The Economics of Cloud Computing Analyzed
Addressing the Benefits of Infrastructure in the Cloud
Oct. 26, 2009 02:00 AM
Government Cloud Computing on Ulitzer
"Of the investments that will involve up-front costs to be recouped in outyear savings, cloud-computing is a prime case in point. The Federal Government will transform its Information Technology Infrastructure by virtualizing data centers, consolidating data centers and operations, and ultimately adopting a cloud-computing business model. Initial pilots conducted in collaboration with Federal agencies will serve as test beds to demonstrate capabilities, including appropriate security and privacy protection at or exceeding current best practices, developing standards, gathering data, and benchmarking costs and performance. The pilots will evolve into migrations of major agency capabilities from agency computing platforms to base agency IT processes and data in the cloud. Expected savings in the outyears, as more agencies reduce their costs of hosting systems in their own data centers, should be many times the original investment in this area." 
The language in the budget makes three key points: (1) up-front investment will be made in cloud computing, (2) long-term savings are expected, and (3) the savings are expected to be significantly greater than the investment costs.
Booz Allen Hamilton has created a detailed cost model that can create life-cycle cost (LCC) estimates of public, private, and hybrid clouds. We used this model, and our extensive experience in economic analysis of IT programs, to arrive at a first-order estimate of each of the three key points in the President's budget. Overall, it appears likely that the expectations highlighted in the budget can be met, but several factors could affect the overall degree of economic benefit.
Booz Allen developed a first-order economic analysis by considering how agencies might migrate to a cloud-based environment and what the costs and potential savings might be under a variety of scenarios. Specifically, given long-standing efforts to protect the privacy and security of the federal government's data and systems, a key variable will be whether agencies take advantage of public clouds, build their own private clouds, or adopt a hybrid approach., The focus was on Cloud Computing infrastructure services as these tend to represent a relatively more consistent set of costs/investments/operating requirements across all agencies. We made some high-level, simplifying assumptions in our initial analysis:
Next, we developed three high-level scenarios that represent potential migration paths. The three scenarios are as follows:
Scenario 1: Public Cloud Adopters
Assumptions: Transition to the new cloud environment will occur steadily over 3 years; workload remains constant (i.e., no increase in capacity demand).
Scenario 2: Hybrid Cloud Adopters
Assumptions: Seventy-five percent of the IT server workload will migrate to a private cloud, and the remaining 25 percent will transition to a public cloud; transition to the new cloud environments will occur steadily over 3 years; existing facilities will be used (i.e., no new investment is required in physical facilities); workload remains constant (i.e., no increase in capacity demand).
Scenario 3: Private Cloud Adopters
Assumptions: Transition to the new cloud environment will occur steadily over 3 years; existing facilities will be used (i.e., no new investment is required in physical facilities); workload remains constant (i.e., no increase in capacity demand).
Agencies publicly report only their "consolidated" IT infrastructure expenditures, which include end-user support systems (e.g., desktops, laptops) and telecommunications. Additional spending on application-specific IT infrastructure is typically rolled up into individual IT investments. In an effort to isolate data center costs, we extrapolated findings based on our experience with actual federal data centers. Specifically, we developed a "representative" agency data center profile that serves as a useful proxy for other agencies and enables us to explore the potential savings of a migration to cloud computing under the scenarios described above. Although agencies of similar size can have very different IT infrastructure profiles, we modeled an agency with a classic standards-based web application infrastructure. For our representative agency, we began with an assumption that a Status Quo (SQ) data center containing 1,000 servers with no virtualization is already operational.  The results at different scales are shown in our analysis.
Using a Booz Allen proprietary cloud computing cost and economic model that employs data collected internally, data from industry, and parametric estimating techniques, we estimated the LCCs for our representative agency to migrate its IT infrastructure (i.e., its server hardware and software) to the cloud under each of the three scenarios described above. We compared these costs to the LCCs of the SQ scenario (i.e., no cloud migration).  We also calculated three common metrics to analyze each scenario's potential economic benefits. These metrics allowed us to evaluate the three elements of the business case in the President's budget and estimate the absolute and relative benefits, as well as the time over which the outyear savings will pay back the investment costs.
The three key metrics in our analysis are as follows:
The top portion of Exhibit 1 shows the analysis results. This exhibit presents the one-time investment phase costs as well as the recurring O&S phase costs for each scenario with a 13-year life cycle (3-year investment phase and 10-year steady-state O&S phase) from FY10 through FY22.
Assuming a 3-year transition period for each scenario, investment costs are expected to be incurred from FY10 to FY12 and include (depending on the scenario) hardware procurement and commercial off-the-shelf (COTS) software license fees; contractor labor required for installation, configuration, and testing; and technical and planning support (i.e., system engineering and program management costs) before and during the cloud migration. Because the SQ reflects an operational steady state, no investment costs are estimated for that scenario. Although the public cloud scenario does not present any up-front investment costs for hardware or software procurement, it does require program planning and technical support, support for porting applications over to the new cloud environment, and testing support to ensure programs and applications are working correctly in the new environment.
Recurring O&S costs "ramp up" for all cloud scenarios beginning in FY10 and enter steady state in FY13, continuing through FY22. For private clouds, these costs include hardware and software maintenance, periodic replacement/license renewal costs, system operations labor support costs, and IT power and cooling costs. For hybrid clouds, the O&S costs include the same items as the private cloud (albeit on a reduced scale), as well as the unit consumption costs of IT services procured from the public cloud. For public cloud scenarios, the O&S costs are the unit costs of services procured from the cloud provider and a small amount of IT support labor for the cloud provider to communicate any service changes or problems. In all three cloud scenarios, a significant portion of the O&S costs are incurred while phasing out the SQ environment during the transition. The SQ phase-out costs "ramp down" from FY10 to FY12, dove-tailing with the ramp up of the new clouds' O&S costs. Not surprisingly, the total LCCs are lowest for the public cloud scenario and highest for the private cloud scenario, with the hybrid cloud scenario's LCCs falling in the middle.
