IT Must Understand Its Overall-and Marginal-Cost
In a world focused on margin achievement, buyers are laser-focused on marginal cost, asking "How much does making the next unit cost me?" With public cloud computing, understanding unit cost is much more transparent than traditional IT cost assessment models. Moreover, the OpEx model is much friendlier to margin assessment than a CapEx-based approach.
Consequently, for IT shops that seek to induce CMOs to place their applications into internal private clouds, offering fine-grained chargeback based on resource use is fundamental. Showback with deferred cost assessment is useless for CMOs or LOBs trying to assess a product's profitability. A different way of saying this is that CMOs will expect to be able to buy IT resource on a retail basis rather than being expected to fund a wholesale offering.
This means IT organizations that want to be in the infrastructure game will have to provide fine-grained chargeback and stand ready to bill users on a pay-per-use basis. In addition, those users will expect to have the same flexibility with regard to use of the internal cloud as they have with external clouds. If the need for resource diminishes, users will expect to be able to release the resources back to the IT organization, and to incur no further charges.
The typically unseen challenge in this for IT organizations is that they will have to truly understand their cost structure and their marginal cost for delivering a specific resource-1 GB of SAN storage for a month, for example. In effect, IT organizations will have to act as their own CMOs, figuring out how to price their offering to cover costs, spread across a given user load.
Managing utilization will be critical in this situation, as the marginal cost of a resource can vary wildly depending on how much the fixed cost associated with the resource can be allocated across a larger or smaller user population. One of my cloud computing predictions for 2013 is that IT organizations will need to understand their economics, and the move to CMO-led IT spending is only going to make that need even more important.
If and when the shift in IT spending moves toward the CMO and fellow LOB execs, we can expect to see a significant shift in IT application profile and infrastructure spending patterns. We'll move from lumpy capital investment to pay-as-you-go OpEx, albeit with a new set of challenges associated with the new model. We can definitely expect to see much more focus on the business metrics on IT resource use, with an increasing emphasis on marginal cost and marginal revenue associated with granular IT resources.
Bernard Golden is the vice president of Enterprise Solutions for enStratus Networks, a cloud management software company. He is the author of three books on virtualization and cloud computing, including Virtualization for Dummies.
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