At a cloud computing conference in New York in June, a number of speakers pointed out that the cloud is moving past the hype stage and is beginning to deliver tangible benefits to organizations. These improvements include increased flexibility and agility.
But moving to the cloud can also mean added costs, some of which might be unexpected, according to IT executives whose organizations have implemented cloud services or are considering them.
While these types of costs don't necessarily prevent companies from getting real business value out of cloud computing initiatives, they will have an impact on the overall cost-benefit analysis of cloud services.
Moving and storing data
It can cost tens of thousands of dollars a year to move large volumes of data onto public cloud services and to store that data over long periods of time. Many companies might not realize the expenses involved.
"A one-time move can [cost] thousands of dollars," says Hernan Alvarez, senior director of IT and operations at WhitePages Inc., a Seattle-based company that provides online contact information for more than 200 million people and 15 million businesses.
Much of the unexpected cost of moving data is for network bandwidth -- cloud providers might charge upload and download fees -- and other costs, including internal labor. "People think there are no labor costs [with the cloud], but as you scale up [to] handle workload, there's a complexity with managing large numbers of cloud instances, just like managing a large number of servers," Alvarez says. Another big cost is for long-term storage of data on the cloud. "When you consider the data growth rates, over the next three years the life-cycle cost of data can be really high," Alvarez says. "You continue to pay for that every month" when data is stored in the cloud.
But the cost of using the cloud "is only an unexpected cost if you don't fully comprehend the cloud model," he says. "If you think about CPUs, capacity and storage [needs] and chart that over time, you can get a pretty good handle on what the costs are and if you can do it more cost-effectively internally."
WhitePages explored using the cloud for data backup, but after extensively evaluating eight vendors, the company determined it would be much too expensive -- as much as three to four times what it would cost to keep it internal, Alvarez says. So the company opted to handle long-term data storage internally, on its private cloud.
In general, though, using public cloud services for purposes other than storage eliminates the need to deploy and maintain the applications internally. The company has been using public cloud services for about two years and now uses 11 different cloud-based applications from service providers including Salesforce.com, SuccessFactors, ADP, WebEx and Yammer. This has led to cost savings that greatly outweigh any of the unexpected costs, Alvarez says.
Integrating apps from multiple vendors
Pacific Coast Building Products, a Rancho Cordova, Calif., provider of building products, wants to start using cloud computing in a big way, and has evaluated cloud services from several providers. But the company has limited its cloud usage so far because the economics are not quite there yet, says Mike O'Dell, CIO.
One of the reasons for this is the difficulty of integrating software applications from disparate vendors on the cloud, and the fact that providing this integration on its own would drive up the cost of cloud computing for Pacific Coast.
For example, the company uses Microsoft Exchange for email and Cisco's Unity Unified Messaging for voicemail, and is interested in using both of these applications as cloud services. "Integration between [these applications] in the cloud, at least the last time we looked, wasn't there," O'Dell says.
Without the integration, users wouldn't be able to leverage some of the capabilities they have now, such as automatic deletion of voicemail messages on their phones when they receive the messages via email.
The same sorts of integration challenges exist with other applications that are larger and more complex, such as ERP, O'Dell says.
"On the SAP side, for us to put that in the cloud means we have to give up features or spend a lot of money on integration," O'Dell says. "Maybe it's just a matter of immature technology, but the integration side is where the hidden costs are. If you don't look at this right out of the gate, you might not be as happy with the economics at the end as you thought you would be."
Not every application is ready for the cloud, and that can result in added costs for cloud users.
"We bumped into some expense that we did not expect for testing and debugging a vendor app that had not been run in a cloud configuration before," says Bill Thirsk, vice president of IT and CIO at Marist College in Poughkeepsie, N.Y.
The college was moving a large-scale ERP system onto a private cloud, using servers that were not yet approved by the vendor. Marist uses its private cloud to provide online services such as registration and billing inquiries and payments to students, faculty and research organizations.
