Time to outsource IT and get down to business.
The best analogy is to electricity, and the way it was delivered 100 years ago compared to today. Companies used to generate their own power, first with steam and then with generators.
Electrical utilities were established. They created an electrical grid which businesses and consumers could tap into. Those customers paid a monthly usage fee which rose and fell with demand.
As more customers moved to the grid, the economics of the new utilities became so favorable that no one continued to invest in their own power generation equipment, except as a backup or in remote settings.
The same centralization of computing resources is happening right now with IT services. Rather than make large investments in hardware and software, businesses and consumers can now pay a monthly fee to a Web vendor for a variety of IT functions – email, data backup and storage, website hosting, anti-spam software, and a wide range of applications.
There are several enabling technologies that make the move to cloud services compelling for all businesses, but especially for small and medium businesses.
First, cloud providers can take advantage of the efficiency of virtualization. That is, they consolidate their customers onto virtualized servers on fewer physical computers, making more effective use of computing resources.
Just as apartment buildings make more efficient use of land by allowing more people to live in their own apartments on the same plot, virtualization creates virtual servers on the same physical server. There are huge savings in computer hardware, cooling, power and support costs.
Second, cloud services give small businesses access to enterprise-class applications that are web-hosted. This kind of software and hardware were investments that were previously affordable only to the largest businesses.
Third, cloud computing scales quickly. If your business grows dramatically, cloud providers can instantly provide more resources to match your expansion needs on demand. You no longer have to order more computers and wait for delivery and installation. Conversely, a seasonal business can reduce usage and costs in slow periods.
Fourth, cloud computing has compelling economics for small and medium businesses. It allows them to focus on their core business, instead of on managing an IT infrastructure.
They don’t have to invest in expensive software and hardware, and costs they do incur can be an operating expense, with significant accounting and operating benefits.
For example, operating expenses can usually be terminated at will. Capital expenditures require a commitment, and financing and depreciation costs have to be written off over time. The capital available for investments may be subject to financing restrictions on debt and capital ratios. Operating costs for small scale projects aren’t often subject to such scrutiny, and can be undertaken without capital approval limitations.
In the next article, I will describe specific cloud computing services you can use to leverage those economic benefits.