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How cloud computing puts adverse selection in its place

Bernard Golden | Oct. 31, 2013
For years, operations departments have used adverse selection principles to allocate resources, often deeming small projects unworthy of enterprise computing power. Today, though, the cloud makes computing so cheap that there's no reason to deny any project, no matter how small. Doing so will simply push users to the public cloud -- and beyond IT's control.

The key challenge in health insurance is motivating a sufficient number of healthy people to participate in the program to enable coverage of less healthy, more costly subscribers. Unless there are a number of users in the population who are in good health, the high cost of treating too large a proportion of sick people will ruin the economics of the plan and require extremely high payments on the part of the smaller, sicker population.

Without this mix of healthy and less-healthy subscribers, the insurance program inevitably fails, because the high cost applied to the remaining sickly subscribers causes some to drop out, which leaves an even smaller population of subscribers to absorb the cost of running the system, and so on. In other words, retaining healthy people is the key to be able to supporting treating people who require a lot of medical attention.

If the IT analogy isn't clear, let me spell it out. Failing to address the needs of low-touch users raises the likelihood that they will exit the IT system by using public cloud computing on their own, leaving IT with only the high-cost, high-touch users and applications. Without the subsidy of the low-touch users contributing to the overall budget of IT, an increasingly large cost will fall upon those users who require skilled support.

As costs go up, fewer applications will be able to justify themselves and will be removed from the portfolio or, perhaps, flee to low-cost outsource arrangements such as managed service providers, which one might regard as the equivalent of medical tourism). Eventually, the pool of internal applications will fall to such an extent that the cost of internal IT will be unsupportable.

It's fair to say that few IT organizations recognize how critical it is to enable automation and self-service. It's not an overstatement to say that satisfying application group needs for agility and scale is vital for IT to have a viable future in corporations. Falling back on easy truisms such as "Automation can't solve the needs of applications that require tuning" as a way to avoid empowering users who are overserved by today's manual processes is a dangerous path to follow and a foolish strategy to pursue.


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