Is adopting the cloud a money-losing mistake?

Is adopting the cloud a money-losing mistake?

Summary: Everything is in the cloud.It certainly feels that way, even though it's patently untrue.


Everything is in the cloud.

It certainly feels that way, even though it's patently untrue. Cloud computing is everywhere, it's a buzzword, it's on the tip of everyone's tongues. To the cloud, I say! To the cloud!

But new research from McKinsey & Co. says that trying to adopt the cloud model would be a money-losing mistake for most large corporations. The research is being presented at a symposium this afternoon sponsored by the Uptime Institute, an organization that focuses on improving the efficiency of data centers.

The McKinsey study, "Clearing the Air on Cloud Computing," concludes that outsourcing a typical corporate data center to the cloud would more than double the cost. The study uses Amazon's well-known Web Services as the model for the price of outsourced cloud computing. According to McKinsey, the total cost of the data center functions would be $366 a month per unit of computing output, compared with $150 a month for the conventional data center.

Moreover, the labor savings resulting from a move to the cloud has been exaggerated, and it's still a costly, labor-intensive endeavor to provide care for company software and help to users.

In other words: don't think the cloud means instant savings, because it doesn't.

(Owning the hardware is cost-effective for most corporations, though: there are significant depreciation writeoffs for tax purposes, according to the study.)

On the other hand, the cloud can be beneficial for small and medium-sized companies, typically with revenues of $500 million or less.

Still, the study suggests that IT pros focus mainly on adopting virtualization, which offers improved efficiencies without too much overhead (so long as it doesn't disrupt everything, says our own Dennis Howlett). According to McKinsey, the average server utilization in a data center is 10 percent, and can be easily increased to 18 percent by adopting virtualization.

With more aggressive adoption programs, servers in corporate data centers can reach up to 35 percent utilization, McKinsey said. [via]

UPDATE 2:35 p.m.: IBM provides a counterpoint to the survey's findings:

IBM believes this view neglects to consider that large enterprises are not going to outsource their entire data center operations to a public cloud like Amazon's. Different workloads demand different support, and as such, there are certain applications that shouldn’t be moved to a cloud model.

Rather, IBM is seeing that many clients are taking advantage of their existing resources through a mix of both public and private cloud models to more cost-effectively support specific applications like business resiliency and information protection services, as well as collaboration services. According to IBM research, companies can save up to 80 percent on floor space and 60 percent on power and cooling – and cloud computing can deliver triple asset utilization, making the resources they already own more efficient. Utilizing overflow capacity in the cloud for highly variable or seasonal workloads is another attractive opportunity which can reduce inefficiencies and cut costs.

Topics: Hardware, Cloud, Data Centers, Storage

Andrew Nusca

About Andrew Nusca

Andrew Nusca is a former writer-editor for ZDNet and contributor to CNET. During his tenure, he was the editor of SmartPlanet, ZDNet's sister site about innovation.

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  • The cloud is many steps backward...

    The loss of control over your applications, data, security, accessibility, accountability, and much more is seriously many many steps backward from where we are now. The cloud has very limited usefulness for very specific applications and the hype over it is drastically overblown. We progressed past general use client-server models a LONG time ago. It would be stupid to head back that direction.
    • It used to be that most corporations...

      ...generated their own electricity, but over time they realized the economy of scale of buying from a grid. Cloud computing is the same thing.
      • But when I buy electricity...

        When I buy electricity, I don't have to give up my intellectual property rights. I don't have to worry about rival businesses stealing my data. I don't have to worry about the electrical company locking my power in a proprietary format so if they go out of business I have nothing left. I don't have to worry about electrical companies going out of business.

        Also there are laws in place that say the electrical company can't just cut me off with out prior notification.

        Electric companies are heavily socialized. They are designed so they basically "can't fail". More socialism, more taxes, more monopolistic practices that damage the consumer and destroy free markets.
        • Duh. It's a software purchase

          You mention:
          1) Legalities
          2) Security
          3) Exit costs and strategies
          You have to evaluate these factors for ANY software purchase, even ones in the cloud. Don't buy services where you lose your copyright. Don't get your data tied up in proprietary formats. Get great tools and an API which allows easy backups. Have an exit strategy.

