The big company and the cloud

In an analysis released today, and covered by Forbes and the New York Times, the consulting firm McKinsey & Company provides a useful, if flawed, counterweight to some of the more excited hype about cloud computing. While granting that “clouds are very cost-effective” for small and medium-sized companies, McKinsey argues that a large company would spend considerably more today if it were to shut down its data center and run all its applications out of a utility-computing cloud. According to its estimates, based on a “disguised client example,” the total cost per CPU per month using Amazon’s EC2 cloud system would run $366, more than double the current in-house cost of $150:


[image from McKinsey presentation; click for larger view]

McKinsey, of course, has an interest in encouraging companies to maintain large and complex in-house IT operations. Consulting firms have, over the years, made oodles of money from “systems integration,” “business-IT alignment,” “data center optimization,” and other services that feed off the vast complexity and expense of corporate IT. And, it has to be said, the numbers McKinsey presents seem a bit skewed, probably understating some of the savings or other benefits of moving to a cloud. For instance, again drawing on a “disguised client example,” McKinsey suggests that replacing an in-house data center with cloud services would reduce IT labor costs by only about 10 to 15 percent:


[image from McKinsey presentation; click for larger view]

I look forward to further analyses of these numbers. I’d be particularly interested in hearing Amazon’s perspective on McKinsey’s comparisons.

Nevertheless, the McKinsey analysis is a valuable one, not least because it underscores how early we are in the development of the utility-computing grid – and why we shouldn’t expect large companies to begin shutting down their data centers any time soon. Then again, I don’t know of any large company that is even considering such a move today or any reasonable analyst that would suggest it. The scenario McKinsey analyzes – the wholesale replacement of a large enterprise computing operation with rented space within an external cloud – is a bot of a straw man. The real opportunity that the cloud offers large companies today is as a supplement or complement to their in-house operations rather than as a complete replacement. The cloud model offers a way to gain access to additional computing and storage capacity, particularly to cover fluctuations in demand or carry out a short-term data-crunching exercise, without having to make capital investments in new equipment or hire more workers. The cloud also, of course, provides a way to tap into powerful software-as-a-service applications that can provide substantial savings, not only in equipment and labor but in licensing and maintenance fees, over the cost of installing an in-house application. (The McKinsey analysis ignores those opportunities.)

Like any utility system, cloud computing becomes more attractive as cloud providers gain scale and experience and are able to push down their prices while improving their services. As each year passes, the economic advantages of an expanding utility system become real for another set of companies. But that process takes time. Don’t expect to see the biggest companies closing down their data centers in the next few years. Besides, the cloud in the end will be more interesting for the new models of computing it opens up rather than for its ability to accommodate the old ones.

UPDATE: Here is the full McKinsey report.