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[Editorial Note: The author will be presenting at Cloud Expo New York (June 6-9, 2011), where his session is entitled "Monetization Strategies for Cloud Computing Services" and his co-presenter will be Penelope Everall Gordon of of 1Plug Corporation.]

As the hot, new "trend of the moment" in technology, cloud computing is touted to be a transformative way to provide computing resources faster and more efficiently through shared infrastructures. Due to the considerable hype surrounding the Cloud, organizations considering cloud as an option will need to begin seeing that this new model does indeed offer improvements in cost, revenue and margins in order for them to gain buy-in from their executives to pursue the model. Because the lines of business and the IT departments in most organizations often speak different languages, it's critical for IT departments that are considering cloud adoption to show how a cloud model will help their businesses realize a return on their investment (ROI).

An initiative from The Open Group has developed a set of considerations for how to build and measure ROI from cloud computing during the early stages that also speaks to a business perspective. Clearly, these indicators will change as the technology matures, but by implementing ROI models as part of the planning process for cloud implementations, companies can begin to take advantage of the potential cloud computing offers right away - from both incremental improvements to disruptive transformation of business processes.

The Promise of the Cloud
Cloud computing has been described as a technological change brought about by the convergence of a number of new and existing technologies. The promise of cloud computing includes the following key technical characteristics:

  • The ability to create the illusion of infinite capacity; performance is the same if scaled for one, one hundred or one thousand users with consistent service-level characteristics.
  • Abstraction of the infrastructure so applications are not locked into devices or locations.
  • Pay-as-you-go usage of the IT service: you only pay for what you use with no or minimal up-front investment costs. You typically just use the service through a connection or device.
  • Service is on-demand and able to scale up or down with near instant availability. Typically no forward planning forecasting is required.
  • Access to applications and information is obtained from any access point.

This is only half the story. These technical characteristics can also be found in non-disruptive technology solutions. The rate of change and magnitude of the cost reduction and specific technical performance impact of cloud computing are not just incremental, but can give a five-to-ten times order of magnitude improvement.

The Capacity-Utilization Curve
The famous graph used by Amazon Web Services illustrating the capacity versus utilization curve has become an icon in cloud computing. The model illustrates the central idea around cloud-based services enabled through an on-demand business provisioning model to meet actual usage.

This matters to businesses because one of the core precepts of cloud computing is to avoid the cost impact of over and under provisioning of computing resources. This is in addition to the opportunity for cost, revenue and margin advantages of business services enabled by the rapid deployment of cloud services with low entry costs and the potential to enter and exploit new markets.

We contend that years from now when cloud computing is seen in an historical context, the capacity versus utilization curve will be seen as an iconic model that had the same effect as previously well-known business models such as Moore's Law, the technology hype/innovation lifecycle developed by Charles H. Fine and Clayton Christensen, and the Boston Consulting Group's Growth-Share Matrix.

But what do these iconic models mean for business? Matching capacity and actual utilization on demand may improve operational efficiency, but is that all there is to it? Capacity and utilization are Key Performance Indicators (KPIs). They measure how much or how little something is being used. But is this aligned with and being used to generate ROI?

Race to the Bottom versus Quality of Service (QoS)
The positioning of cloud computing, while initially seen as a disruptive technology influence on both buyer and seller prospects, is now evolving into a trade-off between low-cost arbitrage and added value to QoS.

The term "race to the bottom" refers to the competing drive between participants in a market driven by the need to make the greatest cost savings. The term is often seen in a negative context, as lower costs and margins are seen as a detriment to the participants. Massively scalable services from cloud computing providers have the effect of driving down costs and prices, as the dynamics of competition are shifted by the presence of potentially rapid cost reductions and huge data center investments.

The counter-balance to this is the QoS and the associated Cost of Service (CoS) that characterizes the value of the cost per unit of performance provisioned. The differentiator of cloud computing is not just the utility infrastructure computing services, but includes all the higher-level services that enhance and build business service value. We see this as the influence and scope of the movement from IT-centric to business-centric services across a wider services continuum, with utility services for infrastructure at one end and the business-centric software and business processes delivered as a service from the cloud at the other.

