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8/9/2019 The Economics of Utility Computing
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The Economics of Utility
Computing
Alan McSweeney
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June 10, 2010 2
Objectives
To discuss how the transition to utility computing can becost-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 computingresources
Users just draw them down and pay for what they use
Nothing new here think of computer bureau services ofold
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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 toimplementation
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 requiredto access information
technology resources
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Utility Information Technology Services Within
Organisation
Business units accessinformation
technology serviceson demand and payfor what they useaccording to billingmodel
This requires thatthe IT functionknows and managesits costs and deliversinformation
technology servicescost effectively
IT Function
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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 factorssuch 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 ofprovision of the resources and a profit margin
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Information Technology Processing Resources
Any computer system consists of
ComputingResources
Information Storage
Resources
InformationTransmission
Resources
External
Information isTransmitted froman External Source
Information isStored Temporarily
or Permanently
Results ofProcessing are
Stored
Information is Movedto be Processed
Results ofProcessing are
Transmitted
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Information Technology Processing Resources
This is what you pay for (because it is what costs money)
ComputingResources
Information Storage
Resources
InformationTransmission
Resources
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Utility Computing
There are significant differences between information technologyutility resources and those of other utilities
Gas, electricity, water and telecommunications are single resourcesthat 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 itcosts
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Utility Computing Pricing
Any pricing model has to reflect the cost of recovery ofprovision 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 internalcosts?
Are there hidden costs?
Can you disengage easily, quickly and at low cost?
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Coases Law on the Nature of the Firm
A firm will tend to expand until the cost of organising an extra transaction within the firmbecome 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 theexecution of all kinds of contracts as well as costs for implementing allocation and trackingmeasures for the contracted services
When internal transaction costs become greater than the costs of externally sourcing theservice, 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 isoutsourced
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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 allpossible sources of cost
Provision for uncertainties include known costs explicitly and allowfor 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
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Reasons for Good and Bad Cost Estimates
Detailed,Stable,AgreedRequirements AgreedAssumptions
DetailedDocumentationandHistoricalData
EffectiveRiskandUncertaintyAnalysis
TrainedandExperiencedAnalysts
IdentificationofaRangeofConfidenceLevels
AdequateContingencyandManagementReserves
ComplexProjectorTechnology
UnrealisticProjectSavings
NewProcesses UntrainedandInexperiencedAnalysts
NoorLimitedComparisonDataAvailable
ProjectInstability
UnrealisticAssumptions Overoptimism
UnrealisticorUnreliableData
UnfamiliarTechnologyorFirst-TimeUseProblems
GettingAccesstoData UnreasonableProjectBaseline
IneffectiveRiskandUncertaintyAnalysis
Lost of reasons for and causes of inaccurate cost estimates
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Sources of Risk and Uncertainty in Estimating Costs
Lack of understanding of the project requirements
Shortcomings of human language and differinginterpretations 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 tapruns dry
You need to understand theoperating model
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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 androles and responsibilities of parties
Need to monitor and manage service provision
Works best for those information technology services thatcan 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
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