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5 Hidden Costs of Cloud Migration

Cloud computing promises a low cost of entry and fast return on investment, but that ROI can fall short of expectations if hidden costs are left out of the equation.

A new white paper from global IT association ISACA, “Calculating Cloud ROI: From the Customer Perspective,” takes a close look at the true costs of cloud migration and offers a practical framework for calculating returns on migrating to the cloud.

The free white paper outlines five hidden costs that enterprises may fail to anticipate when moving quickly to cloud-based services:

1. Cost of bringing services back in-house due to regulatory change (e.g. stricter data privacy laws)
2. Cost of implementing and operating countermeasures to mitigate risk
3. Unexpected expenses involved in initial migration of systems
4. Loss of internal IT knowledge providing competitive differentiation
5. Lock-in with specific cloud provider or proprietary service model, which may slow down future adoption of open standards-based services

“Cloud computing represents significant changes to the delivery of traditional IT services, and its advantages have been well documented for a number of years. However, any movement to a new IT delivery model should identify the proposed benefits and the cost to achieve these over its entire life cycle,” said Vaughan Harrison, President of the ISACA Wellington Chapter and Director at PricewaterhouseCoopers New Zealand.

“Organisations should consider the impact of moving to a cloud environment by identifying potential movements in its current strengths and weaknesses, the ability to achieve future aspirations, cost of service movements and changes to its risk profile. This does not need to be a complex analysis; however, it should be thorough enough to enable an informed and supported decision.”

Enterprises are increasingly turning to public, private or hybrid cloud models to achieve such benefits as shifting cost from capital to operational, becoming more agile, and redeploying IT resources to higher-value-added activities.

While these benefits are achievable, this latest guidance from ISACA details a 12-step process that takes a frank look at the complexity of cloud computing options and the importance of making an informed decision about long-term costs and payback.

An example of positive ROI as a result of cloud migration is global organisation CA Technologies, which uses a private cloud to enable resource pooling and on-demand and scheduled resource acquisition, and to support data centre consolidation and standardisation.

“Early in our deployment we consolidated 44 locations and were able to drive millions in real estate savings and in productivity gains, as well as a 25 percent reduction in budget,” said George Watt, vice president of strategy, CA Technologies, who led the cloud deployment.

“Yet, our newfound agility was the unsung hero. From our perspective, one of the most important steps in calculating ROI is ensuring second-order costs are considered so there is a legitimate understanding of the complete cost of cloud and non-cloud options.”

To help more companies effectively calculate the ROI for their cloud initiatives, the “Calculating Cloud ROI” white paper offers the following practical tips:

Balance the need to be accurate with the need to reach a decision. An overly complex ROI calculation can make it hard to understand why a decision was made or measure its effects. Do as thorough a job as possible, but don’t let perfect be the enemy of good.

Cloud is not right for every organizational need. The type of cloud service selected—and the decision to use cloud computing services—depends on the specific enterprise’s risk appetite.

ROI is a good start, but other financial indicators should also be calculated. ROI coupled with total cost of ownership (TCO), net present value (NPV), internal rate of return (IRR), or payback period will provide a more accurate financial picture across the life span of the cloud investment.

It is far easier and less costly to change a decision when it is still on the drawing board. The time an enterprise spends considering the ROI of various options and selecting the best fit for its needs is time well spent.

Cloud Computing Brings Change And Disruption To IT Practices

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The increasingly integral role of cloud computing in IT operations is accompanied by significant change and disruption for cloud users, their IT staffs and their technology providers, new research released today by CompTIA, the leading non-profit association for the information technology (IT) industry, reveals.

CompTIA’s Third Annual Trends in Cloud Computing study indicates that the market for cloud solutions is robust, with the number of organizations using cloud resources rising for the third straight year. More than eight in 10 companies currently use some form of cloud solution; and more than half plan to increase cloud investments by 10 percent or more in 2012.

The investments firms are planning is based on positive sentiments – 85 percent of survey respondents feel more positive about cloud computing than they did last year, compared to 72 percent in 2011.This popularity is driving both IT and business staff to experiment with cloud options and to re-examine the role and functions of IT.

“This may entail changes to policies and procedures, restructuring of IT departments and use of outside companies,” said Seth Robinson, director, technology analysis, CompTIA.

Policy and procedure changes may be internal to an IT department or broad, corporate-wide changes. For example, as more lines of business attempt to procure and maintain their own cloud solutions, policies regarding security, use of company data and mobile devices need to be addressed.

“Internal IT departments also are on the edge of major transformation,” Robinson noted. “The option for cloud solutions for various parts of the computing stack is opening the doors for IT professionals to perform new tasks, or at least perform old tasks in new ways. It’s also creating new job roles and functions to more tightly integrate IT teams with lines of business.”

Though just one in five companies currently contract with an outside firm for cloud transitions, this may change, especially as micro and small businesses explore more complex uses of cloud. These firms have used outside companies less than medium and large businesses, but they will have a need for more expertise as their cloud usage increases.

The CompTIA study also shows that IT channel companies are poised to step up their involvement with the cloud. In fact, the number one catalyst channel firms cite as driving their entrance into cloud solutions is to provide their customers with access to new opportunities and capabilities not previously available to them.

“This is one of the truly disruptive aspects of the cloud model,” said Carolyn April, director, industry analysis, CompTIA.

“Advanced software for analytics, unified communications, enterprise resource planning, customer relationship management and other sophisticated technology solutions were often out of the price range or skill set of many businesses,” April continued. “With cloud-based solutions and delivery and either set monthly pricing or a pay-as-you-go model, these technologies come within the financial reach of even the smallest of small businesses.”

