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The Basic Value Proposition

Although there are many variations between Cloud vendors, the contracts they offer, the types of services and pricing, there is a compelling logic underlying the model. By using a Cloud solution, the user is able to avoid making substantial up-front investments in roll-out and delivery of complex IT systems, because that cost is born by the Cloud. At the same time, the user is able to get to market far faster in its use of IT services. There are many variations on this theme, and many differences between users, but this remains the basic concept of Clouds.

The Traditional SDLC and its Investment Costs

Value Proposition of Cloud Computing

Value Proposition of Cloud Computing

There are no precise numbers because this is a general model presented as an aggregate of many different cases. Also, the SDLC cost curve has been verified over years of research into IT budgets and how they work in relationship to systems development projects. This curve represents the costs associated with the stages of the traditional systems development process including systems design and conceptualization strategy, systems design and systems analysis, systems engineering, programming, initial roll-out, continued systems implementation, final roll-out, and ongoing maintenance and operations.

In the traditional systems cost curve, systems costs are generally low at the beginning of the project in phase, usually only around 2-3% of the total systems costs. As more detailed systems analysis and systems design starts to be employed, along with gradual purchases of new equipment, the cost starts to escalate rapidly, and continues as the system reaches the zenith of cost-per-day run. While the system continues to roll-out, the cost-per-day run cost starts to fall as major hardware investment costs are absorbed, and as specialists – systems analysis, systems designers, and systems programmers – are no longer needed. Finally, the system enters into an operational maintenance mode. As time passes, the cost for maintenance and operations starts to climb.

The Cloud Model versus the Traditional SDLC

The Cloud model replaces this traditional cost curve with a “flat rate” pricing system. The cost level is subject to negotiation, and clear standards have yet to emerge. Pricing at this time, in the early stages of the Cloud market, appears to be a series of one-off pricing agreements, but evidently priced is a dis-economic way, since leading Cloud providers at this time are running at a loss. In some cases, we have identified contracts in which the user is required to pay a one-time up-front fee for initiating the Cloud contact. In the traditional model of systems development, maintenance starts to rise above the Cloud alternative in value, representing the long-term risk of system obsolescence (it is reasonable to assume that the Cloud provider incurs this cost and pays for it).

Timing Differences

The traditional SDLC rollout extends from the time when the decision is made to go with the specific project, until such time as the system is deployed, and only further operations and maintenance funds are needed to keep going. The critical difference between the Cloud model and the traditional model is time to market. Using an Cloud means you can come to market in about half the time or less than using other approaches. Some are arguing a time factor of 0.2 but it is clear each situation will be different. How well one is prepared to use the Cloud model will determine the advantage in time factor they can achieve.

Sources of Savings with the Cloud Model

We can identify two particular sources of savings for Cloud over the traditional model of systems development:

  • Systems development and infrastructure investment. Since the user does not have to make the investment in infrastructure, and do much of the systems design and implementation, it is able to avoid the costs represented by this need to expend funds.
  • Maintenance and support. After the Cloud option is deployed, the user is able to take advantage of a constant operational cost, thus avoid the extra costs that come from ongoing maintenance, a cost that is born by the Cloud instead of by the user.

Although there is much variation in the way in which companies can take advantage of the Cloud model, there are some caveats to the model.

Variances and Caveats to the Cloud Value Proposition

It is clear that the Cloud model only works under certain conditions:

  • The total cost over time spent with the Cloud must be less than what the user would be spending if they built and deployed the system using their own devices and the traditional approach.
  • The amount of the resulting Cloud solution maintenance and operations cost should be less than what you would be paying yourself. The only exception to this is if the maintenance and operations portion has been subsidized by the savings in implementation and infrastructure investment costs, in which case the Cloud model is no longer of benefit to the user if evaluated on a simple cost basis (providing the elimination of risk is not paid for at a premium).

Need more information? Contact Shaun

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Concern # 5 – Selection of Best Cloud Vendors

There are 1000’s  of Cloud vendors, but most persons have heard of only a few. Under these circumstances, how is it possible to make the best choice? Clearly advertising and word of mouth is going to play an important part in selection and screening, but this can not substitute for a clear and more transparent process. Until the markets ‘‘shakes out’’ some with the emergence of dominant players who have a good market reputation, selection of Cloud vendors will remain extraordinarily difficult to the user. Amelioration Strategy: Use a consultant with a track record in doing this.

