laptops beats "in the cloud" service providers for applications like Microsoft Office hands down.  

Also "economy of scale" argument applied to service providers can be misleading. Large enterprise IT already enjoys significant economy of scale and further centralization might not add anything significant. Let's discuss a hypothetical deployment of very simple and relatively smooth for deployment in the cloud case of a single web server for corporate Intranet. Let's assume that this server supports just http and some minimal video streaming services (corporate, vendors and business partners video materials) so bandwidth is not  a big problem.  Now let's compare the cost of getting the same server in a cloud and associated costs:

The question arise does remote deployment provides any real savings even if we factor in additional building rent/electricity/ air-conditioning, etc related costs?

So far cost effectiveness of outsourced services is mainly observable only on lower level of services and for small start-ups. For example, Web hosting offerings are very attractive for small to medium size web sites. Really primitive, Spartan sites like this one benefits most. But as you move in more complex LAMP applications or god forbid into Java stack benefits gradually disappear and then quickly reverse. Especially problematic are computationally intensive Java based web sites as cost of outsourced solution here is substantially more (you generally need a dedicated server) and reliability is equal to reliability that can be achieves by using one of "small business" Internet connectivity providers and local servers with outsourced to vendor support.

Outsourced data backup is also not cheap (approximately $1 per month per 1G in case of Amazon) and benefit disproportionally small companies and individuals. 

If we think about replacing local servers to remote the cost effectiveness is also open to review. Minimal virtual instance of web server on Amazon costs approximately $100 per month (includes 30G per month traffic).  The cost of equivalent dedicated "real" server from Dell with 3 year on-site warranty can be approximated as $500. That leaves $3100 per three year for maintenance costs in local datacenter to break even with "in the cloud" provider. 

For some applications costs can be less. For example,  Joyent provides hosting of WEB applications on virtual machines with minimal cost of $45 per month which is OK price for a test or QA server. But if you want just one "real" CPU (which is desirable for production instance) costs increases to $250 a month, even more then for Amazon.  In the latter case your one year costs are equal of the cost of a nice locally installed Dell 1U server with outsourced 3 year vendor-based 24x7 hardware support. What savings we are talking about ? 

If Web application works strictly for the company and not for external customers this is a wash. For small amount of traffic Verizon Broadband provides a dedicated digital line with speeds comparative with cable modems for $40 a month service (service also includes 250MB of free online backup). For regions that do not have such service, old good T1 line is approximately $250-$300 a month.  That means that local VMware-based virtual appliances  can be cost effective alternative to "in the cloud" services even for small organizations.    Here is one telling comment to Carr's blog entry Cloud may squeeze margins, says Microsoft exec

I'm sorry guys, I just don't get it with "Cloud Computing"! Really... think about it... All this talk about dispensing with the in-house IT staff and not having to buy and maintain servers?? Passing off the application to the "Cloud"?

Come on! All this would have held true in the days when companies were spending 250K for a mini mainframe, but you can buy one heck of a server for 10,000 bucks; enough of a machine to run a 40 million a year company on. Desktops are under a $1000. Believe me, it's not a compelling argument for cloud computing.

Also, most companies have a hardware and network person visit them by the hour when needed. Even for a company using MS Server 2003, it's bullet-proof enough that it just sits there and works. It may not be Linux or Unix, but it's good enough for a reasonable price. So the "IT guy" isn't going to break the bank. Computing has become a commodity, so there ARE no big savings there - PERIOD!

Now let's say you rent software like Netsuite or You pay and you pay! Every two years you'll be paying the equivalent of a one-time software purchase for a product outright. It doesn't even make financial sense. Software rental is not cheap. What if the network or Internet provider goes down? At least with a desktop system you can still work on a local version.

Most desktop systems are rapidly becoming cloud systems anyway. Like Foundation 3000 accounting software from Softrend Systems Inc. . This software you buy only once and you get both desktop feature and cloud features included. It's not an either/or decision.

Using Online features in software in no way makes the desktop redundant. What the heck do most people use to connect to the Internet with...? A desktop computer! Some software will be Internet-based and some will be desktop based. Most computing platforms of the future will be a mix of both. What we're really talking about here is the software pricing model - not whether your application is sitting on "somebody's" server out in a cloud somewhere.

So let's bring the discussion back to Earth and get our heads out of the Clouds!

