What is cloud economics?
Cloud economics analyzes the total cost of ownership, benefits of cloud services and the overall computing costs in an enterprise environment, focusing on the economic principles driving these factors. It also compares various cloud computing services to see if they are more cost-effective than on-premises options.
Cloud economics has multiple components, such as understanding and controlling the cost of cloud services with the cloud's pay-per-use pricing and pay-as-you-go models. It verifies that cloud services provide the promised features, functions and value, including performance, scalability and reliability, relative to their cost.
It also predicts and plans for future expansion of cloud services based on projected or anticipated growth and changes in business needs. At the same time, it looks to see if the cloud reduces the need for on-premises equipment and infrastructure. Non-direct financial elements such as improved performance, agility, scalability and faster time-to-market are also studied.
Why is cloud economics important?
One of the promises of the cloud is savings. Cloud economics helps an organization make informed decisions about how their use of cloud resources improves efficiency and reduces cost, providing better financial and operational outcomes.
On the financial side, cloud economics helps reduce expenses by only paying for needed capacity and alerts a company when cloud expenses suddenly expand out of control. One of the most common complaints about the cloud is that costs rise considerably as usage increases.
On the operational side, the cloud is also key for resource optimization. This manifests in the following two ways.
- Optimal use of the cloud means better performance and lower costs, which leads to better long-term strategic planning and preparedness for expected growth.
- The cloud must work with on-premises equipment for enterprises using a both on-premises and cloud resources.
Cloud economics also means better agility and the ability to respond faster to changes in business. In the traditional on-premises scenario, a company overwhelmed with traffic and business-related activity would need weeks to order hardware and have it delivered and installed. In a cloud scenario, that deployment can be reduced significantly. However, not every scenario requires the cloud nor is it always the best choice.
Economic benefits of the cloud
The cloud is not a deploy-and-forget technology. An organization must continuously monitor its cloud use to maximize efficiency and value.
Cost efficiency is the primary allure of the cloud. It greatly reduces and can eliminate the need for substantial upfront capital expenditures on IT infrastructure -- such as servers, storage and networking equipment -- and infrastructure. Organizations use a pay-as-you-go model and only pay for the used capacity.
This eliminates the expense of buying and maintaining the equipment, depreciation and disposal, and maintaining expensive data center facilities.
In addition to the ability to scale up rapidly should the need arise, the cloud also provides global access to businesses, allowing them to expand into foreign markets without making an expensive investment or having to navigate the complexities of an international market.
Challenges of cloud economics
Even after almost 20 years, the cloud is still an emerging market and platform. There are new challenges as its use expands beyond simple processes and functions. Among the key challenges are the following:
- Cost management. It's easy to start small and modest in cloud usage and then expand use as needed. Organizations might be shocked by their bill for excessive use. This is why businesses must regularly monitor usage and not just look at the total at the end of the month.
- The complexity of hybrid models. Several organizations use a hybrid approach that combines on-premises and cloud solutions. However, not every cloud and on-premises system work together and integrating them might be a considerable challenge. Additionally, finding employees with the skill set to do it properly can be challenging.
- Vendor lock-in and contracts. No vendor wants to lose a customer, and cloud providers are no exception. They can make it difficult to switch providers, especially as it relates to data stored in the cloud. Therefore, consider the terms of an exit strategy when negotiating a contract with a provider.
- Security and compliance. All major cloud providers have adopted the most common and widely used regulatory compliance rules for data security and privacy, such as HIPAA, the Payment Card Industry Data Security Standard (PCI DSS) and Europe's General Data Protection Regulation (GDPR). Some smaller vendors specialize in providing cloud services for highly regulated industries, such as healthcare and finance. Sorting out a cloud providers' data protection and regulatory compliance should be part of the service contract negotiating process.
- Operational changes. Transitioning to a cloud-based approach is disruptive. It means changes to the operational processes of the enterprise and requires specific skills. This can require retraining or new staffing, adding to the cost of a cloud transition.
Cloud economic use cases
There are several economic arguments for moving to the cloud, including the following:
- Cost savings. The prime argument for moving to the cloud is cost savings. In a 2024 Cloud Industry Forum study, 30% of respondents cited significant overall savings as the main reason for cloud adoption. Interviews with Amazon Web Services users and research by TechTarget's Enterprise Strategy Group found up to a 66% savings in compute, networking and storage costs. Walmart saved millions in its multi-cloud migration by building its platform and tying it to two public cloud providers.
- Scalability and flexibility. Cloud services can add capacity in minutes and scale down capacity just as quickly. This is much more economical than buying too much capacity and having it sit idle when it's not needed. The cloud also provides flexibility in terms of processing, because cloud service providers offer a variety of processors for different tasks, such as AI, high-performance computing and analytics.
- Operational efficiency. If an enterprise can offload a significant portion of its IT needs to a cloud services provider, that translates into less hardware to be powered and maintained. This could free up some budget for other new initiatives and projects. By streamlining operations, enterprises can focus on business initiatives and not on keeping their equipment running.
- Disaster recovery and business continuity. Moving applications and data to the cloud ensures they are backed up by a cloud service provider (CSP) with sufficient capacity and the expertise to securely handle sensitive data. At the same time, on-premises data and applications can be backed up to the cloud for immediate recovery from disaster, including malware and ransomware takeovers.
- Improved innovation. The cloud enhances innovation by providing organizations with access to tools and services that let them swiftly adopt new technologies without disrupting internal systems or undergoing costly and time-consuming deployments. This makes it easy for organizations to experiment with new technologies such as AI, which is expensive and time-consuming to deploy. However, AI as a service from a CSP lets a company experiment with minimal expense.
- Global expansion. AWS, Microsoft and Google have data centers on every continent except Antarctica. For a company looking to expand globally and stay within local regulatory compliance -- such as GDPR -- a global CSP is an easier way to expand internationally.
- Security and compliance. Compliance with major regulatory laws -- such as HIPAA and PCI DSS -- requires considerable investment in systems, personnel, training, validation, policy creation, implementation and auditing. The expenses in technology are minimal compared to those for human resources. CSPs can assist businesses with compliance, but it is still a shared responsibility.
- Financial predictability. If closely monitored, the cloud offers organizations predictable monthly expenses.
- Reduced IT staffing costs. If most IT services move to the cloud, the support staff monitoring these services might become redundant and can be eliminated. For example, database administrators aren't needed if the database moves to the cloud because the CSP provides that function.
How to make the business case for cloud
There are numerous advantages to the cloud and only a handful of disadvantages. In its "2024 State of the Cloud" report, Flexera found that 89% of companies surveyed had a multi-cloud strategy.
The cloud offers flexibility by making resources available in minutes instead of weeks in an on-premises situation. The cloud might provide considerable savings as businesses can outsource the acquisition, operations and management of expensive IT hardware to a cloud services provider. Organizations can leverage their partner CSP's knowledge and experience to complement and supplement their own.
The negatives are relatively minor, with runaway costs due to excessive use of the cloud bringing sticker shock. There are also some concerns about data privacy and security, such as managing sensitive data in the cloud versus on premises.
The cloud might be a cheaper alternative to on-premises IT infrastructure and offer flexibility to react to changing business needs. Cons can be mitigated through cautious use.