All told, Thirsk says, "99%" of the college's ERP migration activities "went very smoothly, and overall we saved hundreds of thousands of dollars by using a cloud configuration." But, he explains, "stabilizing the system within a cloud that already supported 900 virtualized servers gave us quite a challenge."
The added expense was to "untangle the maze of what versions [of] the operating systems and databases would work," Thirsk says. "It was [a] matter of changing some code. It took some time and effort to figure out exactly what lines needed to be changed."
Some applications might not yet be primed to take full advantage of the capabilities of cloud computing, and this can ultimately raise the price tag.
"In our case, we made the assumption that the ERP programming was sophisticated enough to take advantage of all the processors, memory, caches, storage devices and network connections that the cloud configuration offered," Thirsk says.
But it wasn't, and the college invested a "considerable amount" of application developer and systems programmer time to revise the software code. "So far, we have seen a 30% increase in performance, but it wasn't free," Thirsk says.
Rent and utilities
The cloud can introduce IT executives to expenses that normally don't come out of the technology budget. These costs might not be initially evident to IT organizations that are accustomed to having internally hosted systems.
"There are, of course, many costs associated with hosting a system internally, but not all of them, like power and rent, are paid out of my IT budget," says Jonathan Alboum, CIO at the U.S. Department of Agriculture's Food and Nutrition Service (FNS). "With cloud, these basic infrastructure charges are baked into the overall cost, so I'm now paying for some things that previously didn't come out of my IT budget."
FNS has been using a cloud service from Amazon.com since the summer of 2010 for an application that supports the agency's Supplemental Nutrition Assistance Program (SNAP), which used to be known as Food Stamps.
The program, called the SNAP Retailer Locator, provides an online map that helps people find retailers that accept SNAP debit cards. FNS opted for the cloud for this application because it allowed for a quick launch of the program and was highly scalable, among other reasons.
Alboum says he needs to ensure that he has available funds to cover the new monthly costs. "Overall, [the cloud] is very manageable and likely results in overall lower costs for the government," he says. "But it is different than what we've traditionally experienced."
It's not a matter of the cloud service costing more than in-house hosting. "I think of this as a cash-flow issue," Alboum says. "If I'm going to pay monthly costs, I need to have available budget to cover those costs at the time I incur them. In the more traditional model, I would purchase hardware and associated services in a lump sum when I had the budget. The new model is likely less expensive, but requires a change to budgeting practices."
Pilots and setup costs
Be aware that free pilot programs for cloud services can quickly turn into expenses.
"Many providers offer free pilots, with various approaches about when these free pilots turn -- automatically -- into paid services," says Frank Ridder, research vice president at research firm Gartner. "Some pilot schemes are very short."
Before undertaking any pilot program, organizations should negotiate all contract terms and minimum discounts that are due if the pilot is successful, Ridder says.
Setup costs are another area to look out for. "Clients often get attracted by cheap ongoing [service] prices, and do not see the sometimes high transition cost, integration cost, etc.," Ridder says. For a service like email, these costs can be easily $10 to $30 per seat, he explains.
Much about the cloud is still relatively new, and experts say organizations evaluating cloud services need to look at both the costs and potential benefits. In a report on cloud services in April 2011, Gartner noted that IT executives "should take steps to manage inherent risks and unexpected costs during the cloud services revolution."
The services and cloud sourcing are "immature and fraught with potential hazards," Ridder notes. "Cloud computing is driving discontinuity that introduces exciting opportunities and costly challenges. Organizations need to understand these changes and develop realistic cloud sourcing strategies and contracts that can reduce risk."
He says the services sourcing life cycle includes four main elements: sourcing strategy, vendor selection, contracting, and management and governance.
"The life cycle is a critical area to plan and manage, regardless of whether organizations source their IT services through internal or external resources," Ridder says.
Bob Violino is a freelance writer in Massapequa Park, N.Y. You can reach him at firstname.lastname@example.org.