Other Limiting Factors

Risks and Limitations of the Cloud Model

Risks and Limitations of the Cloud Model

Contract limitations. It is impossible to place too much emphasis on the importance of careful contract negotiation. Since there is a poor track record – actually no historical record at all – for Cloud vendors, it will be more difficult to write ‘good’ contracts that can handle the vast amount of new contingencies that may appear. As a result, the contract itself may end up being a liability for either the vendor or the user, neither situation of which is good for the relationship. Amelioration Strategy: Sign shorter contracts, adjust as necessary during renewal. Advance study pays off.

Pricing and economic assumptions may be faulty. There is such a high amount of change in the market, that pricing models can not possibly remain stable. They have not stabilized yet, and may not do so until the third quarter of 2012. As a result, any long-term contract (of perhaps more than 1 year) is subject to a significant amount of arbitrage risk in pricing. Amelioration Strategy: Sign shorter contracts, adjust as necessary during renewal. Do more than listen to the Cloud.

User resistance to change. In some organizations, user re-training, acceptance, and possible resistance to change may inhibit model adoption. Any type of change such as this demands significant sensitivity on the part of IT regarding users. Note that user resistance may not come only from desktop workers, but might as well come from line managers worried about confidentiality and security of their proprietary data. “If one of our competitors is using the same Cloud, how can we guarantee we will be protected?” might be one expressed concern. Amelioration Strategy: Improve training.

Reduced ability to develop competitive systems. Being forced to renegotiate new contracts or add ARUs (additional resource units) each time the enterprise wishes to adopt a major change in technology may not be the preferable route for companies wishing to develop competitive systems. Amelioration Strategy: In-house expertise still needed. Don’t let it slip away.

No standards for certification of applications or service levels. There are no standards for either of these. Amelioration Strategy: In absence of standards, develop your own – either on your own, or with unbiased experienced consultants.

Checklist for Ongoing Management of Your Cloud

Stick to clearly defined responsibilities
  • The company
  • The vendor
Follow pricing formulas and ground rules for change
  • Triggers (tariff increases or decreases, cost of living, etc.)
Formalize change management
  • Formal process and authorization
  • Updates/new releases/new services
  • Changes in requirements
  • Triggers
Monitor performance and service level guarantees
  • Define governance process and responsibilities
  • Specify vital signs, tolerance ranges, and metrics. What is measured – response time, storage capacity, up-time, time-to- repair/recovery, other? How frequently? For what time period? How do you calculate? What period to redress?
  • Reporting periods and formats
  • Face-to-face review meetings
  • Issues management
Put in place an escalation policy and process
  • Define conditions as to when to escalate to next higher level
  • Disputes, recourse and remedies
  • Internal responsibilities
  • External responsibilities – arbitration, the courts
Prepare for untoward contingencies, disaster recovery, back-up and insurance claims
  • Testing
  • Insurance (for multiple reasons – privacy, theft, going out of business, liability, intellectual property
  • Planning
Know how to terminate the agreement
  • Define conditions and responsibilities
  • Define transition plan and costs
  • Define who owns what resources
For more information please contact Shaun

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Concern # 4 – Software Issues

There are a variety of software-related issues that must be considered in the evolving Cloud model:

Risks and Limitations of the Cloud Model

Risks and Limitations of the Cloud Model

Version update problems. What will happen when new versions of the software program are released? Has anyone  had experience migrating hundreds of different customers, and their data, to new versions? Although this is not impossible, not many Cloud vendors have done it yet,  and as a result it is a legitimate concern. However In my experience salesforce.com does manage this well, you need to make sure you choose carefully.  Amelioration Strategy: Exercise control by having ownership of the server or partition if possible.

Inability to customize. If the user organization has contracted for vanilla services from the Cloud, then it will be either impossible or very costly to make any type of modification or customization in the software outside of strictly pre-defined ranges of change. Each of these ranges for change needs to be negotiated in advance, because each will involve pricing; yet, it is impossible for any user fully to anticipate all of the changes that are going to be required. As a result, for some users the inability to customize the software being used might present a series of unanticipated business problems. Amelioration Strategy: Make this an advantage by minimizing customization.

