Wednesday, June 20, 2012

Cloud Procurement

There is a new dynamic to IT infrastructure's role when taking on the responsibility of becoming the cloud broker for their organization, the art of procurement. This new skill set becomes self-evident when negotiating with an external cloud provider for new services.

In his technical brief Cloudonomics, Ben Kepes says some of the economic benefits of cloud computing include:

  • Lowering the opportunity cost of running technology
  • Allowing for a shift from capital expenditure to operating expenditure
  • Lowering total cost of ownership of technology
  • Giving organizations the ability to add business value by renewed focus on core activities

Mark Benioff from outlines the same benefits of cloud computing, "Our definition of Cloud Computing is multi-tenant, it's faster, half the cost, pay as you go, it grows as you grow or shrinks as you shrink. It is extremely efficient."

Moving applications to the cloud that are not a core business function helps renew focus to core activities. Gartner estimates that IT maintenance accounts for around 80% of total IT expenditure. Cloud computing is a force that helps flip this ratio and gives IT departments the ability to spend 80% of their time on core business processes.

Moving away from capital costs to operational costs gives organizations the flexibility to terminate costs at will. As opposed to capital purchases, if you purchase a server you are fully committed to the depreciation cost of the server whether it is being fully utilized or not. That includes the TCO associated to direct costs (server, power, cooling, floor space, storage, and networking), indirect costs (operations managing the the infrastructure), and overhead costs (procurement, accounting, and management personnel).

In a more practical real-world example, think of moving an application to a service provider like renting an apartment. The apartment is a multi-tenant building where costs are more affordable. You don't pay taxes, certain utilities, maintenance, and for yard work. You can decorate the apartment, put your "stuff" in the apartment, and even secure it by locking the door; and if your circumstance changes you are able to give your 30-day notice and seek a new living arrangement. 

Hosting an application in your datacenter is more like home ownership. You purchase the home with a loan that runs 15 to 30 years. You pay the taxes, utilities, maintenance, and someone to do the yard work. Home ownership is wonderful if you want complete control over the property. You can add a deck, build an addition, and paint the exterior. Are you a wannabe rock star that likes to crank his amplifiers up to 10? Then go for it! However, when circumstance change it isn't as easy to move out of home ownership, especially if the value of your house has depreciated.

Even with the cost opportunity afforded by a cloud service provider, which helps your company renew its focus on more strategic initiatives, you need to think critically about contract procurement details. 

Here are some things to consider when working with a service provider.
  • Ensure you lock in price caps, currently many vendors increase their prices by 6% every year with no explanation.
  • The initial cloud pricing isn't always the fully loaded price. Here are some unrecognized costs to watch out for when working with an external vendor
    • Storage Fees
    • Integration Fees
    • Data Extraction Fees
    • Price Increases on Renewal
    • Changing Entitlements Resulting in Surprise Invoices
  • Terms and conditions can change in 30 days after a change was applied. You should try to structure the contract so that you need to consent to changes in the terms and conditions.
  • Don't commit to shelf-ware; buying resources for the future goes against the entire notion of elasticity gained by using cloud computing. Be conservative on estimating a phased user rollout and try to negotiate a volume band agreement.
One aspect afforded by purchasing contemporary software is that if you don't like the product you can stop paying maintenance. You will no longer have support or upgrades, but you retain the data and the current functionality of the software. If your company is using ACT! software as the CRM solution that is 10 years old, the users can still get all the contact information on their clients. On the flip side, if you use as your CRM database and you decide to cancel your contract you typically have 30 days access to your client information. For the most part, extracting data from a cloud service provider isn't nearly as easy as it was to import it into their system using their APIs.

Cloud computing is poised to provide solutions to business problems within organizations, it is more a revolution then evolution in computing. As you can see, the role of infrastructure IT changes dramatically as they progress into cloud brokers. They need to understand the cloud qualifications through a detailed business impact assessment, comprehend comparison costs for hosting internal and external, think about the opportunity costs of renewed focus on core business accountabilities, and still maintain the technical where-with-all to rightsize resources to ensure investments are made soundly. 
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