For channel firms, this reality provides a major selling point. Three-quarters of the largest channel firms cite expanding customer opportunity as a major driver behind adopting cloud.

Technology vendors also are having an influence on their channel partners. More than half of larger channel firms say that vendor demand for them to add cloud to their business portfolio was a motivating factor.

“But channel companies cannot be content to simply resell a vendor’s cloud wares,” April said. “It’s imperative that they build consultative practices that offer services such as integration, architectural assessments, monitoring and management.”

Over the next 12 months, 42 percent of channel firms expect the cloud portion of their business to grow significantly – by 15 percent or more. In 2011, 24 percent of companies expected that level of growth. The study also finds that nearly half of channel firms report either being at their targeted profitability with their cloud business today, or expect to be there in six months or less.

CompTIA’s Third Annual Trends in Cloud Computing study is based on separate online surveys of 500 IT and business professionals in the United States involved in IT decision making; and 400 IT firms. Both surveys were conducted in April 2012.

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Pros And Cons Of The Cloud

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When you talk to a bona fide Cloud supplier they talk in the straight-forward, clear and non-technical way about the business benefits of Cloud computing. However, in the same way that two hundred jumbo jets landing safely at Heathrow is not news but one jumbo jet crashing is news, Cloud makes the headlines when it fails and for those who over-complicate it.

Cloud computing provides organisations with an alternative way of obtaining IT services and offers many benefits including increased flexibility as well as cost reduction. However many organisations are reluctant to adopt the Cloud because of concerns over information security and a loss of control over the way IT service is delivered. These fears have been exacerbated by recent events reported in the press including outages by Amazon and the three-day loss of Blackberry services from RIM. So what approach can an organisation take to ensure that the benefits of the Cloud outweigh the risks?

Before we de-mystify Cloud computing let’s define it.

Different people interpret cloud computing differently so let’s settle on the National Institute of Standards and Technology(NIST SP800-145) definition as the best one: “Cloud computing is a model for enabling convenient, on-demand network access to a shared pool of configurable computing resources that can be rapidly provisioned and released with minimal management effort or service provider interaction. This cloud model promotes availability and is composed of:

* Five essential characteristics (on demand self service, broad network access, resource pooling, rapid elasticity, measured service),
* Three service models (IaaS, PaaS, SaaS), and
* Four deployment models (public, private, hybrid, community).”
* Measured service (cloud systems automatically control and optimize resource use by leveraging a metering capability. Resource usage can be monitored, controlled, and reported to provide transparency).

What makes Cloud computing so compelling to those who use it?

• Confidentiality— Cloud computing solutions provide powerful authentication and authorisation layers. Ironically, since these solutions are used by lots of different organisations the cloud solutions are more secure. The applications which are developed by a company on top of the infrastructure or platform remain the responsibility of the company.
• Privacy- Cloud computing solutions provide good protection for sensitive information
• Integrity—Cloud computing solutions provide similar protection of integer data.
• Availability—Cloud computing suppliers produce the infrastructure and bandwidth to give companies real high speed access, storage and applications. All organisations should still ensure that they have made arrangements for outages. Cloud computing even allows more reliable backup and recovery.
• Resiliency—Cloud providers have disaster recovery equipment to ensure that you will survive untouched by any type of negative event.
• Compliance—Every company has to comply with a huge range of laws, regulations and standards. If data is demanded by the authorities, cloud computing service providers can provide this without compromising any other information.
• Licensing—Cloud computing allows companies to only use those licenses needed at a specific point in time removing any concerns about using illegal software.
• Reliability—Cloud computing provides solutions where people are.
• Transparency—Cloud computing service providers can demonstrate the existence of effective and robust security controls, assuring companies their information is properly secured against unauthorised access, change and destruction.
• Monitoring—Measurable and transparent monitoring is provided by default by solution providers to companies.
• Integration—Cloud computing solutions provide the missing links to integrate with existing internal solutions.
• Network centric—Cloud computing solutions are, by default, offered via the network.
• Certification—Cloud computing service providers can provide proper assurance that they are doing the “right” things. Independent assurance from third-party audits and/or service auditor reports is a vital part of any service provider assurance program.

What added-value?

Cloud computing offers organisations the ability to scale without large financial commitments upfront for infrastructure acquisition and maintenance. Capital expenditure with cloud computing is much lower since services and storage are available on demand and are priced as a pay-as-you-go service. Capital expenditure is largely replaced with operational expenditure. Savings on unused server space and licenses also allow companies to contain costs.

Cloud provides on-demand convenience which is a core added value for many companies since they can unilaterally provision computing capabilities as needed automatically without requiring human interaction with cloud services providers. Cloud services offer both increased flexibility and scalability for the evolving IT needs of companies, allowing for traffic spikes and reducing the time to implement new services whilst increasing innovation.

Companies can also focus on their core business, rather than be concerned about solving peak business demands for performance. One of the major added value impacts of cloud computing is that the business is back in control over its solutions. Business departments can find their own solutions online and decide themselves if they go ahead or not without the intervention of others.

Cloud services allow organisations to better use existing infrastructures and increase productivity and transform business processes using methods that were prohibitively expensive before the cloud. Cloud computing allows business departments to detach their IT needs from their infrastructure and allows data to be stored in a centralised easily accessible manner which the user finds easier. Of course, virtualisation has made it impossible to physically pinpoint the exact physical disc where data is stored.

Instead of extensive discussions, analysis and lots of people involved in developing and testing applications and data solutions, business units are able to activate and use practical solutions in days. This has a fundamental impact on the agility of a business and the reduction of costs associated with time delays. One of the cornerstones of cloud computing is that it can automatically control and optimise resource use by leveraging a metering capability appropriate to the type of service. Resource usage can be monitored, controlled, and reported providing transparency for both the provider and company of the used service.

