Heath Brownsworth

The move from technology capital expenditures to service operating expenses has long been touted as one of the big benefits of cloud computing, however, as Drew Reeves and Daryl Plummer point out in their very candid article, The Truth About Cloud Economics, this transition in financial models is not always an easy one.

Reeves and Plummer do not disagree with the logic that it makes no sense for companies whose core competency is not IT to operate and maintain multiple data centers and that companies routinely expense nonessential items to those who specialize in offering the item as a service. However, they note that:

For companies, cloud computing’s new economic model stands in stark contrast to the traditional economic model of IT where we buy technology from a vendor as a capital investment and continue to invest in maintaining and servicing it over time.

Further, they accurately add that there will most likely be a period of time when organizations need to pay for both the new model and the old model, i.e. switching to the new cloud service does not allow for the old software to be completely shut down.

This leaves the organization in the dubious position of the move to cloud having increased the lines of expenditure rather than reduced them. Definitely not a point highlighted by most cloud and software vendors, nor likely to be considered up front by most organizations. Reeves and Plummer go on to suggest that an Enterprise Agreement may be the best avenue for companies where some of the “pay-as-you-go” (PAYG) benefit is given up in order to enter into a longer term agreement with the software/cloud vendor. On the vendor side, the agreement helps mitigate the risk of customer departures and in turn the vendor is typically willing to offer better pricing with the cost savings helping to subsidize some of the transition to an operating expense model.

The economics of the cloud is most certainly a balancing act and if you are considering a move to the cloud, this insightful article by Reeves and Plummer is more than worth your time.

Heath-

(Cross-posted @ Skywriting)