This issue has a direct bearing on cloud computing ROI and how it can be measured, including:

  • Pricing and cost of cloud services
  • Funding approaches to cloud services to address capital leverage
  • ROI that frees up cash flow issues for IT and Business
  • KPIs that measure real business value rather than just levels of availability
  • Total cost of ownership (TCO) that targets optimal licenses and assets
  • Risk management and mitigation strategies to leverage trade-off rewards
  • Evaluation process for cloud services selection, transitioning, running and changes

New Technology Adoption from a Buyer's and Seller's Perspective
Sellers of resources and services characteristically focus on their operation and technical development, and how they can enable effective business models for existing and potential new customers and markets. Buyers, on the other hand, are typically not concerned with how resources or services are generated and delivered. They seek to understand whether their businesses can be supported by the products or services, and whether these can be reliable and cost-effective. Buyers want to know the choices offered and how they can enhance or swap resources and services for improved business performance.

In cloud computing, the common themes engaging sellers and buyers in the new technology provisioning model includes three key questions:

  • How does cloud computing compare to traditional IT? This principally relates to the comparison of service-level performance and license costs.
  • What can I not put in the cloud? Answers typically include UNIX systems, mainframes and very high I/O applications, but pretty much anything can be co-located or hosted in an elastic virtual container environment. Beyond the technical definitions there are business processes and provisioning models that set cloud computing apart from its predecessors of utility computing and virtualization.
  • How does cloud computing impact revenue and budget lines? These issues involve the cost/performance enabled by virtualization and economies of scale and the lowered need for up-front investments. Movement of revenue to cloud providers may need to be balanced by sale of added-value services.

There are many definitions and viewpoints provided by the sellers of what is now termed "cloud computing."  Much of the vocabulary used is defined from the perspective of IT performance and capacity and the impact on the business consumers of the end services and how they compete and deliver products and services in their industry.

Many business IT departments have addressed emerging trends through actions to drive cost reduction and leverage IT service providers' adoption of cloud style services. Many industry organizations and leading IT suppliers of software, hardware and services seeking to address their customer needs have vigorously evaluated and followed a cloud-style strategy. The challenges and issues are in the transition from the current traditional IT to the potential capabilities of cloud computing. They must be expressed in a way that business and end users can understand and relate to investment, cost improvements or business performance.

Building Return on Investment from the Cloud
The problem with using the view of capacity and utilization alone is that it is a technology buyer/seller viewpoint essentially based on KPIs rather than business benefit metrics. This model is concerned with two measurements:

  • IT Capacity - as measured by storage, CPU cycles, network bandwidth or workload memory capacity as an indicator of performance
  • IT Utilization - as measured by uptime availability and volume of usage as an indicator of activity and usability

But effective cost/performance ratios and levels of usage activity do not necessarily imply proportional business benefits. They are just indicators of business activity and are not in themselves more valuable than lower operating costs. There are, however, business metrics that translate the indicators of the capacity-utilization curve to direct and indirect benefits to the business.

Speed of Cost Reduction
The speed and rate of change of cost reduction can be much faster using cloud computing than the traditional investment and divestment of IT assets. In cloud computing the buyer can move from a CAPEX to an OPEX model by purchasing the use of the service rather than having to own and manage the assets of that service. This responsibility is transferred to the service provider. The use of cloud computing can also potentially mean a movement to a pay-as-you-go- style billing model, which can have different obligations compared to traditional IT ownership.

The key issue is the ability to adopt and remove the service either at the point of use (to scale up or down) or to make choices to use new services or change service providers. There is a trade-off between the benefits of speed, cost, and Quality of Service from a particular cloud service provider and their services versus the choice of alternate services and cloud solutions. The cost of change in an ROI business case in cloud computing as the choice of select cloud services is more stable and more cost-effective than traditional ownership.

Optimizing Ownership
The use of IT has become an enduring feature in all organizations today. The investment in data, knowledge and infrastructure assets and software code now represent many lifeblood operations for businesses. But many of the issues of cost of ownership are often decoupled from choices made during the selection of new IT, and the impact on the long-term running and maintaining of these IT services and subsequent business usage is not properly considered.

A key aspect of moving to cloud computing is the ability to select hardware, software and services from defined design configurations to run in production. Cloud computing seeks to bridge the design-time and run-time divide and optimize service performance through the goal of a more cost-effective asset management lifecycle process for the IT portfolio and identify which assets need to be supported in this way. The key ROI benefit here is optimization of the total asset portfolio.

Rapid Provisioning
Elastic provisioning to scale up and down based on demand creates a new way for enterprises to scale their IT to enable business to expand. Cloud computing can compress provisioning time from a week to hours, providing not just time-savings but defining a new business model. Buyers and sellers can view rapid provisioning as a marketplace of services. Sellers can offer rapid provisioning services that sustain the buyer's needs for existing IT services, offer choices for innovation, and enable rapid introduction of new technology. The impact of rapid provisioning on ROI business cases can be profound.

