Cloud computing revolutions

Changing the nature of cost in IT operations

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This week I want to turn to the revolution that will occur because of the changed nature of cost in a cloud computing environment. In the Berkeley RAD Lab report on cloud computing, it identifies "pay-as-you-go pricing" as a key characteristic of cloud computing. Pay-as-you-go pricing refers to the fact that computing resources in a cloud environment are typically charged for on a fine-grained usage basis.

In Amazon, for example, one pays by the hour for processing capacity, and by the Gb for network transmission and storage of data. Instead of receiving a bill for, say, a month's worth of managed hosting, the bill might be for 63 hours of computing. Because many applications only are used a portion of any given month, the managed hosting model would charge for hours where no actual computing is being done; by contrast, Amazon would only charge for hours that the application was needed and up and running. Of course, this is only possible if one monitors the application and brings it down if unneeded. If no monitoring is performed, and the application is left running even though no load is being processed, a charge is applied.

This type of pricing is often labeled "opex instead of capex." (For more on this confusion, see my previous post on understanding opex vs. capex). That phrase summarises the type of budgeting that takes place for a pay-as-you-go costs, and illustrates the changed nature of computing procurement in a cloud environment, and that goes to the heart of the revolution. The ultimate goal of running a computer is to execute some code, which has, putatively anyway, business benefits. Historically, one could only achieve the aim of executing code on a server that one owned and operated.

In other words, a capital investment in computing gear was a prerequisite to running an application. Capital investments (or capital expenditures, aka capex) are large outlays that pay benefits over time and are therefore depreciated for tax purposes. In most organisations, capital expenditure is very carefully monitored, since companies need to keep financial ratios under control. That monitoring is done by the finance organisation, which rations capital access.

Opex, on the other hand, stands for operating expenditure, and is more typically managed by the organisation doing the spending; that is, the organisation is given a certain operating budget, told to meet certain financial targets, and pretty much left on its own. As long as it stays within its operating budget and "makes its numbers," it can chart its own course.

Because previous generations of computing required relatively large capital investments well before the benefits of the application began to flow, getting IT projects approved was not easy. Everything had to pass by the gimlet-eyed denizens of finance. This had the inevitable result that only the safest, lowest risk, most necessary applications got funded. Also inevitable was the fact that IT decision-making was shifted from the business units that would benefit from the investment to the finance group.

Because no capital investment is required for most cloud computing use, the decision making regarding what applications should be implemented will reside with the group providing the operating expenditure, ie, the business unit. Finance will have much less influence over what applications have money steered toward them. A side question will be how this reduced need for finance approval will affect the organisational politics regarding where IT will report; in many companies IT reports to the CFO because of the capital heavy nature of its business processes. Perhaps the move to cloud computing will result in IT moving out from under the CFO and reporting to business units or the CEO. It will be fascinating to watch this development.

This capex vs opex is the basis for most discussion about the financial impact of cloud computing. In my view, though, it falls far short of understanding the revolution that will occur as a result of finegrained operational cost assignment. We haven't even begun to think about the downstream effects for line of business organisations when costs are more directly assigned to resource use. Here are a few of the changes we can expect to see due to the new cost mechanisms of cloud computing:

Control shift from IT to business units

The need for large capital investment, coordinated by IT (and overseen by finance) has meant that business units have had less control over the computing resources supporting their business efforts. With the move to far less capital investment being needed, IT will have less say over how business units choose to direct their IT spend, and given the reduced barrier to "shadow IT spend", perhaps far less knowledge regarding what computing business units are doing. This will give business units much more discretion regarding where they choose to invest.

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