A framework for estimating the value of cloud computing

The second review in our series on cloud computing economics  is on the paper “Do Clouds Compute? A Framework for Estimating the Value of Cloud Computing” by M. Klems et al.  The authors are presenting a framework for comparing the two cases:  Purchase a service from the cloud or buy hardware and set up your own IT infrastructure. The framework  is based on a certain business scenario specified by the following parameters:

  • business domain
  • key business objectives
  • demand behaviour
  • technical requirements derived from business objectives and technical behavior

Basically the framework is built in a way that if those four criteria are specified, it is possible to create a business case for the cloud computing service and a reference case to compare it with. Both cases further require to enumerate the resource usage in terms of storage, processing power and data transfer volume. The following figure illustrates the template for the framework.

Framework (taken from 1.)

Now let’s a look a littler closer at what the model addresses. Talking about business domain they consider the following possibilities: internal processes, B2B, B2C and collaboration with business partners . The domain is quite tightly connected with what they see as business objectives: cost efficiency, short time to market, no SLA violation, a provisionable and scalable standard environment.  Regarding demand behaviour they address the usual challenge of meeting demand with IT resource capacities. They mention two types of opportunity costs to reflect this challenge. The opportunity costs of under-utilization is wasted compute resources and the opportunity cost of over-utilization is losing customers. Both are not wanted. When it comes to technical requirements, they are a consequence of the business objectives, e.g. time to market would translate into deployment time and unpredictable demand would translate into the need for elasticity.

Regarding cloud computing costs, the paper describes that cloud computing service providers apply a utility computing model to calculate what to charge their customers. So their customers need to estimate the demand in terms of storage, data transfer and processing power. They raise the point that a scheme to make service offers from various providers comparable was needed. But they did not offer any hint on how to achieve this.  The paper also mentions indirect costs like learning to use tools and gaining general experience in using cloud computing technology.

To calculate the cost of the reference model they suggest the following. Although the model can be as complex or simple as wanted it needs to be possible to derive resource specification similar to the cloud computing specification. They suggested to use Gartner’s TCO as a basis and beef them up to account for certain requirements like time to market, customer satisfaction or quality of service related to service level agreements.

Critics

This paper has made it into our top three list as it  presents an interesting framework for estimating the value of cloud computing. We see this framework as a very good start to the whole topic of cloud computing economics.  We suggest the following questions and aspects to be addressed in the future work on this topic.

Although the short term goals are included, how do we integrate the strategic perspective and long term goals into the framework? Especially for established businesses it will be important to align their IT investments with their strategic goals.  It will therefore be necessary to make sure, that the decision made on IT pays off in the long run. Especially costs for migrating established IT infrastructure have to be amortized.

Where do we see the benefits of the scenario (either cloud or alternative) in the framework? The costs are clearly integrated into the framework, the benefits are missing. Although it is possible to see benefits as as cost savings, it would be clearer to distinguish between both.

As the authors themselves pointed out already, the whole framework will really make sense when financial numbers are added. As the framework is right now, it can only be used as a work flow diagram to address all parameters that go into the model in a consistent way.  It will enable decision support with numbers.

Where do the risk considerations (robustness against price changes etc.) go in? We suggest to integrate certain risk parameters into the model to be able to make a clear risk/benefit analysis and to reach a decision based on the simple question: Is the benefit big enough in order to justify the risks?

Finally, as the authors mentioned also,  we would be interested in some reproducible recipe to make the price offers from different cloud computing providers comparable.

Again we want to state here, that this is a thorough paper on the topic and we will certainly use it in our efforts to build a holistic decision support tool for the economics of cloud computing.

  1. M. Klems, J. Nimis, and S. Tai, “Do clouds compute? a framework for estimating the value of cloud computing,” in Designing E-Business Systems: Markets, Services, and Networks: 7th Workshop on E-Business, WEB 2008, Paris, France, December 13, 2008, Revised Selected Papers, 2009, 110.
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About Georg Singer

Georg Singer is an analyst at the University of Tartu in Estonia. He works for the institute for computer science on cloud computing economics.

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