Cloud Computing - Economics

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Cloud Computing Economics mechanisms: By lowering the opportunity cost of running technology
By allowing for a shift from capital expenditure to operating expenditure
By lowering the Total Cost of Ownership (TCO) of technology
By giving organizations the ability to add business value by renewed focus on core activities

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Cloud Computing - Economics

  1. 1. CLOUD ECONOMICS THE ECONOMICS OF CLOUD COMPUTING PEDRO ALEXANDER ROMERO Cloud Computing
  2. 2. Cloud Computing Agenda - Cloud Computing – Economics value - 80 – 20 Rule - Opportunity Cost - OpEX - CapEx - Total Cost of Ownership - Cloud Economics Laws
  3. 3. Cloud Computing Cloud Cost Saving Mechanisms: 1. By lowering the opportunity cost of running technology 2. By allowing for a shift from capital expenditure to operating expenditure 3. By lowering the Total Cost of Ownership (TCO) of technology 4. By giving organizations the ability to add business value by renewed focus on core activities Cloud Computing increase economic value to an Organization
  4. 4. 80 - 20 Rule: Rather than an absolute measure, it tends to be a generalization that is intended to make a point about distribution curves. The most well known use of the rule is the sales 80-20 rule which says that 80% of revenue for a business is derived from 20% of customers. Cloud Computing
  5. 5. Cloud Computing Gartner (*) estimates: IT maintenance accounts for around 80 % of Total IT expenditure 80 – 20 Rule: (*) http://www.gartner.com/newsroom/id/497088 Extrapolation Near 20% IT Time and efforts goes to running applications, where all business value is generated
  6. 6. Cloud Computing 80 – 20 Rule: Cloud Ideal Scenery: Nowhere is the current model’s inefficiency more evident than in the opportunity costs that organizations pay to manage their own computing needs. Cloud helps change the ratio and gives IT Departments the ability to spend 80% of their time in core business process.
  7. 7. Cloud Computing The cost related to the next-best choice available to someone who has picked among several mutually exclusive choices. A move to the Cloud can make the difference between an organization being 20% efficient, and one being 80% efficient. Opportunity Cost: Opportunity Cost: Are not restricted to monetary or financial cost.
  8. 8. Cloud Computing Opex Capex Definition OpEx (Operational expenditure) refers to expenses incurred in the course of ordinary business, such as sales, general and administrative expenses. Capital Expenditures are expenditures creating future benefits. A capital expenditure is incurred when a business spends money either to buy fixed assets or to add to the value of an existing asset with a useful life that extends beyond the tax year. Also known as Operating Expense, Operating Expenditure, Revenue Expenditure Capital Expenditure, Capital Expense Opex - Capex:
  9. 9. Cloud Computing Opex - Capex: Reasons Opex is preferred to Capex  Financial Considerations: Flexibility to terminate cost at will, in the event that the item is no longer required, payments can cease rapidly.  Allows Business Units to Decide: Opex expenditures tends to be delegated to individual Business Units. With Cloud Computing Individual Business Units have the ability to acquire technology that answers their particular business needs
  10. 10. Cloud Computing Opex - Capex: Reasons Opex is preferred to Capex  Overcomes Expenditure Limitations: Acquiring capital for large purchases is difficult, for all size organizations. Moving to an Opex model removes this limitation. While a move away from CapEx is undoubtedly attractive to organizations, it is via TCO that the economic benefits of Cloud Computing become most clear.
  11. 11. Cloud Computing Total Cost of Ownership: TCO is a financial estimate. Its purpose is to help consumers and enterprise managers determine direct and indirect costs of a product or system. For IT capital investments, TCO is allocated in various cost components, mainly: • PURCHASE/ACQUISITION • OPERATIONAL • REPLACEMENT
  12. 12. Cloud Computing Total Cost of Ownership: Both firms indicate the purchase cost being about >32% of the TCO. Given the asset lifespan period, the longer the lifespan, the higher the TCO in absolute figures, but the purchase cost as % of the TCO gets lower. That's why Life Cycle Management of IT assets is significant.
  13. 13. Cloud Computing Total Cost of Ownership: Calculations of in-house costs fail to take into account:  The direct costs running a server:  Power, Floor space, Storage and IT operations to manage those resources.  The indirect costs of running a server:  Network, Storage infrastructure and IT operations to manage the general infrastructure.  Overhead costs of owning a server:  Procurement and accounting and Personnel Despite potential cost savings, Cloud Computing offers significant extra value to organizations by merit of the fact that it allows them to focus on their core business.
  14. 14. Cloud Economics Laws (*): (1/2) Law #1: Utility services cost less even though they cost more. (Cost less when they are not used). Law #2: On-demand trumps forecasting Law #3: The peak of the sum is never greater than the sum of the peaks. Law #4: Aggregate demand is smoother than individual. Law #5: Average unit costs are reduced by distributing fixed costs over more units of output. Cloud Computing (*) According Joe Weinman, 2008 http://www.joeweinman.com/papers.htm
  15. 15. Cloud Economics Laws (*): (2/2) Law #6: Superiority in numbers is the most important factor in the result of a combat (Clausewitz). Law #7: Space-time is a continuum. Organizations derive competitive advantage from responding to changing business conditions faster than the competition. Law #8: Dispersion is the inverse square of latency. Law #9: Don’t put all your eggs in one basket Law #10: An object at rest tends to stay at rest. Cloud Computing (*) According Joe Weinman, 2008. http://www.joeweinman.com/papers.htm

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