Risks versus value in outsourced cloud computing.

• Author: Tisnovsky, Ross
• Position: Technology

Cloud computing is one of the most widely discussed technology trends today. But it's more than hype--it's a game-changer in its ability to deliver value to a business. Cloud computing improves a company's ability to flexibly scale services up and down. It reduces costs; suppliers note that the cloud is an optimized environment, allowing the delivery of information technology services at a lower cost than enterprise set-ups.

Cloud infrastructure can save 40 percent to 50 percent in up-front costs. And it allows pricing model flexibility, including paying per use, low or no up-front costs, no minimum spend and no long-term commitment.

The IT industry is attempting to woo enterprise buyers to the cloud and, as with other outsourced business functions, financial services firms are among the early adopters. However, financial executives need to be careful when considering a move to the cloud. Although it can bring value, crossing through that gate also puts a company in a danger zone.

Everest Research Institute has studied cloud computing's value and risks and where it makes significant sense over a traditional enterprise set-up. Findings reveal that it is possible for some cloud adopters to encounter a negative business case and end up with more costly services than their enterprise set-up.

One of the cloud's risk characteristics is that the IT demand that most often causes many companies to consider the move is the most challenging area to serve from the cloud. Another key factor is that the cloud brings significant incremental risks to a conventional data center set-up.

Buyers of cloud computing services need to understand the risks. The cloud brings challenges and some hidden risks that are not normally present in a traditional outsourcing arrangement.

The Cloud Computing Business Case

The business case is based on the expected cost savings derived from each of four value levers: Utilization, scale, standardization and labor flexibility. For the most part, from purely a cost perspective, a cloud set-up makes significant business sense over a traditional enterprise set-up

Because outsourcing suppliers aggregate the computing demand across their portfolio of customers, they drive higher system usage, reduce software, reduce facilities and their associated rental and power costs and reduce management costs. As illustrated in the exhibit on the next page, better utilization also reduces hardware spend and improves software license management.

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