Another added value of cloud computing is less energy usage and using existing energy at the cloud computing service provider, which might have different locations and choose where energy is cheapest to buy. Re-allocating IT operational activities to cloud computing offers companies the opportunity to focus on innovation and research and development. This allows for growth.

The key premise of the cloud is that by outsourcing portions of information management and IT operations, enterprise workers will be free to improve processes, increase productivity and innovate while the cloud provider handles operational activity smarter, faster and cheaper. Assuming this to be the case, significant changes to the existing business processes will likely be required to take advantage of the opportunities that cloud services offer.

When moving to the Cloud it is important that the business requirements for the move are understood and that the Cloud service is selected meets these needs. Taking a good governance approach, such as COBIT1, is the key to safely embracing the Cloud and the benefits that it provides without fear and with many advantages as I hope I have demonstrated.

Author: Constantine Galonis
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The Cloud And Innovation

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A commonly held belief is that cloud computing—a utility model for computing capacity, software and business functionality—is a phenomenon whose value resides primarily in reducing IT costs. In fact, the flexibility that the cloud makes possible for infrastructures, services and processes means that it is also capable of driving significant innovation.

This is a key finding of new research from the London School of Economics and Accenture, based on a survey of 1,035 business and IT executives, as well as in-depth interviews with more than 35 service providers and other stakeholders.

The innovation trajectory of the cloud will be cumulative. Beginning first with technology and operational changes, its effects will then be felt at the business process level, changing the way companies operate and serve customers. It will be capable of delivering market innovations that enhance existing products and services, create new ones and enable entry into new markets. Finally, the cloud will support new ways of designing corporations themselves.

Reducing the friction: Operational innovation

One of the key ways that cloud computing supports operational and technological innovation is by moving an organization more briskly through the experimental or prototyping stages—or, as some of our interviewees put it, by “reducing the friction” of development. In a cloud model, companies acquire processing, storage or services when they need them, then can quickly decommission those resources when they are not needed.

Such a model supports “seed and grow” activities and faster prototyping of ideas. With traditional IT models, a decision to prototype a new system generally involves the procurement and installation of expensive hardware, with the associated checks and delays that conventional purchasing requires. Cloud provisioning, on the other hand, can be implemented rapidly and at low cost.

That means the cloud can also reduce the risks of operational innovation. Projects and processes that would have been too risky to attempt if they required a large capital investment become worth attempting if unsuccessful experiments can be decommissioned easily.

Language of the business: Process innovation

A distinctive feature of cloud computing is its ability to hide the technical complexity of solutions. The acquisition and deployment of IT becomes almost secondary. Companies are actually deploying a process or service, and that means business and IT executives need no longer try to communicate across a technology gap. They can speak a common language about what the business seeks to do and how it intends to do it.

Steve Furminger, group chief technology officer of global digital marketing agency RAPP UK, underscores this point by noting that the cloud is providing his company with the ability to produce solutions more rapidly without needing to be concerned at such a detailed level about how they are going to do it from a technical perspective: “Just a few years ago, that was a massive concern. Now we can almost forget the technology and just think in terms of what we want to do from a business perspective.”

To illustrate this point, consider an organization’s desire to innovate within its processes and technologies related to sales support—the ability to track contacts, manage and convert the sales pipeline, and generate revenue. With older models of IT solutions, a company would be restricted to particular packages or platforms—forced, in other words, to change its processes to match the software. With a cloud model, companies can think about processes at a level that is more detailed and personalized to their individual needs, but the solution will not need to be customized in older, prohibitively expensive ways. The company could provision a combination of software as a service for sales, along with an enterprise system or financial management system. Sales personnel could have access to specialized sales support over the cloud.

This ability to envision new combinations of cloud-based solutions and create new ways of performing end-to-end processes presents companies with new opportunities to be innovative in new-product development as well as in service and support.

Alignment of development cycles: Business innovation

Information technologies from their earliest days have represented enormous potential to deliver game-changing innovations. Although IT has become the lifeblood of the modern corporation, the path from point A (IT innovation) to point B (business value) has often been a tortuous one.

In part, this is because IT capability cycles and business demand cycles have rarely coincided. It has often taken up to 10 years for a new, major IT capability (client/server computing, for example) to be fully realized in terms of business value, while most businesses operate on near-term planning horizons. But the short development times made possible by cloud computing mean that business and technology have reached a fortuitous point in both cycles where they intersect.

This alignment enables IT innovation to more effectively drive business innovation. Service providers must maintain constant relevance. As Tim Barker, vice president of strategy for Europe, Middle East and Africa of Salesforce.com notes, subscriptions or renewals are due every quarter or even every month. This supports the alignment of a company’s entire business to the success of that project and the success of the customer.

Although moving to the cloud may be disruptive to the existing IT function, it enables CIOs to have meaningful answers to board-level questions about the value being delivered by the current organizational IT environment, including how much it costs and how quickly new services can be provisioned.

The next phase: Innovation in business design

For especially forward-looking companies, cloud computing may provide a platform for radical innovation in business design—to the point where executives are actually provisioning and decommissioning parts of the business on an as-needed basis.

This is a step beyond software as a service or infrastructure as a service, and amounts to the offering of “business processes as a service”—configured business services and processes provided from the cloud. These would be assessed not just through typical service-level agreements but against key business performance indicators.

Although extremely promising in concept, the idea of adaptive business design heightens the importance of the integrator role. The traditional systems integrator would become, in effect, a business integrator charged with managing complex collaborations across a broader ecosystem of internal resources, partners, vendors and others. As business design or business architecture innovators, integrators would connect and manage business services in configurations that change as business needs and goals change.

