Financial risks of public cloud

NOTE:  This post was co-authored with Steen Dalgas

“Traditional cloud sales models market opex as a key driver for adoption, but this is not necessarily desirable for organisations”  –  Deloitte. Capitalizing Your Cloud (Jan 2017)

Purchasing commercial IT hardware traditionally requires a large, upfront investment. Customers configure these big, expensive IT platforms to cope with peak demands that may only last for a few days of the year. They reasonably ask for a better way to buy computing power…could they not just pay for what they use when they need it?

Is public cloud the answer? After all, it scales elastic workloads up or down as needed – and all on a pay-as-you-go basis. Public cloud providers advertise low upfront cost and OpEx-based commercial models as financially advantageous. But the truth is much more complex.

Some Public Cloud Financial Gotchas
Organizations may march to a “public cloud first” drum beat without fully understanding the financial implications. IDC, for example says that predictable workloads (which typically account for around 75% of all applications) often result in significantly higher costs (download the IDC study here). And prepaid on-demand capacity may require a cash investment on the same level as on-premises options.

Migrating to public cloud requires expertise for security, redundancy, backup, specific tool sets and so on. Organizations must either hire specialized staff or contract with consultants. And they must pay for overlapping expertise for both the on-premises and public cloud architectures during the lengthy migration process – assuming they ever even accomplish full migration.

Public cloud requires a different approach not only to technology, but to people and processes. As Keith Townsend explains in, Why is Public Cloud Security so Hard?, organizations should be prepared to assume training costs in order to avoid disasters such as the one that recently befell FedEx. (see Open AWS S3 Bucket Exposes Private Info on Thousands of FedEx Customers).

The variable nature of public cloud charges means a lack of cost certainty and a risk of overspending. Public company shareholders relying on CFO quarterly or annual reporting tend to dislike these potentially large unexpected costs.

Public cloud can entail huge costs arising from switching workloads from one cloud provider to another. These costs include the extensive requirements of learning a new provider’s tools and of writing to that provider’s APIs.

The accounting environment for public cloud is complex. Monthly bills often run to many pages and are difficult to understand and reconcile. AWS, for example, published a 22 page whitepaper to explain its pricing model. Organizations may require an on-going financial resource just to determine the correct accounting treatment of invoicing.

Resolving public cloud performance issues can incur significant unexpected cost. A July 2017 Forester survey of 500 cloud adapters states, “89% of early migrators have experienced performance challenges while migrating mission-critical applications.” Common performance challenges include latency between on-prem and off-premises applications, dependencies on other apps not in the cloud, the “noisy neighbor” effect in the cloud, and so on.

While public cloud providers have an ability to correct security flaws more quickly than most enterprise IT shops, the propensity to share hardware between many customers can sometimes also make them more vulnerable. Resolving security flaws also can add unexpected expense.

Public Cloud and the Impact of EBITDA

Investors often measure organisations on Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA). They favor EBITDA as a key performance Indicator because it tends to closely reflect the underlying operating cashflow of an organization. EBITDA results often determine the compensation plans of senior company executives.

Operating expenses typically reflect public cloud charges which negatively impact EBITA as seen in the example below. On the other hand, income statements reflect on-premises capital expenses as a charge against depreciation over time which does not impact EBITDA.

The Enterprise Cloud Alternative

An enterprise cloud can please both CIO and CFO by combining public cloud attributes of scalability, simplicity, continuous improvement and fractional consumption with on-premises advantages of control, governance and lower costs. Enterprise cloud enables customers to enjoy a cloud-like service on-prem for predictable workloads, and still efficiently utilize public cloud for elastic workloads. And like two of the three leading public cloud providers, Nutanix provides a free virtualization platform utilizing a customized, simplified and hardened version of KVM.

A Nutanix enterprise cloud, like all on-premises solutions, typically enables depreciation of hardware, software and associated implementation costs over the estimated assets’ useful life. But unlike a traditional SAN/server environment, customers do not have to purchase excess storage capacity upfront. They scale out their Nutanix footprint with one node at a time if they wish, benefiting from the increased density and technical enhancements resulting both from Moore’s Law and the Nutanix 1-click upgrades.

Some organizations may not have ready access to capital for an up-front hardware purchase. Nutanix mitigates this issue first through reducing the absolute investment needed and second with both flexible leasing and rental programs.

Thanks to Tim McCallum, Hamut Pascha and David Freeman for review and contributions.

See Also:

The CPU Catastrophe will Hit Hardest in the Cloud. 01/04/2018. Russell Brandom. TheVerge.com

The Single Biggest Benefit of Enterprise Cloud (And It’s Not What You Think). 10/09/2017. Steve Kaplan. Nutanix.com.

Cloud Computing Migration: More Expensive and Complicated than You Thought. 9/22/2017. Steve Ranger. ZDNET.com

When Clouds Break: the Hidden Dangers of Cloud Computing. 07/11/2017. DataCenter Knowledge

Private Clouds, Enterprise Clouds and More. 05/17/2017. Prabu Rambadran. Nutanix.com

Capitalising Your Cloud. January 2017. Deloitte.

Is Public Cloud More or Less Expensive than Corporate Data Center Options. 01/05/2017. Tim Crawford. Avoa.

Disclaimer: The views expressed in this blog are the authors and not necessarily those of Nutanix, Inc. or any of its other employees or affiliates.

 

 

 

 

 

 

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