This document provides an executive summary and overview of key topics relating to the transition to cloud computing and a variable cost operating model. Some of the main points discussed include: - Moving to variable costs can help companies be more agile and responsive to changing markets by shifting IT costs from capital to operational expenses. - Information technology is becoming a utility in the same way that electricity became a utility over 100 years ago, with providers able to deliver reliable computing power at cost-effective prices due to economies of scale. - Cloud computing enables variable costs through on-demand access to computing resources that can be scaled up or down as needed without long-term commitments or large capital outlays.

1. Chapter 2:
The New Economics of
Business
Kriti Doneria 16125022
M. Manjunath 16125023

2. Executive Summary
 Moving to a Variable Cost Operating Model
 Information Technology Finally Becomes a Utility
 Variable Cost IT Operations Enable Business Agility
 A Combination of Technologies Creates Cloud Computing
 Implications of the Transition to Cloud Computing

3. Moving to a Variable Cost Operating Model
 Companies Need to Operate in Unpredictable and High-Change Markets
 In this century, winning cars and winning companies need to be
maneuverable and responsive; they need to shift from a focus on speed to
a focus on agility.
 There was a time not so long ago when all the technology needed to
operate most businesses was a phone, a fax, a pen, and paper. Now, the
phone itself is a computer, faxing is one of many services handled by
computers, and pen and paper have been displaced by digital
communications
 Moving to a Variable Cost Operating is necessary.

4. • At present, 70-80% of company IT budgets goes to the operation and maintenance of
existing systems and data centers. Is there a way for companies to shift the expense and
complexity of IT operations that are not part of a company’s core competencies to
outside vendors?
• Could companies then shift the bulk of their IT spending to developing new systems to
support continuous evolution and modernizing of existing products? To introduce
brand new products?
• Would this give companies the agility they need and a better return on the 94 percent
of their operating budgets they dedicate to non-IT operations and product delivery?
Would this enable companies to transform themselves into the maneuverable and agile
race cars best suited for the twenty-first century economy?

5. Information Technology Finally Becomes a
Utility
 During the 1910s, companies that owned and operated skyscrapers began
considering outside vendors to supply their electricity and debated whether or not
it made sense to tap into the new, emerging power grids. From one perspective,
building owners saw advantages in getting rid of those expensive electricity
generators in the basement.
 Since outside electric power would come to the building through exposed electric
cables, what if someone cut the power lines to the building? How could they
guarantee the security of outside power supplies? T
 These were all valid concerns, but not enduring reasons to maintain power
generation within individual buildings. Electric utilities steadily became more
reliable and it became clear they wouldn’t go out of business.
 Power security issues were addressed, and maintaining power reliability and
minimizing interruption became an appropriately important area of the power
industry’s focus. By the 1920s, the debate about whether to rely on in-house power
generation or to outsource that function to an electric power utility was over, and
we all know how on that argument. In the end, it wasn’t really so much about
‘‘who’’ as ‘‘what.’’ The bottom line won the debate. The idea of providing ongoing,
non-emergency, day-to-day

6. • Fast-Forward 100 Years, Just substitute computing power for electrical power and the analogy is
complete. Why should a given company maintain a large data center, along with the staff and
resources to operate it? On the other hand, why would a company trust its data center operations
to a service provider? The concept continues to be argued in many circles. IT vendors stand at the
ready and heavily promote their utility computing or cloud computing capabilities (and some
organizations consume them on a substantial scale).
• At the same time, there’s an entire landscape of corporate IT organizations concerned about this
model who debate the challenges related to service-level agreements, outages, data security, and
more. It comes down to a basic question that each company must answer: ‘‘What business are we
really in?’’ If companies don’t have to worry about all of the financial and operational overhead
associated with building and operating their own data centers, would they then be able to focus
more on what they do as a business?
• As recession-era budgets continue to stagnate, and CFOs constantly question capital expenditures,
companies are increasingly challenged to investigate and then make use of more efficient ways to
deploy basic computing power. How companies and their in-house IT groups structure
themselves—and what activities they chose to focus on—will be critical as more outside service
• Information Technology Finally Becomes a Utility when providers are able to deliver 1) reliable
computing power at 2) cost-effective price points based on 3) their increasing economies of scale.