Such collaborative, innovative relationships hint at a new agile and adaptive organizational form. Knowing what such a corporation might look like is difficult, but we can see glimpses of it by looking beyond the business community to the organization of particle physicists working at CERN on the Large Hadron Collider (LHC).

To make possible the staggering 15 million gigabytes of data that are being produced every year by the LHC’s experiments, there was a need to create a global organization of collaborators. More than 140 computer centers (each part of a university or research facility) work together to pool their processing resources into a grid computing infrastructure. A globally distributed platform–based on cloud technologies and run as a service—was developed. It is managed collectively by a loosely organized confederation of physicists and their data centers.

Organizational governance in this environment evolves to match the challenges and opportunities. The new organization connects the computer centers through loose memoranda of understanding and business processes, particularly around support, data analysis and technology upgrades. The bureaucratic hierarchies are limited in scope and power, and most work is achieved through collaboration among equals. This structure provides a kind of first look at how an agile, innovative global organization can be created when founded upon collaboration and shared cloud-based technology.

Some companies will perform better than others, of course, when it comes to harnessing cloud-based innovation. Organizational readiness will be key—that is, the ability of the corporate culture and leadership to recognize innovation-based opportunity and move quickly—as will implementation abilities. Above all, companies who are able to collaborate across a wider ecosystem of internal and external players will be at an advantage in capitalizing on the responsiveness and agility that the cloud delivers to the business.

Author: Professor Leslie Willcocks, Dr. Will Venters and Dr. Edgar A. Whitley
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Spending on Cloud Computing to Increase

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Demand for cloud computing is set to accelerate in the days ahead as a survey conducted by CompTIA shows an increased interest among organizations in investing in SaaS applications.

More than half (56 percent) of the organizations surveyed for CompTIA’s Second Annual Trends in Cloud Computing study said their investment in cloud computing will increase by 10 percent or more over the next 12 months.

CompTIA, a no-government organization that often studies on IT sector, says it surveyed as many as 500 IT and business professionals in the United States involved in IT decision-making.

The major reason for technology adoption, according to the research firm, is that most software as a service applications are easily accessible through the Internet and that makes them relatively easy for business employees to use without involving any IT staff.

“This additional investment will likely be accompanied by greater complexity in the overall cloud strategy, such as moving to a hybrid cloud model or adopting more advanced services beyond Software as a Service,” said Seth Robinson, director, technology analysis, CompTIA.

While IT departments continue to be the prime driver behind the transition to the cloud, the CompTIA study suggests there is significant momentum building for individual business groups and units within an organization to seek out cloud solutions.

“Organizations may begin exploring options such as Infrastructure as a Service and Platform as a Service, which will allow them to experiment with custom application development,” Robinson added.

In the survey, about one in five (21 percent) companies said they have lines of business that pursue cloud solutions independently of the IT department.

Although general understanding of cloud computing has improved dramatically over the past year, many users continue to have questions regarding details of cloud implementation, the survey found.

The 2010 CompTIA cloud computing study found that 60 percent of end users desired a clearer definition of cloud computing. In 2011, that number increased to 66 percent.

Areas where users want more clarity include the types of cloud computing offerings (Software as a Service, Platform as a Service and Infrastructure as a Service) and the types of deployment models (public cloud, private cloud or hybrid).

Organizations that have spent time learning about and experimenting with cloud solutions indicate they have a higher level of comfort with cloud computing. In the new CompTIA study, 72 percent of these organizations feel more positive about cloud computing now than they did one year ago. Another 25 percent report no change in their perception.

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Mobile Cloud Use Tripled In 2011

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Mobility and cloud provider Model Metrics identified mobile cloud computing as the number one enterprise cloud priority in 2011 and said that mobile use among its cloud computing customers has increased three fold in the first half of this year.

According to the Chicago-based cloud and mobile VAR, more than 80 percent of its customers have smartphone and tablet adoption plans as part of their broader cloud computing initiatives, making mobilizing the cloud the top enterprise cloud priority this year. Whether customers are using dynamic illustrations of medical products on an iPad to guide surgeons in operating rooms to custom mobile applications to track product inventory, enterprises that make the cloud mobile seek to boost business processes and gain a large return.

Model Metrics based its findings on more than 150 customer engagements and found that cloud computing has evolved in the first half of 2011, with new technologies like mobility and social technologies leading the charge as the top customer priorities.

“The cloud has taken a new shape in 2011,” said Model Metrics CEO Adam Caplan. “It’s no longer just moving business processes to the cloud; it’s about deploying cutting-edge mobile and social apps that enable businesses to change the way their employees work.”

Following mobile, Model Metrics said that engaging communities with social technologies is the second biggest cloud priority for enterprises.

“In addition to leveraging social technologies such as Facebook and Twitter to more closely engage with their communities, 60 percent of Model Metrics’ customers are exploring social enterprise technologies to improve employee collaboration. Enterprises are looking for guidance on how to turn this new paradigm of community engagement into business value using the cloud,” Model Metrics wrote in its report.

The need to transition any business process to the cloud ranked third. From compensation and supply chain management to customer facing retail systems, Model Metrics said, “the sky is the limit” when it comes to what enterprises are building in the cloud.

Custom apps built on cloud platforms continue to accelerate and touch new areas of business, like mobilizing customer-facing business processes, budget management and vertical industry apps.

Another business priority Model Metrics has identified is the need to design cloud business apps that drive adoption.

“Enterprises want customized business and customer-facing apps that reflect their brand and are designed for usability, especially when it comes to mobile apps,” Model Metrics wrote. “This requires new design methodologies specific to cloud user experience (UX) and user interface (UI).”