Come on... let's debate this!

I would say that currently such services are extremely attractive for one time large computational tasks and for testing, but not so much for production.  And the main problem is higher costs and illusory advantages. sure advantages do exist but each and every advantage that SaaS model claims can be replicated cheaper and more efficiently by competing technologies (see below).

At the same time lab/test servers and related equipment in large corporations are grossly underutilized.  Here SaaS is cost effective and makes sense right now (but local VMware servers can do eseentially the same trick).

As for large computational tasks recently NYT performed conversion of its archive to digital form on Amazon for some ridiculously low price.  This is another area were SaaS makes sense right now. there are probably much more areas then those two that I know about. But to claim that this is a universal solution like Carr did is the utter level of incompetence and rogue forecasting...

 enterprise IT costs structure

In the long run, though, the greatest IT risk facing most companies is more prosaic than a catastrophe. It is, simply, overspending.

Nicholas Carr

Carr's "Spend less" is a good, generic, risk-free advice applicable to any large corporation department and any situation. Essentially, this is another way to say that penny saved is penny earned. The problem with it is that "stupidity is punishable" and "scrooges usually pay twice". You need to understand where you need cut spending and where you need to spend more; elimination of local IT that Carr advocates under the misleading label of "utility computing" prevents you from seeing this and as such is a stupid solution to the problem akin to throwing baby with a dirty bathwater.

In a big manufacturing company with multiple local datacenters the total cost of all IT operations is often less then 1% of total costs (in financial companies it is more, reaching 3%-10%). And it was around this for quite a long time. So anybody who tries to speak about overspending on IT needs to explain why current costs are excessive and why we need to jump into bandwagon of "in the cloud" service providers (which might BTW be more expensive and provide lesser quality/agility then local services).  As of July 2008 cloud computing is not high in the priority list (Computerworld) of most CIOs:

The CIOs indicated that server virtualization and server consolidation are their No. 1 and No. 2 priorities. Following these two are cost-cutting, application integration, and data center consolidation. At the bottom of the list of IT priorities are grid computing, open-source software, content management and cloud computing (called on-demand/utility computing in the survey) -- less than 2% of the respondents said cloud computing was a priority.

In big corporation economy of scale already fully realized so from this point of view move to the cloud is questionable. Also, if total costs are under 1% to justify further cutting you need to be sure that risks are lower then rewards. The same thinking is applicable to the return on investment for efforts in in reducing those costs.  In no way modern enterprise IT is a resource hog. It is already pretty slim. 

At the same time race to the bottom in IT costs is self-destructing. There is some limit in cost-cutting after which attempts to diminish IT costs and cut people backfire and actually lead to increased costs. One problem here is the corporate brass's inability to separate wheat from shaft. The real competitive value of a good IT is not only the infrastructure and smooth operation of network and corporate applications; it also provides valuable protection for the company from ruthless and energetic charlatans (aka consultants) who often try to sell the company some new fashionable snake oil  in best big-pharma traditions (IT analogs of  Vioxx and other useless and/or dangerous medications, produced to generate profit not to solve real problems :-).  Outsourcing also destroys loyalty and that has its own (often huge) costs. It is not uncommon that disenfranchised IT staff stops being the filter against aggressive marketing and soon the affected company successfully completes the useless half-million of more acquisition of useless or harmful software. Vioxx-style appliances and software packages are readily available on the market. For example, SAP/R3 is a mixed blessing in many environments leading to increased not decreased costs and flexibility. Actually to deploy SAP/R3 in unsuitable environment is one of the best way to destroy the company. SOX games also can be played pretty destructively for uninformed and clueless brass after no critical mass of IT IQ left the company. See my IT Outsourcing/Offshoring Skeptic: Fighting Outsourcing Myths article for detail.

That means that it might be hard to use IT to gain a strategic advantage (first of all you need talented people as IT is just a technology), but absence of IT talent puts the company in the cost disadvantage. A lot of firms that tried to outsource IT discovered this dimension of the strategic value of  IT rather quickly. Because IT expenditures remains high and businesses can be held hostage by poorly designed IT system, there's enormous need for technically astute, hard-nosed IT professionals who can navigate the companies between Scylla of IT vendors and Haribda of  IT outsources.  Dilbertalization of IT inevitably leads to  high additional costs, costs that exceed to the cost of keeping local IT staff.   




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