The economic analysis confirms that the projected NPV and BCR for all three scenarios are significant relative to the SQ environment. Once the cloud migrations are completed, our model estimates annual O&S savings in the 65-85 percent range, with the lower end corresponding to the private cloud scenario and the upper end corresponding to the public cloud scenario. These percentages can be applied to overall federal IT spending for data centers to estimate the potential absolute savings across the federal government. (As part of the Information Technology Infrastructure Line of Business [ITI LoB] initiative, General Services Administration [GSA] is coordinating a benchmarking effort across the government. If those figures are made public, a total dollar savings estimate will be possible).
Our model shows that the net benefits and payback periods for agencies adopting the hybrid cloud scenario are closer to those for the private cloud than the public cloud. This variation is largely a result of our assumption that 75 percent of the current server workload would migrate to a private cloud and only 25 percent would transition to the public cloud. If we were instead to assume the opposite mix (i.e., 25 percent of the workload migrating to a private cloud and 75 percent to a public cloud), the hybrid scenario economic results would be closer to the public cloud results.
We conducted a sensitivity analysis on several of the variables in our cost model to determine the major drivers for cloud economics. The two most influential factors driving the economic benefits are (1) the reduction in hardware as a smaller number of virtualized servers in the cloud replace physical servers in the SQ data center and (2) the length of the cloud migration schedule. Exhibits 2, 3, and 4 show the results of varying these factors.
In practice, several factors could cause agencies to realize lower economic benefits than our estimates suggest. One factor is underestimation of the costs associated with the investment or O&S phase for the cloud scenarios. Another factor is server utilization rates (both in the current environment and the new cloud environment). Our analysis assumes an average utilization rate of 12 percent of available CPU capacity in the SQ environment and 60 percent in the virtualized cloud scenarios. This difference in server utilization, in turn, enables a large reduction in the number of servers (and their associated support costs) required in a cloud environment to process the same workload relative to the SQ environment. Agencies with server utilization rates that are already relatively high should expect lower potential savings from a virtualized cloud environment.
The charts indicate two key takeaways:
These findings, in turn, lead us to the following recommendations for agencies and policymakers contemplating a cloud migration:
To reduce the cost of running parallel operations, organization should properly plan for and then migrate to the new cloud environment as quickly as possible. The three lines in Exhibit 5 show (in this case, for the public cloud) that the BCR goes down rapidly and the DPP increases as the transition time increases.
Specifically, an agency develops IT investment requests each spring and submits them to OMB in September, along with the agency's program budget request, for the following government fiscal year. OMB reviews agency submissions in the fall and can implement funding changes via passback decisions (generally in late November) before submitting the President's budget to the Congress in February. Theoretically, the earliest opportunity for OMB to push agencies to revise their IT budgets to support a transition to the cloud will be fall 2009; however, agencies typically only have about 1 month to incorporate changes to their IT portfolios during passback. To give GSA and OMB time to develop more detailed guidance, as well as necessary procurement mechanisms and vehicles, it is more likely that OMB will direct or encourage agencies to plan for cloud migrations during the FY12 budget cycle (starting in the spring of 2010).
Other Considerations with Potential Economics Effects
All government organizations struggle with ensuring that the data they have remains secure and adheres to current policies and regulations. Because data security is such a critical issue, cloud providers will be required to address it in their products and services, and should be able to tailor the level of security to meet demand. Additionally, by centralizing data and servers, a cloud environment will allow for easier detection and investigation of incidents, and allow enabling IT staff to replicate and address them efficiently.
However, there are currently no security standards for cloud computing, and until such standards have been developed, and used effectively to measure provider services and enforce accountability, any failures will fall on the agency's in-house IT organization. In awareness of this reality, organizations should be careful about putting mission-critical and core processes into a public cloud, and private cloud architectures should be designed to minimize any security concerns while realizing the benefits of cloud optimization.
Service Oriented Architecture
Migration of Applications to the Cloud
Economic Influence on Policy
As a cloud "storefront," GSA should conduct due diligence reviews to establish that public cloud providers, once identified, indeed offer highly efficient, highly scalable (both up and down) usage-based pricing beyond traditional managed services (e.g., by comparing proposed rates against commercial benchmarks). GSA should also work with potential providers to ensure agencies can readily understand service definitions, service levels, terms, conditions, and pricing. These steps will provide transparency to facilitate agencies' ability to compare potential provider pricing against their legacy operations costs-an essential component of building a credible business case for any type of cloud migration. In earlier shared services initiatives, such as financial management, the lack of such standardized information on pricing and service levels in the first few years proved a major impediment to progress, as agencies faced decisions about alternative solutions that were often based on unreliable cost data from potential vendors.
Finally, GSA will need to establish and communicate its own schedule for cloud services founded in the pricing for the services with different cloud venders..
Summary of Key Observations
Although cloud computing offers potentially significant savings to federal agencies by reducing their expenditures on server hardware and associated support costs, chief information officers, policymakers, and other interested parties should bear in mind a number of practical considerations:
Given these observations, we offer the following recommendations:
Cloud computing has received executive backing and offers clear opportunities for agencies to significantly reduce their growing data center and IT hardware expenditures. However, for the government to achieve the envisioned savings, organizations charged with oversight, such as OMB, NIST, and GSA, will have to facilitate progress, and departments and agencies will have to carefully select and plan for future cloud scenarios that yield the best tradeoffs among their respective costs, benefits, and risks.
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