Preparing for the real costs of cloud computing

Smart companies plan ahead to avoid gotchas that can blow holes in their budgets when moving to cloud services

Most experts agree: The cloud is moving past the hype stage and starting to deliver tangible benefits, primarily increased flexibility and agility.

But moving to the cloud can also mean added costs, some of which are unexpected, according to IT executives whose organizations have implemented or are considering cloud services.

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While these costs wouldn't necessarily prevent companies from getting real business value out of cloud computing, they could have an impact on the overall cost-benefit analysis of cloud services.

Moving and storing data

It can cost tens of thousands of dollars per year to move large volumes of data to public cloud services and to store that data for long periods of time. Many companies might not be aware of 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.

Network bandwidth accounts for much of the cost of moving data: Cloud providers might charge upload and download fees. And even though data and systems are being hosted off-site, there are internal labor costs. "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 data storage in 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 these costs are "only unexpected 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 considered using the cloud for data backup, but after extensively evaluating eight vendors, the company determined it would be too expensive -- as much as three to four times what it would cost to keep data internally, Alvarez says. So the company opted to handle long-term data storage on-site, in its private cloud.

In general, though, using public cloud computing for purposes other than storage eliminates the need to deploy and maintain applications internally. WhitePages has been using public cloud services for about two years and now uses 11 cloud-based applications from Salesforce.com, SuccessFactors, ADP, WebEx, Yammer and other providers. This has led to savings that greatly outweigh any of the unexpected costs, Alvarez says.

Integrating apps from multiple vendors

Pacific Coast Building Products wants to start using cloud computing in a big way and has evaluated services from several vendors. But the Rancho Cordova, Calif.-based provider of goods and services to the construction industry has limited its cloud usage so far because the economics are not quite there yet, says CIO Mike O'Dell.

Two reasons for this are the difficulty of integrating software from disparate vendors in the cloud, and the fact that Pacific Coast would incur added costs if it tried to handle the integration on its own.

For example, the company uses Microsoft Exchange for email and Cisco's Unity Unified Messaging for voice mail, and it's interested in using both of those applications as cloud services. "Integration between [Exchange and Unity] in the cloud, at least the last time we looked, wasn't there," O'Dell says.

Without integration, users wouldn't have some of the capabilities they have now, such as automatic deletion of voice-mail messages on their phones when they receive the messages via email.

The same sorts of integration challenges exist with larger and more complex applications, such as ERP, O'Dell says.

For example, "for us to put [SAP] in the cloud means we'd have to give up features or spend a lot of money on integration," he 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."

Testing software

The need to test software before migrating to the cloud can also result in unforeseen costs.

"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 the vendor hadn't yet approved. Marist uses its private cloud to provide online services such as registration, billing inquiries and payments to students, faculty and research organizations.

Thirsk says "99 percent" 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 adds, "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."

Hidden costs can also crop up if applications aren't primed to take full advantage of the capabilities of cloud computing.

"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 revising the software code required a "considerable amount" of application developer and systems programmer time. "We have seen a 30 percent increase in performance, but it wasn't free," he says.

Rent and utilities

IT executives who move systems to the cloud might encounter another unexpected cost if they suddenly find themselves paying expenses that wouldn't normally be their responsibility.

"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 the 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."

Since the summer of 2010, the FNS has been using an Amazon.com cloud service to host an application that's offered through the agency's Supplemental Nutrition Assistance Program (SNAP), which provides the benefits that used to be known as food stamps.

The tool, called the SNAP Retailer Locator, provides an online map that helps people find retailers that accept SNAP debit cards. The FNS decided to put the application in the cloud because that setup allowed for a quick launch and was highly scalable, among other reasons.

Since he's using a cloud-based service, Alboum has to pay new monthly costs and take a new approach to budgeting. "Overall, [the cloud] is very manageable and likely results in overall lower costs for the government," he says. "But it is different from 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 explains. "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. The new model is likely less expensive, but requires a change to budgeting practices."

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 cloud model is "immature and fraught with potential hazards," says Gartner analyst Frank Ridder. "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."

The cloud sourcing life cycle includes four main elements: sourcing strategy, vendor selection, contracting, and management and governance, says Ridder, adding, "The life cycle is a critical area to plan and manage, regardless of whether organizations source their IT services through internal or external resources."

This story, "Preparing for the real costs of cloud computing" was originally published by Computerworld.

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