Cloud Freakonomics

There is a widely held assumption that the Cloud is usually a more cost-effective means of procuring IT resources. But of course, we all know what happens when you ‘assume’.

Forrester analyst and cloud cognoscenti, James Staten tackles the thorny issue of cloud economics in a new report entitled “The Three Stages Of Cloud Economics” and makes some important points about the hidden costs of the cloud and why it’s not always as clear cut as one might think. Just like Levitt and Dubner of Freaknomics fame have argued, incentives are at the heart of every economic decision we make. And the way business users view the Cloud is no exception.

As Staten points out, the assumption that the cloud is a cheaper alternative is usually derived from lower unit rates for common IT resources such as servers and storage. However, when you factor in the rate of user consumption, those low rates can quickly escalate and the users tend to get a much larger bill than expected. The point is that when it comes to Cloud services, user behavior is often overlooked as a key economic driver.

Notes Staten:

Although blindly buying cloud services won’t lead to substantial savings, understanding the business model can move cloud economics from a cost saver to a profit maker.

Putting on my Freakonomics cap, I would argue that understanding the business model of the cloud is just one (very important) variable in the Cloud equation. User behavior — and the incentives that are put in place in terms of how those services are ultimately consumed — are also vitally important in transforming the cloud into a profit maker.

The thing about incentives though is that they can only be defined if consumers — on in this case, the business user — understands what it’s actually costings to use these services. If you have a teenager with a cellphone plan, you likely understand what I mean. It’s one thing to tell your teenage daughter that their monthly bill is too high and that they need to stop calling their friends. It’s another thing if they can see precisely how much they’re spending and then define an incentive (say, an Apple gift card) that will motivate them to change their behavior.

Likewise, we see our own customers pursuing a dual strategy of transparency and incentives to modify user behavior. For instance, through the use of a Bill of IT, one of our customers artificially inflates the price of an older, more expensive application to their business users as a vehicle to migrate them to a newer and cheaper alternative. In this instance, exposing the price is the incentive lever.

Staten echoes this point when he writes:

While historically, every IT investment has been long-term, cloud economics turns IT spend into something that can be dialed up or down to match business needs.

To take advantage of this shift, CIOs need to gain knowledge and awareness of cloud services and empower employees to experiment with its use.

If you really want to empower employees, it helps to show them that the Cloud doesn’t mean free.