Does the cloud mean big data centers are dead? Economics says no

IT industry futurists who proclaim the end of data centers as we know them forget perhaps that some enterprises are not likely to give proprietary solutions away to others -- and that even cloud service providers need the economics of scale to succeed.

I've been hearing from the PR representatives of more than one industry futurist who are presenting the message that the concept of the data center is changing. They are proposing that enterprises are re-thinking the building stuffed to the gills with computers, storage, networking, power, cooling and other equipment that supports their internal IT operations.

These futurists are suggesting that the industry is moving away from large centralized data centers to many smaller data centers that are a combination of the company's own data centers and those offered by cloud service providers. While the idea appears enticing on the surface, some of these pundits appear to have forgotten basic economics.

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One must remember that there are two different reasons enterprises have IT departments. One reason is that the company is offering an IT-based product or service that relies on its own data, proprietary applications and proprietary processes. Another reason is that the company uses IT based data and applications to support non-IT based products and services. How these enterprises see their IT resources often can be related to whether IT is the foundation of a product or service or if it is supporting something else.

IT-based product

Enterprises that offer an IT-based product or service seldom can purchase everything they need to create and deliver their product. The processes, the data that support those processes and even the applications are custom and not something these companies are willing to share with someone else.

It is somewhat unlikely that this type of enterprise is going to be able to find an off-the-shelf software-as-a-service offering that will help them create and deliver their product. These companies are likely to use their own data center rather than looking to a service provider.

These enterprises, on the other hand, may choose to purchase a cloud service for non-essential applications; that is, something that is not creating their product or service, such as collaborative computing, customer relationship management and the like.

Non-IT product

Enterprises that are offering a non-IT based product or service often see their IT infrastructure and staff as a necessary cost of doing business. Companies in this category may fall into categories such as manufacturing, distribution, health care and the like.

Typically, companies in these categories see IT equipment and staff as a painful part of doing business. They typically are looking for ways to reduce their overall IT spend just the way they're constantly seeking ways to lower other costs. Many would love to hand the whole thing off to someone else. Depending upon the market they serve, complying with regulations or laws might make out-sourcing all of their IT infrastructure impractical.

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These enterprises are likely to see cloud computing as a way to outsource portions of their IT infrastructure. They'd love to reduce their IT footprint and reduce their overall costs of doing business.

Economics come into play

Data centers are expensive tools that companies use both to manage their IT costs and to achieve their goals for performance, reliability, and manageability. This has led organizations, including cloud service providers, to install all of their computing, networking and storage equipment as well as the necessary power supplies, cooling and security into a small number of large facilities. They depend upon the economies of scale to reduce their costs.

While these companies might distribute their IT infrastructure to improve local levels of performance, to reduce the number of single points of failure, or to comply with local regulations making it necessary to keep customer data in-country, it is unlikely for them to deploy a number of small data centers. Deploying a smaller number of larger facilities would allow these enterprises to purchase power, real estate and the necessary equipment in volume and reduce the overall cost. It would also make it possible to reduce overall staffing costs as well.

Snapshot analysis

Since large enterprises often have divisions that offer an IT-based product or service as well as divisions that offer a non-IT product or service, it is unlikely that they will totally out-source all of their IT infrastructure. Custom and proprietary workloads are likely to stay on-site and under the company's direct control.

Even if an enterprise chooses to use the services of a cloud provider, the cloud provider is likely to use its own large data centers to reduce their overall costs.

So, a move to cloud services doesn't equal a move to numerous small data centers. What is happening is that the industry is seeing a change in who owns the real estate, the systems, the networking, the storage, the software licenses and who employs the staff to manage those resources.

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