The Hidden Economics of the Cloud

Posted 8/20/2015 8:39:14 AM by ERIC NAIBURG , Director of Marketing INetU

The Hidden Economics of the Cloud
There are certainly clear economic benefits of moving to the cloud, whether public or private environments. These include scalability, pay for only what you use, high availability, shared resources, near instant scalability, and much more.

However, when thinking whether or not to put an application in “the cloud”, with a managed cloud provider, there seem to be 2 initial streams of thought before heading to the next phase of thinking:

1. Cost
2. Loss of control

But, are we really thinking of it in the right way? When considering whether or not to leverage a managed cloud provider, versus managing the infrastructure in-house or even in colocation, we need to start looking at the real economics and value to the business and potential risks.

I am not talking about the scalability of virtualization by moving to the cloud, which goes without saying and is available whether you manage your own servers in-house or if you put them elsewhere, it is much more about the intangible benefits of moving to a managed cloud provider.

What Is Control Really?

At a recent conference, I talked to a lot of people who were considering a move to the cloud and the lack of control kept coming up. It was a consistent conversation of: “If I move to a managed cloud provider, the servers are out of my control and that makes me uncomfortable. There is no way they can protect them like I can.”  

That was followed with a lengthy discussion of how well they protect their servers, what the server rooms look like, who has access, how many people are managing the servers, what the recovery plans are, and at the end of the day, what is their core business. 

In almost every instance, the core business is developing some type of software application and not managing infrastructure. The data centers, if you want to call them that, in many cases were not much more than converted conference rooms and all of the management was a part-time job at best of many people.

So, I started to ask myself, is control really about seeing a server or is it doing everything within your power to have the best performing, most secure, always up-to-date servers while focusing on improving the applications that run your business?  I would have to say that it is the latter.

The Real Cost of Server Management

But what about the cost? People may say that managed cloud is expensive, but is it really? I would argue that managing your own environment is much more expensive and takes on a much larger risk. Let’s look at the real costs.

You wouldn't dig your own well or generate your own electricity, so why manage your own servers? Server management encompasses many roles within an organization and to manage it correctly, you need to hire experts to handle all aspects of server management.   Now to be fair, someone may be able to own the responsibility for more than one piece, but it is generally a full time job of many. 

Some of those responsibilities include:

- Hardware procurement, setup and management
- 24x7x365 IT staffing
- Utility management of (Power, air conditioning, generators, networking)
- External networking to the internet with multiple vendors
- Architecture design of the infrastructure
- Monitoring and scaling of servers as required (up and down)
- Replacement of older hardware
- Security (physical, administrative, perimeter, network, application, database and server)
- Datacenter space

And of course, you cannot discount the experience that is required in all of these areas.  So, let’s think about this in dollars and cents. Assuming that a fully loaded, experienced employee costs the company about $110,000 a year and if they could take on all of these roles at once, bring the experience and be there 100% of the time, your employee costs are set. 

Then add in the hardware costs which of course varies depending on the size of your environment. Now, for that, we can take a conservative number of $60,000 onetime cost amortized over 3 years for an annual cost of $20,000. Of course then there are the utilities, datacenter space, etc., let’s add another $20,000 a year bringing the total annual cost to $150,000/year.

Remember, however, the $150,000 is just for one person and then the rest of the work is spread across your existing team, you likely will also have to purchase multiple monitoring tools, expensive maintenance contracts and start training your team on aspects like security.

Managed Cloud Hosting Provider

Just like in the example of digging your own well vs. paying an expert to dig it for you, a managed cloud hosting provider is an expert in cloud management and provides all of the services for you, rather than having to manage the environment yourself. They also bring on one more piece, unlike the well, they provide the infrastructure for you too, so that you don’t have to buy the hardware that runs your cloud environment.  

So, taking on the same assumptions in the above business case, if we assumed that environment is fairly small based on the hardware costs, would likely cost less than $10,000/month with a managed cloud provider, bringing your annual costs to $120,000.  

Although we are showing a $30,000 annual cost savings right out of the gate, those are just the tangibles again, well, for the most part. We cannot forget that with a company that does this for a living, they are bringing on much more. Their staff manages cloud environments for many companies, just like yours and with that comes experience. They have employees on staff 24x7x365 to monitor and manage the environment. With them, will generally come database and application expertise to help your team determine issues, especially with performance and design as they span the hardware, software and database layers of the architecture.

Security, often a fear, should actually be a relief when working with the right managed cloud provider. Look for one that has a Security Operations Center (SOC) who will bring security expertise to your organization. Remember, they have usually seen every type of attack attempted because they are managing so many different applications from various industries. They know how to handle them, are managing firewall configurations for you, putting the policies in place and are watching around the clock.  

A good provider will have a security team monitoring everything so that you don’t have to and bring with them the experience that you would have to hire to enforce all of the policies that are required to successfully secure an environment.

Forrester Consulting provides a great example of the total economic impact that can be achieved when working with a managed cloud provider in a case study they did with the National Automobile Dealers Association. You can find that study here


There is a misconception that to control something, you must be able to see and touch it.  That may be true in some instances, but not when it comes to managing servers in the cloud. The cloud provides great business benefits, but if you try to do it all yourself, the costs will likely overtake those benefits in the long run.

Working with the right managed cloud provider can give you benefits well beyond the costs, although those can be significant. You can gain expertise within your team that you likely couldn’t justify adding to your staff and even if you could, it would take many new hires to fill all of the gaps that a single provider should be able to satisfy. 

Just looking a simple numbers, for less than the cost of a single fully loaded employee, you can receive the benefits of multiple people who have expertise in different areas of the cloud, security, infrastructure, facilitates, applications, databases and more, all while getting the required hardware at the same time. Now those are economies of scales that make sense.
If you have any questions or would like to chat further about anything related to cloud hosting, please feel free to shoot me an email.

And if you are looking for a cloud hosting option, I’d be glad to talk about that as well. At INetU, we take a consultative approach from the beginning, ensuring that your systems are architected for performance, reliability and the industry’s highest level of security. Each of our customers is assigned a Chief Hosting Officer who proactively supports your systems for today with an eye toward your future business needs. 

We treat your business as if it was our own. Which it is, because we are hosting your most critical resource.

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About the author: ERIC NAIBURG , Director of Marketing INetU

Eric Naiburg is Director of Marketing INetU and is responsible for cloud product strategy. A software development industry veteran with more than 20 years of experience, Eric is also co-author of UML for Database Design and UML for Mere Mortal, both published by Addison Wesley. Prior to joining INetU, Eric was program director in the IBM Rational brand responsible for all application lifecycle management (ALM) marketing. He also previously served as program director for Information Governance Solutions Marketing and Strategy for the company. He rejoined IBM in 2008, after having previously held several roles within the Rational Software group, including solutions program director, director of product marketing and product manager. Prior to rejoining IBM, he held leadership positions at Ivar Jacobson Consulting and CAST Software. He also spent several years with Logic Works Inc. (acquired by Platinum Technologies and CA) as product manager for ERwin.

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