Increased Margins
One of the core precepts of cloud computing is to avoid over- and under-provisioning. This is enabled by rapid deployment of services with low entry costs and the potential to enter and exploit new markets. The potential for new business models that cloud computing provides can enable businesses to pursue new and existing markets with a rapid entry and exit of products and services. It also removes the need for additional infrastructure to test and enter new markets. For ROI business cases, cloud computing can help the enterprise make more money or make better use of investments with the potential of new markets and services.

Dynamic Usage
Traditional licensing associated with ownership, number of users, support and maintenance costs, and services are being challenged by the pay-as-you-go model found in on-demand cloud computing. Cloud computing is more than restructuring software and hardware licenses into a kind of periodic rented or lease license. It targets the end use of services at the point of the real business need of the number and scope of users of the IT service. A cloud model can change the ownership model from buyer to seller in the sense that IT becomes a commodity purchase, and buyers focus on outcome-based performance and choices. The impact of dynamic provisioning on the cloud computing ROI business case is that the façade of service management becomes more "digital." The expectation of Internet services is translated to the business world where cloud computing enables online service, catalogs, self-service, and automated services.

Risk and Compliance Improvement
The green sustainability issues are seen by a number of industry observers as an argument that moving into a cloud environment will help organizations improve their carbon footprint. The benefit to the economic and emission footprint from the use of shared services is expected to have an improved impact compared to leveraging existing assets. A secondary effect is the growth of more cloud service users as cloud computing takes off. As the cost and emissions footprint per cloud service falls, more services per cost can be consumed. As more advanced services, such as large workload and cost sensitive processing, are moved to the cloud, then "usage creep" can occur as the consumption rates further increase the usage of cloud services. The impact on ROI is directly relevant to the sovereignty, security, and management of services of risk containment. Cloud domains cut across these complex issues and are directly affected by decision processes to adoption of off-premises services.

Business Skills and Dynamic Workload Utilization
Cloud computing drives the potential movement of cost-intensive tasks toward new on-demand ways to reduce those operating costs by supporting the availability of more cost-efficient services and scarce business resource skills. Focusing on the strategic business capabilities that matter to the organization can be helped by leveraging available business capabilities from effective cloud sourcing and the proper governance of elastic workloads to maintain service-level performance.

The Importance of a Business Perspective of the Cloud
From a business perspective, the way an organization operates, differentiating business process and their QoS, is key to business operating success. Identifying competitive business processes as well as standard commodity operations will improve the focus of innovative market growth and cost of service optimization activities made possible by business models based on cloud computing opportunities. Just focusing on infrastructure improvements may result in cost rationalization but may miss the impact and value of applications and business processes to the end customer. QoS is an essential ingredient in evaluating the business effectiveness. The elements of QoS are made up of infrastructure, resources, activities and services spanning the whole life cycle of business.

In cloud computing the operating challenges experienced from one customer can be proactively fixed for all other customers of the cloud service by using a shared platform. Amortization of problems is just one example of how a cloud solution can achieve more favorable QoS levels. So value can be leveraged by amortizing economic economies of scale across the collective membership potential of a service ecosystem created by the cloud.

Just looking at cloud computing from a technical infrastructure point of view is potentially missing the wider picture of the impact of technology on the business. Overall what matters is defining the value to the business. Value can be defined in many ways. It doesn't just mean the financial values of TCO and ROI, but can also mean customer value, seller provider value, market brand value, as well as technical value of the investment.

The business perspective also includes consideration of whether using cloud services can help facilitate interactions with business partners or partner organizations - for example, by using SOA or EDI through the cloud - and whether using cloud services may endanger any existing interactions, where suppliers of data impose particular conditions for handling confidential data.

The work of the Cloud Business Artifacts (CBA) project in The Open Group Cloud Computing Work Group is seeking to identify the key cloud buyer questions and in a language business can understand and use to target solutions to meet real business requirements. ROI models such as this one will continue to evolve as the technology matures.

About Mark Skilton
Mark Skilton is a Director at Capgemini, Strategy, Global Infrastructure Services. He is also the Co-Chair of The Cloud Computing Work Group, The Open Group, an International Standards Body. He has published papers on Cloud Computing business metrics through The Open Group and has spoken at numerous leading international conferences on cloud computing business models. He co-founded SyntheticSpheres.com with Vladimir Baranek, a foundation for next generation business strategies. The views expressed in this article are his own and not of his past, current or future employers. Contact him at mrskilton@gmail.com.

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