          I still don't get how its different than planning any other software purchase.
          • Well said!

            I was going to reply but you answered well. I might add that you do get your electricity in a proprietary format, it just happens to be the same everyone else in the US uses, but take your device to Europe or most other places in the world and you'll find both voltages and frequencies are different. What if you wanted to buy an audio component but it only was available on 240VAC @ 50Hz?
          • Here you go...

            You have convertors that convert electricity to 110V/60Hz. This is pretty standard and the equation in comparison is limited to finger counting when it comes to electricty standards all over the world. Where as in information format there are no real standards when it comes to proprietory formats. And to support (convert) hose without having any insight about the structure (engineering) behind those is a greater potential for reverse engineering. And there is no guarantee that works very well.

            Ram U
          • Uh...

            [i]"Where as in information format there are no real standards"[/i]

            Ever heard of ODF?

            There are conversion applications for most data formats too.
          • Interesting response

            1. I am not stupid. The "Duh" was offensive and uncalled for just because I feel cloud adoption is expensive and has a low return for value.

            2. You summed up my concerns well but failed to offer real solutions. You simply said I need to find them for myself. I have looked for myself. So far I haven't found one cloud company that doesn't reserve the right to change the Terms of Service or the End User License Agreement. This means as a consumer, I have to sign an open ended contract for software. My other out sourced vendors don't make me do that.

            3. I understand when I buy local softare stored on local machines I also get an open ended contract. However the physical structure of the network allows me to monitor my own security, and I own the actual data stored in my network. Basically it is my responsibility to lock down my network as tight as I can. I have to handle intrusions myself and if a legal entity wants my data they have to issue my company a subpoena. With cloud adoption you don't get that type of piece of mind. In the future you might be able to buy it but I suspect it will cost you.

            4. Most of the solutions I have heard from the market place suggest a "hybrid solution" where clouds are used for some things but high security stuff is stored on local networks. The biggest problem with that is you can't eliminate the local network which is where you get the best return for value.If I still have to spend money on an IT staff and equipment, I am not saving the kind of money that cloud adoption promises.

            5. Cloud companies fail. This has already be shown in the open market place. I would have to spend money managing my vendors and managing my data. How is this a cost savings for me. I will still need to hire people to do these things and probably buy equipment for them. Again costing me money.

            6. I would hate to see cloud companies heavily nationalized as I prefer a more capitalistic model for business. So far government intervention would be the best way to prevent key cloud companies from failing.
          • Not uncalled for.

            "When I buy electricity, I don't have to give up my intellectual property rights. I don't have to worry about rival businesses stealing my data. I don't have to worry about the electrical company locking my power in a proprietary format so if they go out of business I have nothing left. I don't have to worry about electrical companies going out of business."
            "Duh" was not uncalled for -- it was simply pointing out the obvious fact that you are not required to give any of these up. You imply that you are required. Negotiate a contract with a vendor, just like you would for any purchase.

            I'm not calling you stupid. I do think you sound a little close-minded on the subject. If outsourcing doesn't work for your business financially, then don't do it. Certainly you should weigh all the costs (entrance, ongoing, and exit) before making that decision and not dismiss one out of hand.
          • I have done a lot of research

            I read the Terms of Services and the End User License Agreements. So far I haven't found one that doesn't have a clause that allows the cloud company to change the agreement with out notification.

            For example: Who owns your data? You or Google? Can Google docs and storage be accessed with out the content originator's permission? Would Google cooperate with a foreign government and turn over records of usage with out the content originator's permission?

            Now I understand Google is not the cloud.

            But if a cloud company can change the TOS and EULA then any data you give to the cloud can be effectively transfered to the cloud vendor.

            Consumers need legal and social protections from these types of practices.

            I don't want to have to sue a cloud vendor to get my I.P. back. Sure eventually that is something that could be done but it adds cost to the overall design.