To be continued…

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Concern # 2 – Operations

Reliability of the Cloud. Cloud Companies may not provide service level required or may go out of business. No one knows that the general reliability of the Cloud will be, or even how it can be measured adequately. If history is any guide to the future, then experimentation with a new model of delivering computing services in a matter of course will involve problems. No one wishes to be the first to experience these problems. Amelioration Strategy: Favor the large End-to-End providers (i.e., EDS/SAP).

Loss of control: data, software, and operational management. How can day-to-day operations and management control be set

Risks and Limitations of the Cloud Model

Risks and Limitations of the Cloud Model

up under the Cloud model? What are the organizational implications when data, software, and operations are under someone else’s purview? Clearly, each organization will be forced to answer this question in a different way, but for some, uncertainty in this domain under the Cloud model may prove to be a significant barrier to adoption. For others, perhaps, it will prove to be a great opportunity. Amelioration Strategy: Difficult. Try to maintain in-house expertise to use in case of a problem.

Technical decisions made by third party. What are the implications for IT autonomy when technical decisions are being made elsewhere, out of direct control? Amelioration Strategy: No real solution, unless Cloud and customers are partners.

Lack of in-house experts. Presumably, use of an Cloud will reduce the need to employ in-house experts in various areas of information technology and applications. This will reduce costs, but at the same time strip away skilled personnel from internal IT operations. IT organizations need to understand the implications of the lack of in-house experts. Note this is generally a long-term systemic issue with outsourcing. Like outsourcing, the Cloud model will create a certain level of dependence of the enterprise on its Cloud. Amelioration Strategy: Give in-house experts control over research responsibilities, and give them management decision status.

Staff migration from company. Few have considered the staffing implications of the Cloud model. What will happen to your own IT staff (assuming you have one) after the Cloud starts to take over major segments of your applications portfolio? If the staff leaves, then will your organization permanently lose the ability to ever build up an in-house operation? If so, then what are the long term implications for that? Clearly, migration of staff away can have serious implications, but it is difficult fully to anticipate what they are. Amelioration Strategy: Give in-house experts control over research responsibilities, and give them management decision status.

Boardroom representation. If the Cloud is a key partner in providing your service, it must be aware of all of your competitive plans, yet it also services your customers. The logical board member representing IT would be the Cloud itself, yet since it services competitors, this is not workable. Amelioration Strategy: Give in-house experts control over research responsibilities, and give them management decision status.

Unclear responsibility for failures. With the Cloud sharing your processing, problem determination can be difficult. If something fails, it may be unclear who is responsible for the failure. Amelioration Strategy: Pick Cloud providers carefully. Contract for single point of responsibility.

Technical decisions made by third party. Once the Cloud is doing the processing, it makes the technical decisions. This removes them from your control. The risk is that you are at the hands of the Cloud for IT-based innovation. Amelioration Strategy: No real solution, unless Cloud and customers are partners.

Mass market versus customization. It is impossible to get competitive advantage from IT applications that everyone else has access to. At the same time, customization can be expensive, possibly reversing the Cloud economic advantage.

To be continued…

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TalendEverything you need, you get Software-as-a-Service (SaaS) or “Cloud Solutions” is one component of an overall strategy to improve business process. Align business users and IT and get more from your cloud and on-premise data – DON’T WAIT TO INTEGRATE!… Learn more

The rapid adoption of cloud applications, platforms, and infrastructure has resulted in more fragmented data and an increased need to integrate data “in the cloud” with data in on-premise applications and databases. Line of business managers and SaaS administrators need rapid time to value and self service. Meanwhile, the IT organization is tasked with avoiding costly data silos eliminating untrustworthy point solutions.

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Cloud Computing Beats Snow

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Sacher Partners is an accredited Salesforce.com consulting partner, with over 11 years experience supporting customers in maximizing their use of Salesforce.com and Force.com.

Salesforce Consulting Partner

See what more than 59,000 companies have already discovered: salesforce.com delivers results. It’s the most complete CRM in the industry—dovetailing sales with marketing and customer service to keep you on top of every lead, every deal, and every customer.

Successful Customer Relationship Management (CRM) is a journey and not a destination. As your company grows and your customers needs change your organisation will need to adapt in order to remain competitive. This landscape will need to be reflected within your Salesforce.com solution.

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