THE ECONOMICS OF CLOUD COMPUTING FOR THE EU PUBLIC SECTOR

Computing is undergoing a seismic shift from client/server-based systems to the cloud, a shift similar in importance and impact to the transition from the mainframe to client/server. At the same time, global economic conditions and public sector fiscal constraints require more cost-efficient use of resources, even as demands to better serve citizens continue to grow. Government leaders have a critical need for a clear vision of where the IT industry is heading, and how the transition to cloud computing can contribute to their immediate needs for costs savings as well as their broader interests in economic growth for European society.

The paper “The Economics of Cloud Computing for the EU Public Sector” assesses the economics of the cloud by using in-depth modeling and analysis. We then use this framework to better understand the long-term IT landscape and what it means for governments.

Summary of findings

Cloud computing brings the benefit of unprecedented economies of scale to IT operations. Cloud technology allows large data centers to standardize and pool computing resources, resulting in highly efficient operations. At the same time, cloud automates and streamlines many maintenance tasks, offering exceptional agility to end-users.

Many of these benefits are amplified as the size of the cloud increases due to the presence of three sources of economies of scale. Supply-side economies of scale result from consolidation of overhead costs, purchasing power, and power efficiency, making large datacenters up to 50% more cost effective than smaller data centers. In addition to the cost of capacity, the overall cost of IT is also determined by the degree to which the capacity is efficiently utilized.

Currently, infrastructure is built to meet peak demand. Our assessment of demand-side economies of scale shows that pooling computing improves the utilization of IT resources and reduces costs by another 50%. Finally, multi-tenancy, which refers to multiple customers sharing the same application, allows those customers to divide the costs of operating the application and can reduce costs by an additional 20%.  The combined impact of these economies of scale can result in long-term savings of up to 80% when comparing large and small clouds.

What this means for government leaders

Cloud enables government leaders to better deliver on some of their key priorities:

• Fiscal responsibility: In times of tight budgets, cloud can help governments achieve necessary spending cuts without cutting into essential services.
• Better serve citizens: Cloud can help make governments more responsive to the needs of its citizens, and increase collaboration and coordination between departments.
• Lower emissions:  New cloud facilities are less power-hungry than existing IT infrastructure and require fewer servers to generate the same output by running them more efficiently.

At the same time, governments have questions about cloud security and privacy, governance issues, as well as compliance and data sovereignty requirements. These concerns prompt IT leaders to explore private clouds which utilize cloud technology without sharing the underlying infrastructure
with others.

While private clouds can achieve some degree of cost savings from the scale economies we describe while addressing some governmental concerns about cloud, our analysis reveals there is a price premium associated with private clouds, as the benefits of scale do not apply equally to public clouds and private clouds. Through our analysis, we show that over time the cost of private clouds will increase to be 10x higher than public clouds, while barriers to public cloud adoption will be addressed to a greater degree. Government leaders must therefore weigh the implications of both choosing a private cloud for their own IT and of enacting regulation that might inhibit the use of public clouds by their citizens.

Journey to the cloud

This future won’t materialize overnight. Government leaders need to develop a new 5- to 10-year vision and plan that includes a path connecting existing IT to this future. The transition represents a delicate balancing act. If an organization moves too quickly in areas where the cloud is not ready, it can compromise operational continuity, security, and compliance – critical issues in the public sector. If IT leaders move too slowly in adopting cloud, they can inadvertently cause budgetary deficits and create an outward impression of being inefficient and ineffective. IT leaders who stay ahead of the cloud trend will be able to control and shape this transition; those who lag behind will increasingly lose control.

To accomplish this, IT leaders need a partner who is firmly committed to the long-term vision of the cloud and its opportunities, one who is not clinging to legacy IT architectures. This partner will neither push for change faster than is responsible nor argue to keep IT the same for the benefit of old business models. Customers need a partner who has done the hard work of engineering a way to marry legacy IT with the cloud, rather than placing that burden on customers by ignoring the complexities of this transformation.

Microsoft is excited about the journey to the cloud. To learn more about what the journey entails and why you should join us, we invite you to read The Economics of Cloud Computing for the EU Public Sector

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