Why IT's Economics Revolution Is More Than OpEx and CapEx

Many view cloud economics as a question of operating expenses versus capital expenses -- or, more simply, the cost to rent versus the cost to buy. It's more complicated than that, though, since the cloud forces organizations to more thoroughly examine all costs associated with providing IT services.

By Bernard Golden
Wed, October 02, 2013

CIO — Countless words have been written about cloud computing economics. The catchphrase is summed up as "OpEx vs. CapEx," shorthand for rent vs. buy, with an ongoing and endless vociferous argument on the topic.

Most of the controversy surrounds whether it's less expensive to use pay-per-use resources offered by a cloud provider or if it's cheaper, in the long run, to use purchased assets owned by the user organization.

As you might expect, the position to which one adheres usually aligns with whether they use public cloud computing or on-premises infrastructure. There's also a third-party to this argument, which claims that it's the agility of cloud computing, not the economics, that's important.

Frankly, I've always found the last position untenable. The real issue is agility at what price; if agility's too expensive, no one's going to take advantage of it. After all, it's easy to maintain that, really, it's the comfort of a car that's important. It's only after realizing the cost of a top-range Mercedes that most of us opt for less comfort but a more affordable monthly payment.

You Need to Know What Each Use Costs

As I wrote a few months ago, affordable agility is cloud computing's real selling point. However, the OpEx vs. CapEx debate fails to capture the real revolution in IT economics that cloud computing has brought: The "pay-per-use" model forces an understanding of the real costs of offering IT resources.

That's because pay-per-use requires three things:

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  • Transparency.Say what you will about Amazon Web Services, but it posts its prices right on its website. This discomfits its competitors, who are more accustomed to a knowledge advantage that's leveraged to extract higher margin from smaller, less-powerful customers.

    From the point of view of IT organizations, this means there's pressure to unbundle offerings and provide more granular resource offerings. In any case, what AWS has brought forward is an expectation that it should be easy to find out what something costs without needing to engage in a lengthy discussion and/or negotiation.

  • Benchmarking. Once an established price regimen is available, users will compare other offerings to it. From a positive perspective, this lets other providers understand what they must meet; from a negative perspective, this creates competitive pressure for competitors to get up to scratch.
  • Preparing for diffusion. Many IT organizations respond to AWS economics by creating private clouds and assigning public cloud-comparable prices to the resources provided internally. However, it doesn't take Carnac the Magnificent to realize that, inevitably, users running legacy applications in the same internal data centers will soon demand the same transparency and cost-competitiveness. With that will come the associated pressure to deliver non-cloud resources at the same costs as offered by the private cloud.

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Put another way, many IT organizations are offering private cloud pricing at competitive pricing without really knowing whether, say, a virtual machine offered at $.10 per hour really costs $.10 or less; they just offer them, figuring that the overall cost of the private cloud is so tiny compared to the total budget of IT that any cost inefficiencies are immaterial. However, once all users want the same kind of transparency and prices, there's nowhere to hide on understanding real cloud computing costs and being prepared to meet available benchmarks.

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