Buy IT like you buy power and realize the cloud’s true value
In the late 19th century, the manufacturers and shop owners that bought electricity from Thomas Edison’s central plants in New York, Chicago, and Cincinnati flourished, while those who continued to generate their own power floundered.
The forward-thinking companies no longer required the manpower and infrastructure to burn coal, freeing up cash and resources to pump into the development and sale of their core products. And with electric light bulbs, they showcased that innovative spirit to their customers.
The cloud today is much like the utility then.
The companies that outsource their technical infrastructure, support, and service can invest more freely and be more innovative with the products and services they’re known for.
What affords it all is an activity-based costing (ABC) model. ABC is a costing method that seeks to identify business activities and assigns the cost of each to the organization’s products and services according to the consumption by each. Different than conventional costing, ABC assigns indirect costs into direct costs1.
Here are some examples:
- Many companies still purchase Microsoft Exchange software, a server and bulk packs of addresses (of which most companies purchase way more than needed), and then hire an IT person to manage it all. But cloud-based services like Gmail let businesses pay per user of an address, only adding cost when a net new employee joins the company. Presumably, that happens when the company adds a new client or sales flow. Thus, new profit.
- AWS Redshift, announced last November2, provides a cloud service that replaces the traditional data warehouse. Unlike an on-premise physical facility, there is no capital investment for hardware, no software (and therefore, no licenses) and no extensive staffing requirement to run or operate it. There’s always enough space, and never any extra space. Companies only pay for what they use as they go, and can scale up or down without any forecasting. As you scale up, the resulting costs can be tied directly to a product line, rather than factored as a general expense of doing business.
- Ilesfay can also eliminate many of the traditional costs of storing and transferring data within an enterprise. Replicating data over a WAN requires time, an IT expense for hardware and staff, and an installment that can be sized for your business now and in the future. It often requires multi-year contracts with vendors, and in a larger corporation, there may be limitations about which vendors you can even choose.
Ilesfay has many of the same benefits as Redshift: Scale up as you need, pay for what you use. Let the IT costs track directly with business activity.
The cloud is a nearly perfect environment to apply activity-based costing. Instead of business units or workgroups having to overestimate and centralize IT expenses, they can acknowledge what an individual process or need costs and evaluate whether or not to procure the service or product. Once companies apply this they can further invest in and focus on the products and services that will help them grow, and show clients a forward-thinking, best-for-business mindset.
Richard Seroter of InfoQ described the impact of Redshift and cloud-based services best in a December 2012 article3:
In aggregate, these services begin to chip away at enterprise concerns about whether it is cost-effective and efficient to gather, store, and analyze their business data in the public cloud.
Links for story:
(1) Activity-based costing. Wikipedia.
(2) Amazon Redshift – The New AWS Data Warehouse. Amazon Web Services Blog.
(3) Amazon Makes Compelling Case for Hosting and Processing Your Big Data. InfoQ.
Cincinnati | January 22, 2013 | Chris McLennan