Model Metrics found that 80 percent of customers customize their UI and UX, including designing the most efficient clickstream for specific business processes.

And lastly, enterprise cloud customers want to deploy globally and customize locally, Model Metrics found.

Sixty percent of Model Metrics’ cloud deployments in 2011 have a global reach, double the amount from a year ago. That results in multinational enterprise adoption of the cloud and an increase in enterprise-wide use cases and feature multilanguage support, localization and customer and partner access from anywhere in the world.

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The Economic Benefits of Cloud Computing

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As the cloud paradigm matures it is becoming increasingly well understood that companies and organisations of all sizes – from the smallest SME to the largest enterprise or public agency – can realise highly compelling economic benefits by adopting cloud computing solutions. In fact few could now credibly argue that emergence of the cloud model is not profoundly and fundamentally changing the economics of IT.

At a macroeconomic level the Centre for Economics and Business Research (CEBR) predicted in February 2011 that cloud computing could inject some €763bn (£670bn) into the major economies of the European Union over the next five years, with the UK reaping an estimated €30bn over the period. CEBR’s Cloud Dividend report identified the cost savings (CAPEX and OPEX) made by companies adopting cloud computing services and measured these against macro and business variables such as business development opportunities; business creation; indirect gross value added (GVA); tax contributions; as well as expenditure on cloud services to estimate the Euro value of the technology in each country.

Elastic consumption, elimination of CAPEX and improvements in agility

The cloud technology model allows organisations to standardise and pool IT resources and automates many of the maintenance tasks done manually today. Cloud architectures facilitate multiple benefits including elastic consumption, elimination (or at the very least a dramatic reduction) of capital expenditure, self-service, and pay-as-you-go pricing.

In most cases migrating to the cloud eliminates CAPEX and replaces these major up-front costs with predictable and manageable OPEX. This transition is crucial as it lowers the risk associated with strategic IT projects, so keeping business agile by allowing for more experimentation and entrepreneurship.

The elasticity offered by the cloud model means that organisations can take on computing projects that would have been completely beyond the capabilities of their in-house IT resources. Cloud means that it is possible to scale up and scale down resource intensity nearly instantly so organisations only pay for the computing power they actually need.

In this world of cloud computing the value-add delivered by IT through enhanced technical capability and improvements in staff productivity derived from providing “always on” fixed or mobile access to central cloud-based business applications can be significant. However, the scale of these potential economic benefits is only just beginning to be understood by business and technical decision makers.

Leveraging cloud economies of scale

Rolf Harms, director, Corporate Strategy Group at Microsoft, noted that many firms are only just waking up to the fact that cloud computing can slash IT costs.

“Our analysis uncovers economies of scale for cloud that are much greater than commonly thought. We believe that large clouds could one day deliver computing power at up to 80 per cent lower cost than small clouds. This is due to the combined effects of three factors: supply-side economies of scale, which allow large clouds to purchase and operate infrastructure cheaper; demand-side economies of scale, which allow large clouds to run that infrastructure more efficiently by pooling users; and multi-tenancy, which allows users to share an application, splitting the cost of managing that application,” Harms explained.

“We believe the best way to form this vision is to understand the underlying economics driving this long-term trend. We’ve done extensive analysis of these economics in Microsoft’s Corporate Strategy Group, leveraging Microsoft’s experience with cloud services like Windows Azure, Office 365, Windows Live, and Bing.”

A Microsoft research report, published in November 2010 entitled The Economics of the Cloud, reiterates this view that cloud is having a profoundly beneficial impact on the economics of IT for companies of all sizes.

Technology promoting innovation

“The economics will have a profound impact on IT. Many IT leaders today are faced with the problem that 80 per cent of the budget is spent on keeping the lights on – maintaining existing services and infrastructure. This leaves few resources available for innovation or addressing the never-ending queue of new business and user requests. Cloud computing will free up significant resources that can be redirected to innovation,” the report noted.

“Demand for general-purpose technologies like IT has historically proven to be very price elastic. Thus, many IT projects that previously were cost prohibitive will now become viable thanks to cloud economics. However, lower TCO is only one of the key drivers that will lead to a renewed level of innovation within IT.”

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Business Market Plays Cloud Computing Catch-Up

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The big spenders on technology are businesses and government agencies. They buy about 75 percent of the computing goods and services sold worldwide. Yet it is increasingly evident they are not driving the new ideas, excitement and powerhouse technology companies in ascent these days.

“The cutting edge of innovation is on the consumer side — digital technologies for consumption activity, play, entertainment and social-networked communication — and not in corporations anymore,” observed Timothy F. Bresnahan, an economist at Stanford.

Nowhere is that more apparent than in cloud computing, the technology industry’s buzz term for customers’ accessing information held in big data centers remotely over the Internet from anywhere, as if the services were in a cloud.

In the early days of computers, technology advanced because of government-financed research projects and work in corporate laboratories. Hobbyists developed the first personal computers, but it was only when I.B.M. entered the field in 1981, lending its seal of approval, that the PC industry really took off. Selling to businesses paved the way for the leading PC software and chip suppliers, Microsoft and Intel, to become giant corporations.

But marquee companies of the Internet era have made their names and fortunes mainly in the consumer market — both the first-generation Web winners like Amazon and Google, and the second-generation successes like Facebook and Twitter. And they have grown big and grown fast by offering search, shopping and social-networking services in the cloud.

Cloud computing, though, is more than a hyper-efficient means of distributing digital services. The cloud model is animated by a set of Internet technologies for juggling computing workloads in data centers far more efficiently than in the past — potentially reducing costs by about half, analysts say.

Yet to date, the large, established technology companies — and their businesses and government customers — have trailed in cloud computing. The marketing of the cloud, analysts say, is way ahead of real offerings by suppliers and its adoption by business customers.

