Cloud Computing ABCs

By Mal Postings  |  Posted 04-14-2011

Cloud Computing ABCs

As the widespread acceptance of cloud computing grows, so too does the pace at which companies, suppliers, customers and consumers are adopting cloud computing and associated services -- public, private, community and hybrid.

According to Ernst & Young's 2010 Global Information Security Survey, 23% of respondents are currently using cloud computing services, 7% are evaluating its use and 15% are planning to use within the next 12 months. These are surprisingly high numbers, especially given the evolving nature of cloud computing and the market confusion that still exists around the "ABCs" of cloud computing:

  • Architecture
  • Business benefits (and risks)
  • Costs (and new financial models, as well as any effects on related corporate accounting)

Cloud computing services use Internet technologies, deploy multitenancy, achieve scalability and meter by use. Service-oriented architecture (SOA) has reached technical maturity and now needs to be applied throughout the business architecture. Business service thinking needs to focus on what it is that cloud services providers are delivering and not on how they are delivering it.

The benefits and risks of cloud services are becoming well understood (and improved) on a daily basis. And the change from an OpEx to a CapEx utility cost-based approach is gaining traction, with certain services taking a lead position. The new IT strategy focuses on finding the balance between using third-party commoditized IT cloud-based services and retaining innovative IT that internally supports market differentiation.

In the next evolution of business, both business and IT should be viewed as one, and decisions on usage and cataloguing of cloud services (expectations versus reality) should be made and governed with joint responsibilities and clearly defined outcomes. With these considerations in mind, we'll break down the ABC's of cloud computing.

Cloud Computing ABCs: A is for Architecture

Architecturally, there are two main considerations:

1. New methods of modeling and orchestrating end-to-end scenarios of business services (across multiple providers). IT functions need to move away from a business process engineering view. Such a view is based on a design principle that assumes processes are all largely performed within an organization's boundary. Instead, new thinking around the architecture of the business needs to occur, with a focus on the services companies will be known for providing in the future--and the resulting new business models and opportunities that will emerge.

Based on this concept, we expect to see a new three-tier model of:

  • Software as a Service (the horizontal cross-industry generic services)
  • Industry as a Service (or business process as a service describing industry-vertical common services - mostly moving from database management into information services)
  • Enterprise Services (the organization's in-house services - some of which will be shared or common globally).
  • Each of these tiers is supported by technical frameworks -- Infrastructure and Platform as a Service (where usage templates continue to evolve, dictating more consistent systems delivery).

2. Additional technical / integration considerations. Additional considerations include: new systems integration challenges where corporate IT will want to connect with third-party service providers; new approaches to identity and access management using federation and trust relationships; and security and encryption over the wires, which will escalate in importance.

Cloud Computing ABCs: B is for Business Benefits (and Risks)

There is a need for deep understanding of the business benefits and risks of cloud computing. From a benefits perspective cloud services provide:

  • A simple value proposition
  • Easy, fast and low-cost deployments
  • A payment system based on usage
  • Elastic scalability and improved asset use
  • The strength of third-party on-demand capability and efficiency
  • Continual system currency and maintenance
  • New opportunities for cross-company community collaborations
  • Renewed focus on the strategic areas of the IT function

Looking at the risks, which can be minimized with the right approaches, major concerns include:

  • Risk management and compliance
  • Security and privacy
  • Business continuity and resiliency
  • Emerging standards allowing interoperability
  • Procurement, legal and contractual
  • End-to-end service management
  • Service management integration and orchestration across multiple providers 
  • Staffing and related organizational change management
  • Provider choice

Cloud Computing ABCs: C is for Costs (and new financial models)

In terms of cost models, cloud computing appears to be moving away from a fixed capital cost base and toward an increasingly variable operations-based or usage cost consumption model. There is also a desire by companies for improved and delineated price transparency.

However, the question remains whether the short-term benefits (reduced up-front capital costs) outweigh the long-term real financial returns. Companies can determine which cost model is right for them by developing a total cost of ownership business case for the cloud that compares the one-off costs and the recurring costs.

Cloud service fees are relatively new and many providers have different pricing models (and levels of pricing complexity based on service options). Some of these pricing models include:

  • Subscription-based. This type of model is generally used for services over longer periods at consistent levels.
  • Usage-based. In a usage-based model, seasonal businesses or those with more volatile peaks and troughs can purchase capacity as required.
  • Advertising-based. Largely unproven, this model uses advertising revenue to support corporate applications.
  • Success- or ROI-based. This model shares the risks and rewards with vendors. Payments are made based on successes and results.

Achieving the Correct Balance

So how do you achieve the correct balance? We see a polarization emerging in IT between those areas that are clearly seen as being driven by commodity cost savings (and therefore suitable for external cloud services) and those areas where companies are willing to innovate and invest in IT to achieve market differentiation and top-line growth.

Companies should consider both of these options when developing new IT strategies and associated portfolio planning.

Mal Postings is Chief Technology Officer, Information Technology Advisory, Ernst & Young LLP. The views expressed herein are those of the author and do not necessarily reflect the views of Ernst & Young LLP.