PWC published a study last year on the Future of IT Outsourcing and Cloud Computing, we checked it out because we continue to believe that the Virtual Private Cloud (VPC) is the ticket to unlock and tip the market toward IT as a Utility. See my earlier Digital Bridge Partners blog post here.
PWC argues, no surprise that the Cloud will have a profound effect on how Corporate IT from SMB to Enterprises will manage their IT infrastructure. The graphic below suggests that within 3 years, nearly 2/3rds of all IT infrastructure will run on Private and Public clouds.
What’s more interesting is that 39% of all IT infrastructure will be managed by a Service Provider (in either a Private or Public incarnation), most of which will be Private Clouds.
So, let’s talk about what this all means from an Economics point of view. The Journey to the Cloud is really about one big thing, and that’s business transformation; in short – allowing businesses to take advantage of the economies of centralized supply, improving resource utilization, and freeing IT from maintenance to drive IT agility and, ultimately, IT as a driver of business model innovation.
To understand the role of the Private Cloud in driving IT down this business transformation path, its important to understand the Journey from Virtualization to the Cloud. The following graphic shows in simple terms how an IT Org goes from the ‘pre-cloud stage’ of Virtualized, On-Prem (which has no cloud economies) to Opex, Off-Prem, Multi-Tenant (which has all the cloud economies).
The first step is to Private Cloud Stage 1, which is Capex, On-prem. This has the advantages of not being very disruptive, but also not being very valuable. Sure companies get some self-service and automation and IT orgs learn about becoming internal service providers, but bottom line, is that there’s not a lot of evidence that this really is a huge business transformation.
It is only when we move into Stage 2 of Private Cloud which involves some aspect of Opex (e.g., using a Service Provider to deliver a Virtual Private Cloud) that we start seeing the business model transformation. Stage 2 is only a start because the cloud is still sitting on premise which means that it costs more money to operate and probably has more of a semi-fixed (aka capital cost) element intrinsic to it. But Stage 2 does deliver some aspect of opex and that’s good from a resource utilization level; the service provider owns the equipment and charges a monthly fee, but with some less than pure pay-go features). Also, the SP is managing the cloud so IT is freed to innovate.
It’s in Stage 3 where the real business benefits come. The Private Cloud is managed in the Service Provider’s facility which means that though the servers are not multi-tenant, much of the remaining infrastructure is and its therefore delivering economies of centralized supply. Staff, facilities, networking, broadband, maintenance and other elements of the service are costs which the Service Provider can spread over other client deployments and that’s what makes Cloud Economics WORK.
Stage 4, which is pure Multi-tenant may not see dominance in the short-term due to security or performance issues, but its interesting to observe that years back everyone said the same thing about Salesforce.com not being able to handle proprietary data and performance requirements for CRM in a multi-tenant environment. But, $2B in revenues later, we know who won that argument.