But there are some recent signs of change. Last week, I.B.M. introduced a range of cloud services, including paying for computing resources like processing and storage on a metered pay-for-use formula, almost as if modeled on an electric utility. I.B.M. will offer customers an à la carte menu, in which they pay for different levels of guaranteed security, support and availability.

I.B.M., a bellwether in the corporate technology market, forecasts that it will have $7 billion in cloud revenue by 2015. Of the total, $4 billion will be customers shifting to cloud delivery from the company’s traditional software and services, and $3 billion is expected to be entirely new business.

“We’re moving to where the puck is going in this industry,” said Steven A. Mills, I.B.M.’s senior vice president for software and hardware. “And we’re more than willing to make this transition.”

In another industry move announced last week, Dell said that it would invest $1 billion over the next two years to build 10 new data centers and expand customer support, largely for cloud offerings.

The largest single customer for computing goods and services, the United States government, endorsed the cloud model this year. Vivek Kundra, the White House chief information officer, wrote a “Federal Cloud Computing Strategy” report, and identified $20 billion, or one quarter of the government’s total spending on information technology, as “a potential target” for migration to the cloud.

That document has certainly caught the attention of the government’s technology suppliers, like Lockheed Martin, the largest. “We’re keenly focused on cloud computing,” said Melvin Greer, a senior fellow at Lockheed Martin.

Still, the outlook is for an evolutionary shift toward the new technology spanning several years, even a decade or more, analysts say. People set the pace of technology adoption, and corporate data centers are filled with people whose skills and livelihoods are based on older technology and ways of doing things.

But technology managers, surveys show, are also genuinely concerned about security, reliability and liability if confidential corporate data resides on another company’s computers — and getting locked into proprietary clouds, controlled by one company. Standards groups are moving to set technical rules for sharing data across different clouds, including a working group established last week by the IEEE, a professional electronic and computer engineering organization.

“Cloud computing will become the new foundation for corporate information technology — it’s inevitable,” said Frank Gens, chief analyst for IDC, a technology research firm. “But there are a lot of concerns, challenges and inertia that will slow things down.”

There are also insurgents, like Amazon, that could speed things up in corporate cloud computing. Five years ago, the online bookseller and retailer decided to start a side business, offering computing resources to businesses from its network of sophisticated data centers. It called the new unit Amazon Web Services. It is a pay-for-use utility model, with customers paying from pennies to millions of dollars a month, says Adam Selipsky, vice president for product management.

Today, the customer ranks include Netflix, NASA, drug companies and major banks, which use Amazon’s data centers to remotely run Web applications that do tasks like tracking customer movie requests or running credit-risk simulations.

The Amazon cloud strategy, Mr. Selipsky says, mirrors its tactics in online retailing: build scale and efficiency, then cut costs and prices to gain market share. Amazon Web Services, he said, has reduced prices a dozen times in the last three years. “Most of that has been in the absence of competition,” Mr. Selipsky said, “because competitors have been so slow to emerge.”

Yet competition in the cloud market is intensifying. And that competition is taking shape across a number of fronts. It includes vendors offering basic computing resources like Amazon and Rackspace, joined by telecommunications giants like AT&T and Verizon that have entered the cloud business; companies offering ready-to-use applications tailored for businesses like Google’s online e-mail, document and collaboration services; Microsoft’s online version of its Office and collaboration tools; and Salesforce.com’s online customer management and collaboration tools.

Several companies also have built development environments on which programmers can build cloud software applications. Google has App Engine, Amazon has BeanStalk, Microsoft has Azure, Salesforce.com has Force.com, and VMware has Cloud Foundry, which was introduced on Tuesday. By 2014, IDC estimates that 30 percent of total spending on software applications in the corporate market will be for cloud applications.

Revenue from business cloud services — infrastructure resources, software applications and developer tools — was $22.2 billion last year, less than 2 percent of total technology spending, IDC estimates. But cloud revenue is growing at more than 25 percent a year, and will reach $55.5 billion by 2014, the research firm estimates.

Salesforce.com, founded in 1999, began selling customer-relationship software to businesses as an Internet service long before the industry began talking of cloud computing. Things built slowly at first, but Marc Benioff, founder and chief executive of Salesforce.com, says the turning point has come.

“What’s being called the cloud now is the future of enterprise software, but when I started in 1999 no one believed that,” said Mr. Benioff, who recently raised the company’s revenue forecast by 25 percent. “Sometimes you do have to wait them out.”

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Federal Agency Predicts 40% Savings From Move to Cloud

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The Equal Employment Opportunity Commission (EEOC) expects to save 40% over the next five years by switching its financial management application to a cloud computing vendor — a sign of the massive savings to come from the U.S. federal government’s shift to the software-as-a-service model.

The EEOC ran a competitive bid and chose Global Computer Enterprises (GCE) of Reston, Va., to provide Oracle’s Financials Release 12 software in a cloud-based delivery model. The five-year contract has an estimated value of $10 million.

The EEOC is the second federal agency to migrate its financial management system to GCE’s cloud-computing service. The Department of Labor — and all 12 of its subagencies and offices — made the switch to GCE last year.

“We’re not ones to break new ground,” says Jeff Smith, CFO of the EEOC, which enforces anti-discrimination laws in American workplaces. “It was important to us that the Department of Labor had already done this with GCE from a past-performance point of view. We had some comfort that they had done this successfully in the required time frame at Labor.”

The Office of Management and Budget is pushing federal agencies to adopt cloud-computing services as a way of reducing cost and time-to-market for enterprise IT systems. In February, U.S. CIO Vivek Kundra released the federal cloud computing strategy, which advocates a cloud-first approach and estimates that the U.S. federal government could shift $20 billion of its annual $80 billion in IT expenditures to cloud computing vendors.

