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

By Mal Postings  |  Posted 04-14-2011 Print


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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.


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