            Sure I could "trust" that my vendors aren't going to go out of business, provide me with APIs (which I would have to hire someone to implement), or even security but the cost/benefit ratio doesn't favour cloud adoption as a useful business wide paradigm.

            I actually like the ideas of cloud computing but I also advocate telling others the dangers of adoption with out consumer protection.

            Think of this way, would you fell comfortable with someone accessing your health records with out your knowledge? does it happen? Sure but why hand them out to everyone on purpose. If you health care provider uses online storage with out any encryption, your records are available. Do you want to lose your job because your company accessed you health records with out your permission, found a health care danger, and fired you before you could get company health insurance? Sure if you could prove a data breach you might have a lawsuit but since you just lost your job who has more money to fight a legal battle? You or the company that just fired you? For most people it wouldn't work out in their favor.

          • The thing is, a cloud may not be the place for all your data.

            If you are a small enterprise, you may want to keep data like billing, HR and such in house. On the other hand, if you have a catalog and price lists, employee email, warehouse inventories, etc, the cloud is great for that sort of stuff. The fact is that thousands of vendors have been using Amazon and eBay as cloud providers for a long time, and most of them have had good success. I've heard a few horror stories about a certain online payment provider, but that doesn't mean that there aren't better ones out there; I suspect you get what you pay for, like everything else.

            On the other hand, there is no reason that a large company can't create it's own private cloud. HP used to sell a prepackaged cloud called the UDC, which allowed you to configure resources (storage, backup, processing, etc) on the fly using a GUI. At around US$6M starting, they were not for everyone, but rumour has it that HP sold at least six of them, and their customers were quite pleased with what they got.

            I would take it a step further and drop it all in one of Sun's Black Box MD20s, so that it could be located anywhere, and moved as needed. Since clouds assume redundancy, if a disaster hits an area, shut down that datacenter, load it on a truck and move it to another preestablished site. Downtime? How long does it take to drive there + about 6 to 12 hours for loading, unloading, dis/connecting cooling, and powering down and up. If your chiller is also in a 20 container, both can be moved with the same truck.

            No, don't think of cloud computing as the only solution, think of it as an additional tool in your box. After all, just because you buy electricity prepackaged doesn't mean you've stopped buying batteries, right?
  • A cloud is used to process data, not be the data hub

    A cloud system is an outsource for processing data on a shorter time frame where the cost would be less than trying to run the same process on their current system. If done on their own system, it will take up all their resources, and slow down production as well losing money.
    Maarek Stele
    • That is a microscopic view

      Basically, you are looking at a the underlying technology and giving a good example of where the cloud works.

      The problem with the cloud is not the technology. It is the society issues, legal issues , and security issues that are the big detractors.

      Great, you can out source a process for a better data usage. How does that get around my company having to give up our intellectual property rights? How does that prevent my competitors from stealing my data? How does that prevent foreign or local governments from taking my data? How does this prevent a cloud company from going out of business and destroying all of the business that use their services?

      The Cloud just isn't ready for prime time.
      No company or individual should be using the cloud with out some idea of the risk.
    • Very good, but

      Who owns the data? What are the odds of losing the control over the data to the hosting company? How well the supporting SLAs need to be cooked? How much of legality needs to be run through? Data ownership clarification should be the most crucial part of SLA. And I smell a lot of legal issues running about it. More and more usage of cloud computing generates a lot of legal issues in the long run and I see a need for newer branch in legal education to support these types of needs.

      In addition to Data Ownership clarification, I need to justify the cost of owning the data by comparing it hosting inhouse vs. outside. On the same lines I need to consider and cookup SLAs to support data integrity, security and data piracy. Without considering some of these terms, an enterprise should not move to cloud in a hurry. I am not discouraging cloud, but enterprises should consider all sorts of issues that might arise while moving to cloud Vs. inhouse hosting.