The EEOC deal is significant because it involves an agency choosing a cloud computing model for a mission-critical application such as financial management. Other agencies including the General Services Administration have chosen cloud-computing vendors for applications such as e-mail and Web-based collaboration.

Under the terms of the EEOC contract, GCE will provide all the necessary hardware, software and networking for hosting Oracle Financials for the EEOC. It also will provide related helpdesk, tech support, security, reporting, accounting and transaction-processing services.

Prior to awarding the contract to GCE, the EEOC since 2002 had used a government data center called the National Business Center that is run by the Department of the Interior to host its financial management systems. This arrangement was supposed to save the EEOC money, but the government data center’s charges were escalating.

“We were seeing 25% increases in costs year-over-year, which was pretty much unsustainable,” Smith says. He added that the EEOC’s agreement with the National Business Center would expire in 2012, and “we had to do something to replace that contract.”

The EEOC held a full and open competition, allowing government entities like the National Business Center to bid as well as private companies including GCE. The agency required fixed-price bids. Bidders weren’t required to offer a cloud computing solution, but the EEOC found that those were the most cost-effective bids that it received.

“We expect to save about 40% for operations and maintenance across the life of the contract,” Smith says. The software-as-a-service model “had some competitive advantages … GCE put together a darn good bid.”

Ray Bjorklund, senior vice president with market research firm FedSources Inc., says the EEOC has budgeted a decline in IT services spending that he attributes in part to anticipated savings from cloud computing. “Considering that EEOC’s headcount and workload continues to increase annually, I read into this change that EEOC was throttling back its spending,” Bjorklund says. “Perhaps some of that throttling could be attributed to stopping the legacy [financial management] program, regrouping, and jumping on the cloud.”

The EEOC says it isn’t worried about the cultural changes involved with cloud computing because it already used an outside vendor to host its financial management application.

“We had 10 years of handing off financial management to an approved shared service provider. For the most part, other than cost, we were happy with the functionality and the service level,” Smith says.

The EEOC is considering moving other applications including electronic fax and Web conferencing to cloud computing, says Kimberly Hancher, CIO of the EEOC. “These are applications where we feel that more cost-effective services are easily found in the cloud,” she adds.

The EEOC was able to turn around its bid for the new financial management service relatively quickly, issuing a Request for Information in January 2010 and awarding 12 months later. Smith says the EEOC would have made the award three months sooner if the OMB hadn’t put a temporary hold on all financial management systems awards last summer.

The EEOC will be transitioned to the GCE platform by October, when the new federal fiscal year begins. One of the challenges for the contractor is training 100 agency users on the Oracle Financials software, as they were previously using a rival platform called Momentum. All of the agency’s data needs to be migrated to the new software, too.

Smith says the cloud-computing deal will be a success if it passes muster with an outside auditor at the end of fiscal 2012. “That’s the Housekeeping Seal of Approval for us,” Smith says.

David Lucas, chief strategy officer for GCE, says the company’s ability to quickly migrate the EEOC to its cloud-based computing platform is one reason it won the award.

“We were able to show them a plan for how quickly we can move them from one service provider to another,” Lucas says. “We will have them live by Oct. 1. We can do that by having a system that’s already built. Our accounting system is already constructed as software-as-a-service. That reduces the risk in moving from one provider to another, and it gives agencies a whole lot of comfort.”

Lucas says GCE also provides the EEOC with a substantial return on investment because the agency doesn’t have to hire a contractor to build a new application from scratch. “The cloud model gives us a lot of flexibility, a lot of risk mitigation and a lot of cost advantages,” Lucas says.

Lucas says he hopes other agencies will follow suit and adopt the cloud computing model for their financial management systems.

“We’re trying to turn financial management into a commodity service instead of having a financial management application built for each agency,” Lucas says. “The EEOC award is going to, I believe, further validate this idea to CIOs and CFOs across the government, that they can modernize their workforce on a new set of tools in a cost-effective way.”

EEOC officials are encouraging other CIOs to be open minded to cloud-based computing. “I think the federal government has got a lot to learn about the economies of scale that come from running the same service for multiple customers,” Smith says.

Lucas adds that highly standardized government applications like financial management are ripe for software-as-a-service implementations, not only for federal agencies but also for state and local governments.

“Wherever you can find a rigorous set of standard business processes, those are the areas where industry can offer software-as-a-service to government,” Lucas says. “Logistics, supply chain management, case management are all ripe for this type of investment. … I expect growth in back-office applications like HR, financials, budgeting, procurement and acquisition.”

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Cloud Computing: Four Favorite Flavors, Explained

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Cloud computing is famous for being a metaphor instead of a technology, but that metaphor is increasingly hard for non-techies to understand. Many variations of cloud have emerged that have little to do with the initial vision that sparked interest— a public cloud with burst-up capability on demand.

“Public cloud is not what most of our clients are talking about right now,” according to Chris Wolf, analyst for Gartner Group’s Burton Group consultancy. “Pretty much everything’s hybrid.”

Public cloud (pay-for-play) services such as Amazon’s EC2 and Microsoft’s (MSFT) Azure were the proof-of-concept for cloud technology. Rather than shift the majority of their own IT to professionally maintained shared-resource services such as those, however, most companies are today using cloud to build on their internal virtual infrastructures, analysts say.

The greatest benefit of cloud is its ability to connect otherwise incompatible infrastructures, not just one or two applications at a time, and its ability to let customers dial up more compute power when they need it, says International Data Corp. analyst Ian Song. Nevertheless, IDC’s market surveys predict that spending on cloud will rise from $17 billion in 2009 to $44 billion in 2013.

