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What Are the Real Economics of the Cloud?

Considering only the unit costs associated with the cloud doesn’t provide a true picture of the economics.

Buyer beware is a long-standing and foolproof guideline for any bank technology executive. Whether evaluating potential replacements for legacy core systems, considering new analytics systems or application development tools, or assessing possible BPO partners, CIOs must cut through marketing hype, management prejudices and price confusion to make informed, objective decisions about the technologies their organizations license, pay for and use. This also involves defining and applying relevant metrics and key performance indicators that can track and interpret the performance of these technology investments.

Nowhere is a CIO’s ability to combine skepticism, bargaining power and market insight more important right now than in the ability to make decisions about cloud computing. Even as the cloud becomes more pervasive in banking (the focus of this Bank Systems & Technology issue), new questions are emerging about the value and riskiness of running core applications in the cloud. A recent KPMG study of business and IT leaders across 16 global markets reported one-third of respondents said the costs of moving to the cloud were higher than expected. Whether it’s the actual savings banks achieve from moving processes to the cloud (or other variable-cost, hosted models) or the expenses involved in the move, this often seems to be a case of un realized “great expectations.”

It’s not that the cloud in and of itself is a flawed technology — far from it. In fact, the cloud’s potential to enable banks to be more flexible and responsive to market opportunities is going to make it essential to any IT organization, according to Joe Weinman, senior VP of data services company Telx. Weinman noted at the recent Interop New York conference, “We live in an increasingly digital world, so IT and a cloud form of IT is imperative.” However, he said, while moving to the cloud brings with it economies of scale around investments such as servers and storage, “there also are scale-in variant costs and diseconomies of scale,” which means that considering only the unit costs associated with the cloud doesn’t provide a true picture of the economics.

Another way of looking at it, according to another Interop speaker, Howard Rubin, president and CEO of Rubin Worldwide, is that the cloud is a way to provide what he calls “elasticity” that enables banks to ”engineer the economics” of their IT organizations and “become masters of [their] economics rather than victims.”

So, along with the calculator and specs list, bankers considering cloud-based systems must factor in the pace of technology change and innovation, along with the consumerization of IT that is driving demand and expectations of employees and customers. It’s a more complex, but more realistic, way of under standing the true economics of the cloud.

[See Also: Majority of Banks Will Turn to Cloud for Processing Transactions By 2016]

Katherine Burger is Editorial Director of Bank Systems & Technology and Insurance & Technology, members of UBM TechWeb's InformationWeek Financial Services. She assumed leadership of Bank Systems & Technology in 2003 and of Insurance & Technology in 1991. In addition to ... View Full Bio

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Byurcan
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Byurcan,
User Rank: Author
10/31/2013 | 2:08:41 PM
re: What Are the Real Economics of the Cloud?
The results of the KPMG study are interesting, given the cost-savings is usually the biggest benefit touted for moving to the cloud. While cloud services definitely have many benefits, it just goes to show that the picture if a bit more nuanced than some might paint.
Zarna Patel
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Zarna Patel,
User Rank: Apprentice
10/31/2013 | 2:48:11 PM
re: What Are the Real Economics of the Cloud?
That's an interesting perspective. I always here a lot about how switching to cloud saves money on maintaining data centers, but never enough on whether the actual process of switching is worth the price.
Becca L
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Becca L,
User Rank: Author
10/31/2013 | 5:49:22 PM
re: What Are the Real Economics of the Cloud?
Excellent point. I had thought and heard the same. The "next big thing" is hardly ever as perfect as we imagine. Understanding these economics is indeed important, and I imagine these kinds of stories are stalling would-be cloud users. Cloud providers need to be more upfront about the potential costs.
Jonathan_Camhi
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Jonathan_Camhi,
User Rank: Author
11/1/2013 | 3:45:51 PM
re: What Are the Real Economics of the Cloud?
Estimating the actual costs of moving to the cloud is very difficult from the outset. But it's getting to a point where if you want to be a truly innovative company you're going to have to move certain functions to the cloud at some point because of the flexibility they offer. It really is a long term investment, and that has to be kept in mind when looking at the costs of the move.
KBurger
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KBurger,
User Rank: Author
11/1/2013 | 4:04:25 PM
re: What Are the Real Economics of the Cloud?
I think with cloud it is emerging to be kind of "you can have it all." Right now, the focus is turning to the strategic benefits of the cloud (speed, flexibility, etc.) vs cost efficiencies. I guarantee if economic conditions take a turn for the worse the focus on cloud will be all about the savings. I don't see why both can't be priorities.
Jonathan_Camhi
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Jonathan_Camhi,
User Rank: Author
11/1/2013 | 7:02:17 PM
re: What Are the Real Economics of the Cloud?
Even without an economic downturn I think the cost savings are a big draw, especially for smaller institutions.
IvySchmerken
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IvySchmerken,
User Rank: Author
11/4/2013 | 2:31:31 PM
re: What Are the Real Economics of the Cloud?
Among the benefits of cloud is that firms can test out ideas for $12 as opposed to making an upfront investment in thousands of servers, noted Verizon Terremark's Chris Drumgoole. [http://www.wallstreetandtech.c... cloud brings down the cost of innovation.]
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