Menu
The Case Against Cloud Computing, Part Four

The Case Against Cloud Computing, Part Four

We tackle the fourth big argument against cloud computing: TCO vs. in-house servers. The real maths may surprise you.

Here's what I turned up.

First, I turned to everyone's favorite research tool: Google. There is a well-established school of cost accounting called Activity-based Costing (going, inevitably, by the moniker ABC). I learned about it during my MBA program. So I researched it. There's a ton of ABC literature on areas it has been applied, especially in manufacturing-and, by the way, ABC is the real deal; when it's applied it can provide real enlightenment about the true cost of creating a good or providing a service. On the other hand, I couldn't turn up a single example of ABC applied to IT. Nada. Zip. Either it's not an interesting application of ABC, or it's too hard. But it doesn't exist.

So I then turned to everyone's next favorite research tool: the wisdom of the crowd, expressed via LinkedIn. I posted a question to my network asking if anyone knew of good studies of internal IT organization costs vs. outsourcer costs.

I got a number of replies and actually had an extended dialogue with a fellow named David Moufarrege, who has had a long career in outsourcing, and specifically worked in outsource proposal pricing. I asked him about his experience in doing this pricing and he told me that one of the biggest problems his company would face in making a proposal is that the IT organization being proposed to didn't really understand their true cost structure. IT organizations would count up the number of machines, assign a putative cost, do a headcount review, and assert an overall cost. David's company would then have to point out that there are software licenses associated with the machines, including management software, etc., etc., to come to a more realistic cost picture.

In turning to the outsourcer side, I asked David how they knew their own costs of running a set of machines and so on to enable a bid to be placed. He noted that the pricing was typically parity-based; that is, the number proposed is typically a comparison to the IT organization's own costs (after suitable adjustment as noted just above). So I guess the outsourcing motto really is "Your mess for less." Outsourcers establish a current running cost for the IT organization doing the work itself and then bids something less than that number and figures it will make money by spreading labor costs across multiple customers (e.g., an Oracle DBA manages databases for four different companies; each company's share of that DBA-1/4 his or her loaded salary plus outsourcer profit margin-is much lower than the cost of each company employing its own Oracle DBA).

When I queried David about the pricing of an individual system (to establish a fairer cost comparison to Amazon, the point of this exercise), he noted that outsourcers try and avoid a menu pricing arrangement, preferring to provide an overall price, thereby precluding the ability of an IT organization to comparison shop-this reinforcing one of my old truisms: "everyone loves transparency-in somebody else's business." And, in fact, it may be that outsourcers themselves do not really know what it costs to run a single piece of equipment; one response to my LinkedIn query was a suggestion that I speak to a particular individual at one of the very large outsourcing firms, as his current assignment is figuring out its true cost of service.

Join the CIO Australia group on LinkedIn. The group is open to CIOs, IT Directors, COOs, CTOs and senior IT managers.

Join the newsletter!

Or

Sign up to gain exclusive access to email subscriptions, event invitations, competitions, giveaways, and much more.

Membership is free, and your security and privacy remain protected. View our privacy policy before signing up.

Error: Please check your email address.

Tags cloud computing

More about ABC NetworksAmazon Web ServicesC2etworkGoogleLinuxMicrosoftOracleStratus

Show Comments
[]