“It’s not real clear in most people’s minds what virtualization or cloud will get them,” according to Roger Johnson, who evangelized both in his previous job as a senior IT manager at audio-systems reseller Crutchfield Corp., and does so now as a senior systems engineer at Richmond, Va.-based integrator SyCom Technologies.

“Most people seem like they’re interested in cloud but they don’t want to touch it until there’s more adoption and a better track record,” says Johnson.

Most companies take a roll-your-own approach to cloud, adding cloudlike interfaces to existing systems, building new systems on virtualized, highly interoperable systems, or hiring co-location, server hosting or online services to meet specific needs or east particular points of pain, Wolf says.

There is no single model for how best to mix all the various cloud service permutations, but a few consistent models have emerged:

1. Internal Clouds

In what’s turning out to be the most common form of cloud computing (and convenient for virtual-server vendor VMware, (VMW)) internal, private clouds allow a company to weave layers of virtualization and management software around existing infrastructure to tie servers, storage, networks, data and applications. The goal: Once they’re interconnected and virtualized, IT can shift storage, compute power or other resources invisibly from one place to another to give all the end-user divisions all the resources they need at any time, but no more than that.

What’s the difference between a highly virtualized environment and an internal cloud? VMware says an internal cloud should also have a high degree of management automation and offer chargeback capabilities for business units. Private clouds should make managing both information and technology easier, but will blow apart the silos into which most IT organizations have been built over decades, Wolf says. “Right now the server people talk to the server people, not networks or support or anything else,” he says. “If everything’s virtualized, everything’s on ever box, so your job can’t be defined according to where the box you’re responsible for sits.”

2. External Cloud Hosting

External cloud—any IT service maintained by an external service provider and accessed through the Internet—is the best source for both cost-effective IT extensibility and of insecurity, mistrust, confusion and the potential for disaster. Among the best known U.S. providers of external cloud services are Rackspace, Terramark, Equinix (EQIX), AT&T and IBM (IBM). The big worry: In a recent Portio Research survey, 68 percent of respondents say worries about security are holding them back from cloud projects; 58 percent say performance is also a drawback.

“In the public cloud a lot of the fear factor is that your data is sitting on someone else’s infrastructure,” says Vince DiMemmo, general manager of cloud and IT services at data-center hosting and services company Equinix. “When you hire someone else your expectations for security are much higher, so most customers aren’t comparing what a service provider offers compared to what they do in their own systems. They tend to be nervous about cloud, too, not for [co-location] and server-hosting that they’ve been doing for a long time.”

There’s not a lot of difference betweeen co-location or hosting and cloud services in the platform-as-a-service market, which means any IT organization with external providers has already done most of the vetting needed for a cloud provider, says Jim Levesque, systems programmer and supervisor of the cloud-based disaster-recovery and backup system built by the Los Angeles Department of Water and Power for its 600-server business-application network.

“You check the security, make sure about their finances so they’re not going to disappear right away, talk to their references and make sure they’ve got good provisioning on the things that are important— plenty of I/O and network access, redundant connections and power supplies, emergency plans, all that stuff,” Levesque says.

But many customers are also worried they’ll get locked in to a single service company if the APIs, systems and interfaces their cloud provider uses don’t allow them to pick up an move back to internal servers or to a different provider’s infrastructure, according to Karl MacDonald, chief evangelist for cloud service provider Cloud.com.

3. Hybrid or Modular Approach

It’s pretty clear that the near future of IT is the hybrid cloud model, Wolf says. Hybrid cloud computing can include a mix on internal clouds, external cloud services and traditional SaaS options. The mix of pieces that hybrid should include for a specific business will end up being as unique as the IT organizations that provide it, he says.

Some small- and mid-sized companies face the same dilemma as that guy who insists he can wear the same jeans he did in high school, despite their 32-inch waist and his 42-inch belly. The CEO keeps cinching the budget a little tighter every quarter.

Smaller-scale workspace on demand services can fit the bill here. Originally conceived for applications such as on-demand test and development environments (where the need for 100 virtual workstations on which to test a software distribution script wouldn’t be unusual) workspace on demand companies such as CloudShare, Soonr or Microsoft Azure offer mini versions of the macro cloud.

Rather than buy large-scale services with a lot of configuration and management from Amazon or other hosting companies, it makes sense to have a service you can use to get IT-on-demand for workgroups rather than enterprises, according to Steve Peltzman, CIO of New York’s Museum of Modern Art.

“We, like a lot of companies, have only one set of staging servers for anything, and you don’t want to add a feature because you don’t want to mess with the staging, so you have to put that off,” Peltzman says. “There are lots of needs, strategic or tactical, we have to meet during the day without having a rack of servers to pull out to do it. We look at where it makes sense to outsource SaaS providers, SalesForce, outsourcing email to Gmail, Amazon or Cloudshare for platform. Sometimes I don’t know what we’re going to use a specific service or function for, but I know we’re going to need it. That’s what I’m looking to the cloud for.”

4. Traditional SaaS

For those looking for an even smaller slice of additional functionality or capacity, plain-jane SaaS may be the way to go. The quickest way to get into “cloud computing” is to sign up for free email at Yahoo (YHOO) or Google (GOOG), or for productivity apps from Zoho, 37Signals or a host of other services aimed at businesses or individuals.

Google’s corporate email is popular among small companies that put managing their own Exchange servers somewhere down below housekeeping and maintenance. Productivity apps are available online from Microsoft, Zoho and others who’d rather not pay for bulk upgrades of feature-heavy desktop applications.

Companies that don’t even want to have to maintain Windows can go to Desktone, ThinkGrid and a few other VDI-on-demand providers.

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