IT Economics

Dedicated to investigating the financial value of information technology.

Month: March 2015

The financial benefits of cloud computing are still to be determined.

There is a significant movement today towards cloud computing; come consider it the panacea to all their IT woes. Well, it is not. In fact it may well cost you more than are paying now. There are benefits and drawbacks to cloud computing and these are explicated below. From a financial viewpoint cloud computing may cost more than the traditional computing model.

Benefits of cloud computing are touted across the Internet, and many of these pundits are from the cloud vendors themselves. Of course, it is natural that they should echo the benefits and ignore the shortfalls of the cloud model. These benefits may include financial ones as well as operational advantages. Here is a touted advantage that impacts both areas.

Time to application deployment is often cited as a major benefit. One can simply go online and voila, instant compute power for a new application. The traditional path to deploy a new application is to petition the IT department for capacity that is a guess at best, and hope for a system within a few weeks. Yes, this is true; however, it illustrates poor project management.

The PM should know the status of the software project and as it approaches the launch date the PM should order the system in advance. If one requires capacity for a short term and there is no excess capacity in the data center, e.g., software testing, the cloud may be an appropriate alternative. The cloud may also be suitable for an application where capacity requirements are unknown; once known, the app can be moved in house.

Understand that even in these circumstances the cloud is not a cheap solution. The advertised price is low, however, when one adds on the necessary services, e.g., backup and technical expertise, the price rises with each amenity to the premium plan fee. Remember, someone has to buy the IT equipment and operating the data center requires people and electrical power. And, they need to make a profit on their cloud services. Thus the costs, although operating expenses, may truly exceed the traditional capital and operating expense model.

Understand that many public cloud projects fail, see Iland, “Casualties of Cloud Wars: Customers Are Paying the Price”, June 2014. Private cloud implementations are also subject to failure, see http://blogs.gartner.com/thomas_bittman/2014/09/12/why-are-private-clouds-failing/ for several reasons. A lot of money is being spent for no reason at all.

The best advice is do the math. Start with a blank spreadsheet and list the costs of the cloud solution and compare it to the costs of an in-house solution. Be honest with the numbers and follow proper financial modeling methods. The NPV method is required to do a proper analysis of both capital and operating expenses over time, and it is taught in a majority of finance programs at universities. The text I employ is “Principles of Corporate Finance” by Brealey, Myers and Allen, and it is used at many universities.

What’s in a protocol, what is a protocol, and why care?

Replication of data across data centers is an accepted “best practice” to protect files from damage, natural disasters and other risks. Storage vendors understand this quite well and over the years have developed proprietary languages, called protocols, whereby their storage arrays can talk to each other and replicate the data between them. Buyers have come to expect this and take it for granted that these protocols will function properly, and they do. Note that each vendor has their own protocol and it is specific to their storage array.

Each vendor’s protocol may produce the desired result, properly replicated data. As buyers, we rarely question the vendors as to the efficiency of their protocol. Replication requires telecommunication/network links and these are expensive, especially in the case where replication requires long distance satellite links. Occasionally vendors are put to the test in a head-to-head Proof of Concept, PoC, and I was fortunate to meet a systems engineer that had recently concluded a PoC.

This PoC involve replication of data from a data center in Europe to one in North America for a large financial institution. The buyer had prepared a set of benchmarks regarding the amount of data and within what time period it required replication to take place. Given these parameters two vendors were put to the test.

In order to meet the objectives, Vendor A required 16 satellite links to replicate the data in the time allowed. Vendor B was able to meet the data volume and time objective with only three (3) [This is not a typo.] satellite links. Imagine the savings or the expense of 12 additional satellite links! This reduction in telecommunication (operating) expenses more than outweighs any difference in up front capital expenses for the storage arrays. What is most impressive is that the buyer took the time, effort and expense to conduct the PoC on a topic rarely studied—protocol efficiency. And for that effort they will enjoy many months of reduced telecommunication expenses.

How many zombies are in your data center?

What do I mean by zombies in your datacenter? Zombies are the living dead servers, both virtual and physical, that you have in your computer room. These servers are no longer in production, however they have not been decommissioned or removed.

In the case of physical servers they are occupying rack space, may be consuming power, and generating heat that must be removed from the data center. In addition, network connections and storage capacity, allocated to these now deceased applications, have become unused resources.

In the case of virtual servers you might argue that they are not consuming resources, however, they are occupying albeit a minimal amount of processor power and storage and/or network connections might be allocated to these virtual servers. Thus other resources are negatively impacted by the existence of the zombies.

From the financial perspective what we have here is money being spent for no reason at all. Our electric bill is inflated because of the zombies consuming power and air-conditioning resources, thus negatively impacting operating expenses. Since the zombies are consuming datacenter assets, we lose the opportunity costs of the network connections and storage capacity. We may perhaps even by additional switch connections and/or storage under the impression that insufficient assets are in place because of the zombies consuming these scarce resources. Thus capital expenses are negatively impacted by the zombies.

Housecleaning may not be a high priority action item in the datacenter. Over the years the zombies increase in numbers and we become more and more inefficient, and the funds to maintain them continue to grow. Recent studies indicate that only 35% of our processing power in the datacenter is actually in productive use, yet we continue to pay the operating expenses for the remaining 65%. Given the magnitude of our zombie problem the time has come to purge the datacenter of these monsters and reduce our costs.

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