7. Variable Cost IT Operations Enable Business
Agility
 IT is still a young, emerging field with only about 50 years of history to date. He
suggests that the real impact of IT is only now starting to reveal itself.
Desirable Characteristics of the New IT Architecture
 In the current economy, companies are looking for ways to cut IT expenses, yet the real
opportunity is to find ways to manage total company expenses so that they track with
the demands of business operations. Saving 10 or 20 percent on a company’s IT budget
is relatively small compared to deploying IT wisely to save 10 percent on the company’s
overall operating expenses—or by using IT to grow company revenue by 10 percent.
With newer technologies, companies have the opportunity to shift from the traditional
fixed cost IT operating model move toward a variable cost .Companies can power their
business operations with IT infrastructure that meets three operating standards:
 1. Low capital expense 2. Variable cost of operations 3. Scalable computing platform

8. A Combination of Technologies Creates Cloud
Computing
There are three particular characteristics widely agreed upon that describe cloud
computing:
 1. Practically unlimited computing resources.
 2. No long-term commitments. Computing resources are immediately available and
they may be used as long as needed and then retired because they are acquired on a
month-to-month or even a minute-to-minute basis.
 3. Pay-as-you-go cost structure. Because there are no long-term commitments, the cost
of cloud computing resources is a variable cost, not a fixed cost; cost fluctuates
depending on the amount of usage.
 Cloud Computing Has Three Component Layers:
 1. Hardware virtualization
 2. Data storage and database management
 3. Applications and application development environments

9. Implications of the Transition to Cloud
Computing
 Larger companies are creating their own internal ‘‘private’’ clouds, and smaller
companies are moving to clouds from external service providers commonly called
‘‘public clouds.’’ The twin concerns of performance and security are valid as
companies transition to these models, but they are increasingly met with practical
conversation and decision making, rather than just excuses or reasons to avoid a
switch to cloud computing.
 The New Economics of Business:Just as some IT professionals in the 1980s resisted
introduction of PCs in their companies, and some IT professionals questioned the
value of the Internet in the early 1990s, some IT professionals are now resisting the
introduction of cloud computing in their companies. As in previous, disruptive eras,
new technologies reduce demand for certain traditional skills and they change the
way the IT profession is organized. Cloud computing is no different.
 Cloud Performance and Security Concerns
 Just as performance and security were central to the debate 100 years ago about
whether to rely on outside vendors to provide electric power, they remain central
to today’s debate about cloud computing.

10.  Cloud Computing Drives the Creation of New Businesses :Plans to simply cut IT
budgets and to try to keep operating expenses down until business rebounds won’t
work. If companies restrict IT operations and IT is seen and used by their company
simply as a cost center instead of a strategic thread through the collective needles that
make up the company’s value proposition, then the company won’t be able to roll out
new products in a timely manner, or keep up with changing needs of its customers, or
respond quickly enough to new threats and opportunities. Hanging onto internal IT
infrastructure may prove to be a losing and precipitously risky strategy, much like it
was when electric power naysayers avoided the public power grid 100 years ago.
Instead, a far better move will be to find ways to enable the transition to the cloud, and
to move your company to a more variable cost operating model.
 The New Economics of Business: Business units create real customer value with
technology. All of this is similar to how social media are fast becoming another way
companies spread the word about their products—and is challenging the consumption
of traditional media. IT as customer support and relationship management is how
modern companies need to connect with their customers and build long-term
relationships. Information technology is now woven throughout so many products—
like financial services, consumer electronics, smart phones, Internet applications,
entertainment, and consumer services—that companies need to offload all of the
routine parts of technology management so they can focus more on how to weave the
technology in their products. How many new companies will be created to develop
and deliver those products? We’re in an era of new opportunity enabled by cloud
computing.

11. THANK YOU