      My 2 cents.
      Ram U
      • Well, when you deposit money in the bank... are trusting that bank to give it back when you ask for it. Who owns the money? You do, even though the bank holds it for you. Cloud computing is the same principle, only at a younger stage of evolution.
        • I agree...

          but when a bank becomes zombie, atleast FDIC supports you to some extent. In the case of a cloud maker (data services hosting company), we don't have support like FDIC atleast for now. There is a good opening for insurance companies to sell insurances to avoid the cash damage might result in such scenarios. Of course I know you could say I need to have backup strategy. Sure, thats why I mentioned well drafted SLAs come handy and a governance around it is needed. But how many small organizations do have well drafted SLAs and governance team to control it?

          In a bank you might get some interest on your money (depedning upon the account you open up with them) and normally they rotate that money, and when you need it they give it to you back. This doesn't fit in a cloud computing scenario. They can't rotate or lend your data to some other clients of their own or use it for their own purpose. This becomes information piracy. There should be a good SLA and law/legislation to prevent these type of issues. In my previous post I made a case like those. Before some nasty legal issues open up and cases go on for a trial for a long time, there must be a law and education behind this to handle the issues that might comeup in future as quickly as possible, because cloud computing is inevitable.

          I don't see Large Mega Corporations, which live on public bailout -- also known as real zombies, would ever consider cloud as the primary option and most of the time they have teams and $ to put a great governance team that can draft and operate on a well written SLAs. But the hardworking small and medium sized shops might consider cloud would be a potential saver, and infact it is if properly operated, and how many of them will really have enterprise governance established that can mandate the SLAs and their operations. I am not against cloud, all I am saying is cloud should be treated as any other software purchase which should be properly planned and executed like any other IT operation within the firm.

          My 2 cents.
          Ram U
          • I understand your objections...

            ...but my point is, they are temporary ones. Those laws [i]will[/i] come into play, and that objection will go away. When you deposit money in the bank, the bank uses your money to make more money by loaning your money to others and charging interest. However, your money stays your money. In a Cloud, they won't lend your data, they will lend your computing resources. Your data stays your data, but while you aren't using your resources they will be put to use for other things, say searching for life outside of our solar system and figuring out the scatter characteristics of an electron striking an atom.
            Your last statement assumes public clouds; there is no reason for an enterprise not to implement it's own cloud, as many have begun. It doesn't matter if they buy a UDC from HP or a Sun Cloud or an IBM offering, or they build it themselves using Dells and Microsoft, the fact is that enterprises are [i]going[/i] to evolve to cloud computing over time as a matter of competitive pressure, because, like those computer makers that were slow to recognize the importance of the PC (DEC, DG, etc), they will get trounced by those who adopt.
  • RE: Is adopting the cloud a money-losing mistake?

    The last couple migrations I have made. Initial hosting costs went up, and the human resources and planning that went into the migration definitely drove costs up.

    Overall migrations cost money. It requires a lot of changes in process and though which can slow things down and make it painful.

    However once up and running our system performance has gone up. We can do things much cheaper than before.

    And over time our costs have gone down because of lack of lease commitments, hardware acquisitions.

    So at first its easy to see as costing more, but the overall changes introduced to your company will be positive. But not without pain.
    • Share more, please

      How have the security issues been resolved? What happens if there's a breach? Who is responsible for the integrity of your data if it gets corrupted? Do you store all data in your organization or do you use cloud resources more as a storage alternative? What sort of apps is your organization running from the cloud?

      The reduction in costs in some areas is very intriguing. However, most cloud vendors seem unwilling to accept any responsibility for their services -- if/when a failure occurs they accept no responsibility for anything, at least that's what we got pitched last week. And we did not buy.
      • on a considerably smaller scale, but can teach a good lesson

        i like millions of others used and abused my 'yahoo briefcase'. briefcase was an off site storage place for those documents and other data that i didn't want to loose to a major system failure. last year yahoo purchased flickr. they then moved all my private stuff to flickr servers. completely unsecured and open to public view. apparently it was like that for more than a month before i found out.

        should that happen to a multi billion dollar corporation, well that would be bad to say the least.