The Economics of Utility

Computing

Alan McSweeney
Objectives

• To discuss how the transition to utility computing can be

cost-justified by an organisation

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Utility Computing

• Utility computing can be:

− Within an organisation
• Where users of computing services are charged based on usage
− With a public cloud model
• Where the organisation is charged for its use of computing services

• Utility computing can replace capital costs and charges

• Utility provider is responsible for providing computing
resources
− Users just draw them down and pay for what they use
• Nothing new here – think of computer bureau services of
old
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Utility Computing

• Utility Computing is a better term than Cloud Computing

− Describes the payment, operation and usage approach
− Cloud computing implies technology and approaches to
implementation
− Not just computing but needs to include other aspects of
information technology resources
• Storage
• Data transmission
• Service management

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Utility Information Technology Services (UITS)

• Turn on/off the tap as required

to access information
technology resources

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Utility Information Technology Services Within
Organisation
• Business units access IT Function
information
technology services
on demand and pay
for what they use
according to billing
model
• This requires that
the IT function
knows and manages
its costs and delivers
information
technology services
cost effectively

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Utility Information Technology Services From
Outside the Organisation
• Service provider enables delivery of utility IT services through
plumbing with appropriate service metering
Utility IT Service Provider

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Utility Computing Payment Models

• Same range of charging models as other utility providers: gas,

electricity, telecommunications, water, television broadcasting
− Flat rate
− Tiered
− Subscription
− Metered
− Pay as you go
− Standing charges
• Different pricing models for different customers based on factors
such as scale, commitment and payment frequency
• But the principle of utility computing remains
− The pricing model is simply an expression by the provider of the costs of
provision of the resources and a profit margin

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Information Technology Processing Resources

• Any computer system consists of

Results of
Processing are
Stored
Computing
Resources
Information is
Transmitted from Information is Moved
an External Source to be Processed
External
Information is
Stored Temporarily
or Permanently
Information Storage
Resources
Information
Transmission
Resources Results of
Processing are
Transmitted

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Information Technology Processing Resources

• This is what you pay for (because it is what costs money)

Computing
Resources

Information Storage
Resources
Information
Transmission
Resources

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Utility Computing

• There are significant differences between information technology

utility resources and those of other utilities
• Gas, electricity, water and telecommunications are single resources
that you access
− Easily metered
− Simple charging models
− Providers are not responsible for how the product is used
• Information technology utility resources consist of
− Computing Resources
− Information Storage Resources
− Information Transmission Resources
• Can requires more complex payment model
• You need to know what you want, what you are getting and what it
costs
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Utility Computing Pricing

• Any pricing model has to reflect the cost of recovery of

provision of service
− Capital cost
− Operational costs including service management costs
− Profit margin

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Paying for Utility Computing

• Within an organisation
− Do you know how much IT is costing so you can implement a utility supply and
payment model?
− Do you know what your costs are so you can charge for their recovery?
− How mature is your costing model?
− Could you implement a cost-recovery/chargeback model tomorrow?
• Outside the organisation
− Any costs paid to an external utility provider are still part of the IT budget
− Do you know if their costs will be cheaper or more expensive than internal
costs?
− Are there hidden costs?
− Can you disengage easily, quickly and at low cost?

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Coase’s Law on the Nature of the Firm

• A firm will tend to expand until the cost of organising an extra transaction within the firm
become equal to the costs of carrying out the same transaction on the open market
• This means when it is cheaper to buy the service externally it will generally be bought
externally
• However there is an assumption of perfect knowledge and perfectly rational use of this
knowledge to achieve the most logical solution
• In reality this perfection is rarely if ever achieved
− Other less rational factors affect the decision
• Everybody Else Is Doing It
• I Want To Do It So It Appears On My Resume
• I Like New Technology
• Vendors Keep Talking About It
• I Need One Good Idea To Stamp My Mark On The Organisation
• It Will Solve All My Problems
• I Hate Dealing With IT
• I Do Not Want to Setup a Large IT Function
• Cost estimates are rarely accurate
− What we know about most projects is that they either or both overrun on costs and deliver less
than expected
− Cost overruns are generally caused by a mix of errors in the initial cost estimates and deliberate
distortions in order to cause the decision to be made

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Transaction Costs

• Along with production costs, there are costs for preparing, entering into and monitoring the
execution of all kinds of contracts as well as costs for implementing allocation and tracking
measures for the contracted services
• When internal transaction costs become greater than the costs of externally sourcing the
service, the service will be obtained externally
• There are hidden costs associated with sourcing a service externally
− Selecting the wrong supplier
− Costs of writing contract
− Costs of enforcing contract
− Having a poor service contract that results in hidden cost and/or reduced service
− Overlooking personnel issues
− Loosing control over the outsourced activity
− Management, quality assurance and supervision overhead
− Implementation and termination costs
− Loss of flexibility
− Loss of integration between applications and data
− Data extraction costs
− Security framework implementation
• Transition to utility computing model requires full knowledge of costs – current and future
• Note that anything can be outsourced except the management of what is
outsourced
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Characteristics of Credible Cost Estimates

• Clear identification of requirements of the ultimate deliverable

• Broad participation in preparing estimates
• Availability of valid data for performing estimates – historical,
experience, benchmarks
• Standardised and comprehensive estimate structure that includes all
possible sources of cost
• Provision for uncertainties – include known costs explicitly and allow
for unknown costs
• Recognition of inflation
• Recognition of excluded costs
• Independent review of estimates for completeness and realism
• Revision of estimates for significant changes in requirements

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Challenges of Developing Good Cost Estimates

• Requires detailed, stable, agreed requirements

• Agreed assumptions
• Access to detailed documentation and historical data for
comparison
• Trained and experienced analysts
• Risk and uncertainty analysis
• Identification of a range of confidence levels
• Adequate contingency and management reserves

June 10, 2010 17

Reasons for Good and Bad Cost Estimates
Ineffe
and U ctive Risk
Effect ncer
i ve
Unce Risk and Unfa Analy tainty
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Ident
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Conti
ngen te Data ical E xp e
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Assumreed able New
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or Te x Project
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Savin Project
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• Lost of reasons for and causes of inaccurate cost estimates

June 10, 2010 18

Sources of Risk and Uncertainty in Estimating Costs

• Lack of understanding of the project requirements

• Shortcomings of human language and differing
interpretations of meaning of project
• Behaviour of parties involved in the cost estimation
process
• Haste
• Deception
• Poor cost estimating and pricing practices

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Utility Information Technology Services (UITS)

• What happens when the tap

runs dry
• You need to understand the
operating model

June 10, 2010 20

Availing of Utility Information Technology Services
(UITS) Model
• Need to understand existing and future IT costs completely
• Need to understand the service model, its limitations and
roles and responsibilities of parties
• Need to monitor and manage service provision
• Works best for those information technology services that
can be commoditised
• Does not do away with the need for an IT budget, IT
function and IT management
• Remember: Anything can be outsourced except
the management of what is outsourced
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More Information

Alan McSweeney
alan@alanmcsweeney.com

June 10, 2010 22